Covenant Deeds And Property Value: Understanding Their Impact On Property Negotiations In The UK
When buying or selling a property in the UK, covenant deeds can have a significant impact on its value and negotiations between buyers and sellers. Covenant deeds are legal caveats that place restrictions or obligations on land and property ownership. They are extremely common, particularly in new build developments, and cover aspects like parking, pets, exterior styling and more. For those involved in the conveyancing process, it’s important to understand precisely what covenant deeds are and how they can affect property transactions. This article will examine covenant deeds in detail, looking at how they work, the types of covenants, their influence on property value and negotiations, and strategies for managing them when buying or selling.
What is a Covenant Deed?
A covenant is a promise relating to land or property that is embedded in a legal document called a deed. The covenant deed imposes either positive or negative obligations that transfer to future owners when the land or property is sold. These obligations are known as covenants that ‘run with the land’.
Covenants first emerged in the early 1900s and remain widespread today. They are commonly used by developers building new estates to maintain standards across the properties. The deeds usually contain restrictive covenants focused on preserving the character of the development. But covenants can also be created between two property owners, for example, to grant access rights over adjoining land.
How Do Covenant Deeds Work?
For covenants to be enforceable under property law, four key elements must be satisfied:
- The covenant deed must be signed and formally executed as a deed. Simply agreeing to obligations is not sufficient.
- The covenant must ‘touch and concern’ the land. This means it must relate directly to the property, rather than just the owner personally.
- The covenant deed must show a clear intention for the covenants to bind successors in title – i.e. future owners. Vague wording may not meet this requirement.
- The original parties to the covenant must have the legal capacity to create it. For example, minors cannot enter into covenant deeds.
If these conditions are met, the covenants will be binding upon future owners and occupiers of the property indefinitely. The covenants ‘run with the land’ until the deed is formally amended or removed.
Common Types of Covenant Deeds
While the specific covenants in a deed relate to the particular property or development, there are some common themes:
- Parking covenants – These regulate parking arrangements, for example stipulating that owners must park in designated spaces and keep spaces clear. They ensure everyone has fair access to parking.
- Pet covenants – Deeds may restrict certain pets like dogs and place conditions on those allowed, such as keeping them leashed. This avoids nuisance for neighbours.
- Garden covenants – Owners may be required to maintain front gardens to a certain standard and keep them free of rubbish. This preserves the appearance of the development.
- Alteration covenants – Restrictions are frequently placed on external changes like painting, extensions, satellite dishes etc. Consistent standards for the exterior appearance are maintained.
- User covenants – These dictate what activities can take place on the property e.g. operating certain businesses from home. They prevent unsuitable business uses.
- Leasehold covenants – Apply specifically to leasehold properties and require compliance with the terms of the lease.
- Positive covenants – As well as restrictions, deeds may contain positive obligations such as contributing to shared upkeep of communal facilities and areas.
How Covenants Can Affect Property Value
Covenants can influence the value and saleability of a property in both positive and negative ways. Factors that impact value include:
- Severity of restrictions – Excessively strict covenants make a property less attractive to buyers who want freedom over the property. They may deter some buyers altogether.
- Shared benefits – Covenants that exist for collective benefit, like maintaining the quality of development, may enhance the value of individual properties.
- Cost implications – Complying with positive covenants for maintenance contributions and approvals can entail costs that diminish value. But ignoring covenants risks enforcement action.
- Future uncertainty – If there is potential for covenants to be changed or new ones added down the line, this can put buyers off. Vaguely worded covenants also create uncertainty.
- Enforceability issues – Weakly worded or ambiguous covenants that would be unenforceable in court are less likely to impact value. The risk of breach is lower.
- Scope for renegotiation -Savvy buyers may negotiate amendments to overly restrictive covenants before purchasing, unlocking a property’s full value. However, renegotiation depends on the developer’s willingness to cooperate.
Overall the nature of the covenants matters more than the mere presence of them. Reasonable covenants targeting collective interests are less likely to harm value. But draconian or vague covenants require careful evaluation.
Covenants in Property Negotiations
During conveyancing, buyers, sellers and conveyancers will closely analyse covenant deeds to determine their impact on the property in question. They will aim to negotiate around covenants where needed to satisfy both parties. Tactics may include:
- Pricing – If covenants severely limit alterations or parking, for instance, the seller may need to reduce the asking price accordingly.
- Amending or removing covenants – Developers can be open to revoking or relaxing covenants that harm the property’s value but may charge the owner.
- Adding new covenants – A buyer may request covenants to protect privacy, restrict nearby development etc. The seller would need to negotiate this with the developer.
- Indemnities – Sellers can indemnify buyers against enforcement of breached covenants for extra protection.
- Deposits – Where covenants threaten valuation, buyers may negotiate paying a lower initial deposit until covenants are resolved.
- Walking away – As a last resort, an unsatisfied buyer can withdraw their offer if covenants remain unaddressed.
Even where covenants appear unreasonable, renegotiation with the developer or freeholder is not guaranteed. Much depends on their willingness to cooperate. However, both parties should explore options before abandoning a sale. Creative solutions are often possible.
Strategies for Managing Covenants
For buyers and sellers to successfully navigate covenants, certain strategies are recommended:
- Seek thorough legal advice on the covenants
- Budget for potential compliance costs
- Weigh up impacts on your plans for the property
- Try to renegotiate or remove any unreasonable covenants
- Explore indemnity insurance as a safeguard
- Provide full details of covenants early in conveyancing
- Be open to negotiating on price, deeds etc.
- Discuss options for removing covenants if needed
- Be honest about any known breaches of covenants
- Take legal advice on enforceability risks
Professional advice from solicitors and licenced conveyancers is vital when assessing covenant deeds. This expertise helps maximise negotiate leverage and avoids future surprises. Both buyers and sellers should also budget for legal fees around covenants, as they can take considerable time to analyse in detail during transactions.
Covenant deeds are a common and significant aspect. These deeds often contain obligations that bind successors in title, and they can exert a notable influence on a property’s value, either positively or negatively, depending on the specific restrictions they impose.
For both buyers and sellers, having a solid grasp of “what is a covenant deed,” understanding the terms and conditions they entail, their enforceability, and the potential for negotiation around them is essential. This understanding is vital in ensuring that both parties can come to an agreement that safeguards the buyer’s interests while delivering the optimum price for the seller.
It’s worth noting that complications related to covenants do arise quite frequently, but with expert legal input, satisfactory solutions are almost always within reach. Legal professionals can provide the guidance needed to navigate the complexities of covenant deeds and reach agreements that are equitable and beneficial for all parties involved in a property transaction.