Deed Of Covenant: An Essential Guide For UK Property Transactions

A deed of covenant is an important legal document used in the UK property market to alter the provisions of a lease. It allows the landlord and tenant to agree to change certain terms in the original lease, without having to draw up a new lease agreement. 

Deeds of covenant are commonly used in commercial property transactions to make lease agreements more flexible. They allow landlords and tenants to respond to changing business needs without the cost and disruption of negotiating an entirely new lease.

This guide provides an overview of deeds of covenant, including:

• What is a deed of covenant?
• Key features and clauses 
• When are they used?
• Benefits for landlords and tenants
• Process of creating a deed of covenant
• Stamp duty and registration requirements
• Enforcing a deed of covenant

What is a Deed of Covenant?

A deed of covenant is a legal agreement between a landlord and tenant to change or add terms to an existing lease. It is a supplemental document that alters provisions in the original lease but leaves the primary lease agreement intact.

The deed records the amended obligations and rights agreed between the parties. It does not replace the original lease but works alongside it. Any clauses in the original lease that aren’t specifically changed by the deed remain fully valid and enforceable.

Deeds of covenant allow flexibility not available in the original lease. They permit variations to be made cost-effectively without drafting an entirely new lease.

They are commonly used to

• Change rent or review terms
• Alter repairing responsibilities 
• Modify user clauses 
• Extend or surrender the lease
• Vary notice periods
• Adjust service charge provisions

The deed only affects the parties named in the document. It does not benefit or bind anyone else with an interest in the property, such as a mortgage lender.

Key Features and Clauses

Deeds of Covenant contain standard legal terms along with specific details negotiated between the parties. Key features typically include

Parties

The deed names the landlord and tenant as the parties bound by the covenant. It should accurately identify

• Full legal names
• Registered addresses 
• Company registration numbers if applicable

Getting the parties wrong could mean the deed is unenforceable.

Recitals 

The recitals briefly summarise the original lease and the motivation for the deed. This puts it in context, explaining why the changes are required. 

Recitals usually identify

• The property address
• Original lease date
• Key lease terms
• Reasons for requiring a deed 

Operative terms

The operative part specifies the agreed amendments to the lease in precise legal language. It details exactly which clauses are altered and how. 

Changes are normally grouped thematically, such as modifications to

• Rent 
• Repairs
• Use Restrictions

Technical legal phrasing is essential to ensure the changes are given proper legal effect.

Confirmation of unchanged terms

There is normally a standard clause confirming clauses not specifically mentioned remain in full force. This avoids uncertainty about whether omitted terms are impliedly amended.

Execution provisions 

The deed must be properly signed and witnessed to take effect. The execution clause sets out the process required. This normally mandates

• Signatures from authorised persons 
• Witnessing by independent parties
• Exchange of copies 

Meeting procedural formalities is vital for the deed to become legally binding. 

When Are Deeds of Covenant Used?

Deeds of covenant are used in various situations where parties to a lease want to change its terms between rent reviews or renewals.

Common scenarios include: 

Altering lease provisions

A deed of covenant allows landlords and tenants to modify lease terms to suit changing needs without drafting a new lease. For example, a tenant may want to remove a user clause restricting the permitted business activities. Or a landlord might want to revise service charge cost-sharing arrangements.

Responding to rent review disputes 

If parties cannot agree on the revised rent at a review date, they may enter into a deed settling the new rent figure until the next review. This avoids the delay and cost of referral to court or arbitration.

Revising repairing responsibilities

A deed can reallocate repair obligations between landlord and tenant. For example, a tenant might accept responsibility for some disrepair issues in return for decreased rent.

Surrendering leases

A deed of covenant can be used to document the early surrender of a lease, setting out required payments and handover arrangements. This avoids having to serve formal notice and take possession proceedings for forfeiture.

Settling disputes

A deed may form part of a negotiated settlement if a dispute arises, recording an agreement between the parties on contentious issues. 

Tax planning 

Altering rent provisions and review frequencies can sometimes be used for tax planning purposes.

Key Benefits of Deeds of Covenant

Deeds of covenant offer several benefits for landlords and tenants compared to negotiating an entirely new lease

1. Cost saving

Drafting a new long-form lease is expensive, typically costing thousands of pounds in legal fees. A short supplemental deed adapting an existing lease is faster and cheaper for both parties.

