Remortgage With a Restrictive Covenant

What Is a Restrictive Covenant?

A restrictive covenant is a legally binding obligation that restricts how the owner of a piece of land can use that land. Unlike positive covenants (which require you to do something), restrictive covenants require you to refrain from doing something. They are attached to the land itself, meaning they pass from one owner to the next and remain enforceable regardless of who owns the property.

Restrictive covenants are typically created when land is sold and the seller wants to retain some control over how the land is used after the sale. They are recorded in the property's title deeds and, for registered land, noted on the register at HM Land Registry.

Common examples of restrictive covenants include:

• No business use — The property must only be used as a private dwelling and not for any trade or business purposes.
• No further building — The owner must not erect any additional buildings or structures on the land without consent.
• No alterations to the exterior — The owner must not alter the appearance of the property without approval.
• No subdivision — The property must not be divided into separate dwellings.
• Fencing and boundary restrictions — Requirements about the type and height of fencing or hedging.
• No caravans or mobile homes — The land must not be used for stationing caravans or mobile homes.
• Approved use only — The property must only be used for purposes approved by the original developer or estate owner.

It is worth noting that restrictive covenants are separate from planning permission. Even if you have planning permission to carry out certain works, a restrictive covenant may still prevent you from doing so. Both planning law and covenant law must be satisfied.

How Restrictive Covenants Affect Your Remortgage

When you apply to remortgage, your solicitor will review the property's title as part of the conveyancing process. Any restrictive covenants noted on the title will be examined and reported to the lender. How this affects your remortgage depends on the nature of the covenant and whether it has been complied with.

Covenants that are being complied with

If the restrictive covenant is being fully complied with, it is unlikely to cause any problems with your remortgage. For example, if there is a covenant preventing business use and you are using the property solely as your home, the lender should have no concerns. The covenant simply remains as a condition on the title, and the lender's solicitor will note it in their report.

Covenants that have been breached

If a restrictive covenant has been breached, this is where complications can arise. A breach could occur if, for example, you have built an extension on a property with a covenant preventing additional building without consent. In this case, the lender will be concerned about the risk that the person or body with the benefit of the covenant could seek to enforce it.

Enforcement could potentially involve an injunction requiring the breach to be remedied (such as removing the extension) or a claim for damages. This represents a risk to the lender's security, which is why they take covenant breaches seriously.

Obsolete or unenforceable covenants

Some restrictive covenants may be very old and effectively obsolete, or the person or body who originally benefited from the covenant may no longer exist or be identifiable. In these cases, enforcement is highly unlikely. However, until the covenant is formally removed or modified, it remains on the title, and the lender's solicitor must still consider it.

Lenders' typical approach

Most lenders take a pragmatic approach to restrictive covenants. If the covenant is being complied with, they will generally proceed without issue. If there is a breach, they may accept the situation if indemnity insurance is available and the risk of enforcement is considered low. Some lenders may require the covenant to be formally dealt with before they will proceed.

Dealing With a Covenant Breach

If your property has a restrictive covenant that has been breached, there are several options available to address the situation before or during the remortgage process.

Indemnity insurance

The most common and cost-effective solution is to obtain indemnity insurance. This is a one-off insurance policy that protects the property owner (and the lender) against the financial consequences of the covenant being enforced. The policy covers legal costs and any damages or losses that might arise if enforcement action is taken.

Indemnity insurance is widely available and typically costs between 50 and a few hundred pounds for a one-off premium. Most lenders will accept indemnity insurance as adequate protection against covenant breaches, provided the policy meets their requirements. It is important to note that indemnity insurance does not remove the covenant or make the breach lawful. It simply provides financial protection against the risk of enforcement.

One crucial point about indemnity insurance is that you must not contact the person or body who benefits from the covenant before obtaining the policy. If you draw their attention to the breach, it can invalidate or make it impossible to obtain indemnity insurance.

Obtaining retrospective consent

If the covenant requires consent for certain actions, you may be able to obtain retrospective consent from the person or body who benefits from the covenant. This resolves the breach entirely and removes the issue from a legal perspective. However, this approach carries risks as the beneficiary may refuse consent or demand payment, and once you have drawn their attention to the breach, indemnity insurance may no longer be available.

Applying to the Upper Tribunal (Lands Chamber)

Under Section 84 of the Law of Property Act 1925, you can apply to the Upper Tribunal (Lands Chamber) to have a restrictive covenant modified or discharged. The Tribunal can modify or remove a covenant if it is satisfied that certain grounds are met, such as the covenant being obsolete, the proposed use being reasonable, or the covenant not securing any practical benefit for the person entitled to enforce it.

This route provides a definitive legal solution but can be time-consuming and expensive. It is typically reserved for cases where indemnity insurance is not available or where the covenant is causing significant ongoing problems.

Negotiating a deed of release

You can approach the person or body who benefits from the covenant and ask them to agree to a formal deed of release, which removes the covenant from the title. This requires their voluntary agreement and may involve paying a sum of money. As with obtaining retrospective consent, this approach should be considered carefully because it involves disclosing the breach.

