Covenants in the UK: Selling and Buying Houses and Properties at Auctions
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This excerpt is from a chapter in the book, THE TRUTH ABOUT PROPERTY, written by NRLA trainer, Henry Davis, www.henrydavisproperty.com.
Covenants can tie you into ongoing maintenance costs, which devalues an asset or accrues other recurring costs, and can also stop you from developing or give rise to you paying someone else a claw-back payment on any planning gain. They are legal obligations written into the deeds of a property. These obligations need close attention by your solicitor as they can have a big impact on a property’s value yet are discreetly hidden in complicated legal jargon. I have tried unsuccessfully over the years to understand them, so I always refer to my solicitor to correctly advise on their implications. I now use a specialist Covenant Expert Solicitor because of the challenges.
Covenants rule what you can and cannot do on the property or land. There are two types of covenant: positive and negative. Positive covenants are usually obligations to do something such as building work or fixing a fence, or perhaps contributing to the maintenance of a footpath, shared drive or road for example.
Negative (also known as restrictive) covenants prevent things being done on the property or land, like further development. They can range from restrictions on activities such as keeping animals, to restrictions against trade or doing business on the property. The one to look out for and one of the most common issues that auction buyers tend to have is a covenant which affects the ability to obtain a mortgage and restricts the use of the property to a ‘Private Dwelling’. This makes it difficult to mortgage (not bridge) for a buy-to-let lender as many will refuse. Although, limited lenders may accept covenant insurance.
You need to understand their hidden implications as they can have a big impact on development potential in particular, by restricting development. From my experience I have found the newer the covenant, the harder it will be to overcome with covenant insurance, which is a common method to resolve covenant risk. There can be recurring costs which you will be responsible for in the future, and any property that has a legally enforceable recurring ongoing cost to you, the buyer, has an impact on the property valuation as any monthly costs for you are effectively a liability. I have learned over the years that many older covenants are not enforceable and there is case history to support this. Ultimately, it’s a matter of how any future lender looks at your particular case, as it’s one thing having a covenant and another issue to understand how it affects the mortgage. Often, you won’t find this one out until the deal goes through the final stages of the legal process.
I repeat again as it’s so important, and will help improve your valuation knowledge, watch live local auctions inUse a specialist solicitor for any covenant issues. I find all solicitors claim to understand them, but this isn’t my personal experience. Many covenants may be enforceable if over 30 years old, but each case is different, which is why you need a specialist solicitor. Feel free to contact me at www.henrydavisproperty for a recommendation.
Henry is the CEO of We Buy Any House and Genii Developments Ltd and a developer for over 32 years. He is also an accredited Property trainer for the National Residential Landlords Association.
Copyright, Henry Davis. www.henrydavisproperty.com