2. Speed and convenience

Completing a deed of covenant takes significantly less time than negotiating and executing a full new lease. The simplified process allows needed changes to be made quickly.

3. Flexibility

Deeds provide flexibility to alter leases reactively to meet changing tenant or landlord requirements over time. Lease terms can be adapted without completely starting over.

4. Certainty

Amending an existing lease gives contractual certainty. The original lease remains in place except for the specific changes set out in the deed. There is no need to renegotiate familiar terms.

5. Tax advantages

Adjusting rent provisions in an existing lease may offer stamp duty or capital gains tax planning benefits compared to granting a new lease.

6. Maintains goodwill

Renegotiating leases can damage landlord-tenant goodwill. A deed allows pragmatic adjustments preserving the original bargain. This promotes stable long-term tenancies. 

A deed of covenant offers a quicker, more flexible alternative to renegotiating an entire lease. Targeting only required changes provides cost and time efficiencies for all parties. This makes deeds a useful option for landlords and tenants to achieve necessary lease alterations while minimising disruption and expense.

How to Create a Deed of Covenant

If a landlord and tenant agree to amend a lease using a deed of covenant, there is a straightforward process to create one

1. Heads of terms

The parties should agree on written heads of terms, clearly setting out proposed changes to the lease. This ensures there is a shared record of agreed alterations before instructing solicitors.

2. Legal drafting

Each party should appoint a solicitor to negotiate specific terms and produce the final deed wording. It is typically drafted by the tenant’s solicitor before being approved by the landlord’s solicitors.

3. Execution

Once the document is settled, the parties must formally execute the deed following required legal formalities, with witnessing and exchange of copies. Proper execution is essential to take effect.

4. Registration

To fully protect their interests, the parties should promptly register the deed at the Land Registry if the title to the property is registered. 

5. Contract amendment

For consistency, any contract referring to the original lease should also be updated referencing the deed of covenant.

Either party’s solicitor can usually draft a basic deed of covenant varying straightforward lease terms for a modest fixed fee. More complex or contentious changes may need greater input to resolve.

Stamp Duty and Registration Requirements

Deeds of Covenant do not typically attract stamp duty if they do not grant any new interest or contain other dutiable transactions. However, they must still meet registration requirements.

Stamp duty 

Most deeds of covenant modifying a lease will not be subject to stamp duty as they do not grant a new leasehold interest. However, stamp duty may be triggered if the deed:

• Grants a new right of occupancy 
• Extends the original lease term
• Includes other dutiable matters like a sale or mortgage

Professional advice should be taken if the deed goes beyond simply supplementing the existing lease agreement. 

Registration

To take priority over later third-party interests in the land, a deed of covenant must be registered against the affected title at the HM Land Registry. 

The priority rules for registered land mean a deed only binds third parties once registered. Backdating it to the original lease date does not make it retrospectively binding. 

If the title is unregistered, the deed should still be noted against the title records and any related property deeds updated.

Enforcing a Deed of Covenant

A deed of covenant is legally binding between the original parties like any contract. If one party breaches the amended terms, the other can pursue various remedies through the courts.

Common enforcement options include

• Damages Compensation for proven losses flowing from the breach

• Injunctions Court orders compelling compliance or ceasing breaches  

• Specific performance Mandatory orders to carry out agreed actions 

• Forfeiture Ending the lease for serious tenant breaches

The deed can also be enforced against successors in title who take over the landlord or tenant’s interest. They will be bound to adhere to the covenant’s terms, provided the deed is properly registered.

Ultimately, if a party refuses to comply voluntarily with the deed, court action can be taken to compel the performance of its contractual obligations. Professional advice is essential before commencing proceedings.

Conclusion

Deeds of covenant are useful supplementary documents that allow landlords and tenants to efficiently adapt existing commercial property leases to meet changing requirements. 

Rather than undergoing the expensive and time-consuming process of negotiating an entirely new lease, a simple deed can target only the specific amendments needed by both parties.

They provide flexibility between rent reviews and lease renewals. Deeds enable pragmatic adjustments in response to emerging issues, supporting stable long-term tenancies.

When properly drafted and executed, deeds of covenant offer a legally certain way to alter lease agreements cost-effectively. They play an important role in the commercial property market by facilitating necessary lease variations while avoiding unnecessary disruption and expense.