Types of Restrictive Covenants and Lender Attitudes

Not all restrictive covenants are viewed equally by lenders. Understanding how different types of covenant are typically assessed can help you anticipate whether your remortgage will be straightforward or whether additional steps may be needed.

Standard residential use covenants

Covenants requiring the property to be used as a single private dwelling are very common and rarely cause issues, provided you are living in the property as your home. Lenders are comfortable with these and they do not typically require any special attention.

Building and alteration restrictions

Covenants restricting building work or alterations are common on both older properties and modern estates. If you have carried out work that might breach such a covenant, the lender will want to know whether consent was obtained or whether indemnity insurance is in place. If no work has been done that could breach the covenant, it should not affect your remortgage.

Estate management covenants

On modern housing estates, developers often impose covenants to maintain the character of the development. These might restrict the types of fencing, require properties to be maintained to a certain standard, or prevent certain activities. Lenders generally view these favourably as they help protect property values across the estate.

Historic or obsolete covenants

Some properties carry very old covenants that are clearly outdated, such as restrictions on keeping livestock or prohibitions relating to specific trades that no longer exist. While these covenants technically remain enforceable, lenders generally take a pragmatic view and will proceed without concern, particularly if indemnity insurance is available at minimal cost.

Covenants affecting property use

Covenants that fundamentally affect how the property can be used, such as those preventing conversion into flats or restricting commercial use, are taken more seriously by lenders. If such a covenant is relevant to the current or intended use of the property, the lender will want to see it properly addressed before proceeding.

Restrictive covenants on new-build properties

Many new-build properties come with restrictive covenants imposed by the developer. These often include requirements such as not altering the exterior appearance, not erecting satellite dishes in prominent positions, or maintaining front gardens to a certain standard. Lenders are generally comfortable with these as they are standard practice and help maintain the quality of the development.

The Role of Your Solicitor in Covenant Matters

Your conveyancing solicitor plays a crucial role when it comes to restrictive covenants and your remortgage. They are responsible for reviewing the title, identifying any covenants, assessing whether they have been complied with, and reporting their findings to the lender.

Title review

As part of the remortgage process, your solicitor will obtain official copies of the title register and title plan from HM Land Registry (for registered land). Any restrictive covenants will be listed in the charges register section of the title. For unregistered land, the solicitor will examine the title deeds to identify any covenants.

Compliance assessment

Your solicitor will ask you about the current use of the property and any works that have been carried out. This helps them assess whether the covenants are being complied with. Be honest and thorough in your responses, as failing to disclose a breach could cause problems later.

Reporting to the lender

The solicitor will include details of any relevant covenants in their report to the lender, along with their assessment of the risk. If there is a breach, they will recommend a course of action, such as obtaining indemnity insurance, and confirm whether the lender is willing to proceed on that basis.

Obtaining indemnity insurance

If indemnity insurance is needed, your solicitor will typically arrange this on your behalf. They will ensure the policy meets the lender's requirements and covers all relevant risks. The cost of the policy is usually paid by you as part of the conveyancing costs.

Advising on options

If a covenant issue is more complex, your solicitor can advise you on the available options, including whether it is appropriate to seek a formal modification or discharge through the Upper Tribunal, or whether other approaches might be more suitable. Their expertise is essential in navigating these sometimes complicated legal issues.

It is important to choose a solicitor who has experience with restrictive covenant matters, particularly if you know or suspect that there may be a covenant issue with your property. Not all conveyancers have the same level of expertise in this area, and specialist knowledge can make a significant difference to the outcome.

Practical Steps Before Remortgaging With a Covenant

If you know or suspect that your property is subject to restrictive covenants, taking a few practical steps before applying to remortgage can help ensure a smoother process.

Check your title

If you do not already know what covenants apply to your property, obtain official copies of your title register from HM Land Registry. You can do this online for a small fee. The charges register will list any restrictive covenants. Read them carefully and assess whether you are complying with all of them.

Review any works carried out

Consider whether any building work, alterations, or changes of use have been made to the property that could breach a covenant. This includes work carried out by previous owners. If you are unsure, your solicitor can help you assess the situation.

Gather evidence of compliance

If you can demonstrate compliance with the covenants, gather any relevant evidence. This might include planning permission documents, building regulations certificates, or correspondence with the party who benefits from the covenant.

Do not contact the covenant beneficiary

If you suspect a breach, do not contact the person or body who benefits from the covenant until you have taken legal advice. Doing so could draw their attention to the breach and make it impossible to obtain indemnity insurance. Let your solicitor advise you on the best course of action first.

Allow extra time

If covenant issues need to be resolved, the remortgage process may take longer than usual. Start early, ideally several months before your current deal expires, to give your solicitor time to deal with any complications.

Speak to a broker early

If you are aware of a covenant issue, mention it to your mortgage broker at the outset. They can then target lenders who are known to take a pragmatic approach to covenant matters, saving you time and avoiding unnecessary declined applications.

By preparing thoroughly and working with experienced professionals, most restrictive covenant issues can be resolved without preventing you from securing a competitive remortgage deal. The vast majority of homeowners with restrictive covenants on their property remortgage without any problems whatsoever.