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Remortgaging a Property With Restrictive Covenants

Restrictive covenants are obligations registered against a property's title that limit what the owner can do with the land. They can affect remortgaging where a breach has occurred or where the covenant creates a title risk that lenders find unacceptable. Understanding your covenant position and the remedies available is essential before applying to remortgage.

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Common Types of Restrictive Covenant and Their Impact

User covenants restrict the use of the property to a specific purpose, most commonly a single private dwelling house. These are extremely common and cause problems when a homeowner has run a business from the property, converted part of it into a separate letting unit, or changed the use in some other way. A breach of a user covenant can make the property unmortgageable until the breach is addressed, either by ceasing the offending use or (if the breach is historic) by obtaining indemnity insurance.

Development and alteration covenants prevent the construction of new buildings or the alteration of existing structures. Where a homeowner has built an extension, converted a loft, erected outbuildings or carried out other building works without the consent of the covenant beneficiary, this constitutes a breach. If the breach is relatively old (typically more than 12 months) and there is no evidence that the covenant beneficiary has taken any steps to enforce it, restrictive covenant indemnity insurance is usually available and acceptable to lenders.

Covenant to contribute to costs (sometimes called positive covenants) require the property owner to contribute to shared costs such as road maintenance, shared drainage or shared service infrastructure. These are not strictly restrictive covenants (as they impose positive obligations rather than restrictions) but they can affect mortgageability if they are not adequately documented, if the obligation is unusually onerous, or if there is a dispute about contributions. Lenders will want to understand the extent of any ongoing financial obligations before proceeding.

Restrictive Covenant Indemnity Insurance

Restrictive covenant indemnity insurance is the most commonly used remedy for covenant breach in the residential conveyancing and remortgage context. It is a one-off premium policy that protects the property owner and their mortgage lender against the financial consequences of a covenant being enforced. It does not remove the covenant or legalise the breach, but it provides a financial cushion should the covenant beneficiary ever take legal action.

The premium for restrictive covenant indemnity insurance is typically a single payment based on the insured property value and the nature and severity of the breach. Premiums can range from less than £100 for a relatively minor or long-standing breach on a modest property, to several thousand pounds for more recent or serious breaches on higher-value properties. The policy should be obtained in the joint names of the property owner and the lender, and the lender's solicitors will require sight of the policy before releasing any mortgage advance.

For indemnity insurance to be available, the breach must generally be at least 12 months old and there must be no evidence of the covenant beneficiary having taken steps to enforce it (known as "not having put the beneficiary on notice"). Critically, you must not contact the covenant beneficiary or make any approach to them before obtaining the insurance, as this could alert them to the breach and prevent insurance being available. If you are in any doubt, instruct a specialist conveyancer before taking any steps.

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Covenant Modification and Discharge

Where indemnity insurance is not available (for example, because the breach is recent, because the homeowner has already contacted the covenant beneficiary, or because the beneficiary has made threats to enforce) or where the homeowner prefers a permanent resolution, it may be possible to seek modification or discharge of the covenant through the Lands Tribunal (now the Upper Tribunal, Lands Chamber) under section 84 of the Law of Property Act 1925.

Section 84 applications allow a property owner to apply to have a restrictive covenant modified or discharged on specified grounds, including that the covenant has become obsolete due to changes in the character of the property or the neighbourhood, or that the modification would not injure the covenant beneficiary. These applications take considerable time (often 12 to 24 months) and there is no guarantee of success. They are most appropriate where the covenant is clearly obsolete or where the property owner needs a permanent, uninsured resolution for a high-value or complex transaction.

In some cases, the most pragmatic approach is to negotiate directly with the covenant beneficiary for their formal written consent to the breach or modification of the covenant. Where the covenant beneficiary can be identified and approached (through solicitors rather than directly by the homeowner), they may be willing to provide a formal consent or release in exchange for a modest payment. This provides a clean title resolution that is preferable to insurance in many cases. Your solicitor can advise on the most appropriate approach for your specific covenant.

Lender Attitudes and the Remortgage Process

Lenders take varying approaches to restrictive covenants depending on the nature of the covenant, whether there is a breach, and what remediation is in place. Many mainstream lenders will accept properties subject to standard residential covenants provided there is no identified breach. Where a breach is identified by the lender's solicitors, the lender will typically require either confirmation that the breach has been remedied, or a restrictive covenant indemnity insurance policy in acceptable terms before proceeding.

Some lenders have very low tolerance for any covenant issues and will decline even where adequate indemnity insurance is available. Others are more pragmatic and will proceed with appropriate insurance. Specialist lenders who are accustomed to complex title cases are generally better equipped to assess covenant issues proportionately and are more likely to proceed where the risk is manageable and well-insured.

The most important step you can take is to instruct specialist conveyancers early in the remortgage process and provide them with a copy of your property's title register and title plan. Your conveyancer can identify any restrictive covenants, assess whether there is any breach, advise on the remediation options available, and obtain any required indemnity insurance policies. Presenting a fully addressed covenant position to the lender's solicitors at the outset avoids delays and the risk of a last-minute issue derailing the remortgage.

Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.

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Frequently Asked Questions

A restrictive covenant is a legal obligation registered against a property's title that restricts what the owner can do with the land, such as prohibiting building extensions, restricting the use to residential purposes only, or preventing the division of the property. It affects your remortgage if there has been a breach of the covenant or if the covenant terms are particularly onerous. Lenders will require either confirmation that no breach exists or appropriate indemnity insurance before proceeding.

The starting point is your property's official copies from HM Land Registry (available for £3 per document). The title register will note any restrictive covenants, and the title plan will show the extent of the land affected. You will also need to check the title deeds or conveyance documents that created the covenant for the full wording, as the Land Registry entry often only provides a summary. Your conveyancer can obtain all relevant documentation and advise on the covenant terms.

No. Lenders instruct solicitors to carry out a full title investigation as part of any remortgage application, and restrictive covenants will be identified during this process. If a breach is identified and not addressed, the lender will not proceed. Attempting to conceal a breach from your lender could constitute mortgage fraud. The correct approach is to identify any covenants and breaches early, take specialist legal advice, and obtain any required indemnity insurance or other remediation before proceeding with the application.

The cost depends on the property value, the type and severity of the breach and the age of the breach. For a typical residential property with a historic minor breach (for example, an old outbuilding erected in breach of a development covenant), premiums of £100 to £500 are common. More serious or recent breaches, or higher-value properties, attract higher premiums. Your conveyancer can obtain quotes from specialist indemnity insurers. The premium is a one-off payment and the policy runs with the property indefinitely.

Not without addressing the covenant first. You have several options: identify and approach the covenant beneficiary (through solicitors) for a formal deed of release or consent, apply to the Upper Tribunal for modification of the covenant, or obtain planning permission and building regulations approval for the extension first and then seek a retrospective covenant release or insurance. The correct approach depends on whether the covenant beneficiary can be identified, their likely attitude and the urgency of the situation. Take specialist legal advice before proceeding.

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