Deed of Covenant on a Leasehold Property?

deed of covenant

IN THIS ARTICLE

Buying a leasehold flat can often be more complex than buying a freehold property. The addition of a third party, ie; the freeholder or landlord, in the conveyancing process means that there are various extra documentary requirements involved, typically including the requirement to sign a deed of covenant.

The following guide looks at deeds of covenant within the conveyancing process for residential leasehold properties, from what these are to the consequences of breaching the terms.

What is a deed of covenant?

When buying a leasehold property, there will be a written agreement between the leaseholder (or tenant) and freeholder (or landlord). This will set out the term or length of the lease, together with various other conditions relating to the rights and responsibilities of each party.

Typically, the lease will include a condition that a deed of covenant is required upon any transfer, assignment or underletting of the property. This means that when the flat is sold, the buyer will need to sign a written agreement to carry out the obligations, or refrain from the acts, stipulated therein. In this context, a deed of covenant is essentially a form of legal agreement in which the incoming tenant promises to comply with the terms of the lease.

Why are deeds of covenant used?

Strictly speaking, under the provisions of the Landlord and Tenant (Covenants) Act 1995, there is no obligation on an assignee (the incoming tenant) to enter into a direct deed of covenant with the landlord (or freeholder) for leases granted on or after 1 January 1996. This is because, by law, both the benefit and burden of the covenants made between the previous tenant and landlord will automatically pass to the new tenant on assignment of the lease.

As every assignee automatically becomes liable on the tenant’s covenants, and able to sue on the landlord’s covenants, this mean that no deed of covenant is actually required. The net effect is that the new leaseholder will become liable for any ground rent and service charges, without the need for any additional agreement, and be bound by any restrictions as to the use of the property. They will also be able to enforce the landlord’s covenants.

Additionally, the provisions of the 1995 Act make clear, to the extent that the lease contains covenants conferring rights exercisable by or against a third party — such as a management company who has undertaken obligations for the repair and maintenance of the building — that the assignee will also be liable for, and have the right to legally enforce, those covenants.

Before the 1995 Act came into force, deeds of covenant were commonly used in respect of the assignment of tripartite leases, in order to ensure that assignees were in a direct contractual relationship with the management company. Even though the law relating to privity of estate ensured that assignees would be liable on tenant’s covenants, and able to sue landlords for breach of theirs, the position in respect of management companies was less clear. To this extent, deeds of covenant still serve some useful purpose for older leases.

Still, it remains common practice for new long residential leases to require the purchaser of a leasehold to enter into a direct deed of covenant with the landlord and, where applicable, the management company, despite the fact that this is a wholly redundant requirement.

In many cases, the seller’s solicitor is likely to include a specific condition in the contract of sale requiring the execution of a direct deed of covenant, where any failure to comply is likely to frustrate the whole process.

Further, if the lease stipulates that this is what is required then it must be acted upon — where any failure to do so would place the tenant in breach of the lease. In these scenarios, the landlord and management company may not accept any payments for service charges or ground rent until a deed is signed, as to do so would mean that their right to enforce any of the leasehold covenants at a later stage could be treated as waived. In the meantime, until a deed has been executed, arrears and penalties will accrue.

Examples of leasehold covenants

In basic terms, a covenant is a legal promise that you will either carry out certain acts or, alternatively, refrain from doing certain things. There are two types of covenants: positive and negative, where these basically dictate how parties to a lease must or must not act.

Positive covenants are acts that you must carry out, such as being responsible for paying ground rent or a service charge, or keeping the property in good repair. In contrast, negative covenants stop you from doing certain things, such as not to carry out structural alterations to your property, not to carry out illegal acts, not to run a business from your flat, not to cause a nuisance, not to sublet or not to keep pets.

These clauses are commonly referred to as restrictive covenants, because they limit or restrict what you can and cannot do whilst living in the property. Restrictive covenants are essentially designed to prohibit any conduct that could affect other tenants and/or devalue the property as a whole.

As a deed of covenant will include various positive obligations on you as the potential new occupier, together with an agreement to observe certain restrictions, it’s important that you carefully read the document, together with the lease to which it refers, before signing. In this way, you will fully understand your legal rights and responsibilities when you agree to buy a leasehold property. Most covenants remain in place for the duration of the lease, so they are permanent unless otherwise removed or varied with the agreement of the landlord.

It’s worth noting, however, that insofar as any deed of covenant purports to bind you for the entire lease term, even if you later sell the property, this should be treated as void under the provisions of the 1995 Act. This is because the Act specifically abolished the principle that the original tenant would remain liable on the lease covenants throughout the whole of the term. That said, signing a deed of covenant still serves as a stark reminder to anyone who buys a leasehold property that they will be bound by its terms, at least whilst in occupation.

What information does a deed of covenant include?

The deed of covenant will be set out in a fairly standard format and is usually annexed to the lease in question. Typically, the deed will include:

  • the property details, inclusive of the address, postcode and title number
  • the parties to the agreement, inclusive of the names and addresses for service
  • any relevant definitions, depending on how complex the deed is, and whether there’s a need for certain terms to be explained to avoid any doubt as to how these are to be interpreted
  • the agreed terms are then usually set out to stipulate exactly what the deed of covenant requires, and what is being agreed, when signing, although a basic deed may simply state that the assignee agrees to take over the tenant’s obligations under the lease
  • the appropriate execution clause will be included, to ensure that the document is signed as a deed, in order to make the same legally binding.

Sample wording for an assignee’s covenant could read: “To pay the ground rent and service charge, and to observe and perform the tenant covenants and other tenant obligations as set out in the lease from completion of the assignment for the residue of the term of the lease”.

Executing a deed of covenant

If a deed of covenant is required within the conveyancing process when buying a leasehold flat, the solicitors acting for the seller will usually provide a draft form of the deed to the buyer’s solicitors. The buyer’s solicitors will then create the final deed to be executed by the buyer to confirm that they agree to comply with the terms of the lease moving forward.

The document must be signed, as a deed, to make it legally binding. This must be done in the presence of an independent witness. This must be someone who is over 18, has no interest in the matter and is not related to either party, nor living at the same address as them.

Are there fees for deeds of covenant?

There are various costs involved when buying a leasehold flat, including the conveyancing costs for your own solicitor, but also certain disbursements or fees incurred by the landlord or management company. In the case of deeds of covenant, your own solicitor will complete this for you, prior to you signing, for which you will have to pay for their time in doing so.

The landlord and/or management company will often also charge a fee for updating their records. The cost of this can be anything between £100 to £300, although whether this is paid by the buyer or seller is often the subject of negotiation.

What happens if there is a breach of covenant?

As a deed of covenant is a legally binding document in which the buyer agrees to be bound by the terms of the lease, this means that action can be taken against the new leaseholder for any failure to comply with its terms — although even absent any executed deed of covenant, by law, the assignee is bound by the terms of the lease in any event.

This means that leasehold covenants are not mere guidelines that you can choose whether or not to follow, but rather you must abide by the terms set out in the lease. Where these covenants are breached, a landlord will be able to enforce them against you in court. There are various remedies available to landlords in the context of long residential leases, including:

Injunctive relief

Where the court prohibits the tenant from breaching agreed covenants.

Specific performance

Where the court orders the tenant to comply with agreed covenants

Damages

To financially compensate the landlord, in addition to or in lieu of an order for an injunction or specific performance

Forfeiture

This will terminate the lease, giving possession of the property to the landlord.

Equally, however, the landlord will also be under various obligations, and restricted from doing various things, where you too could take legal action against your landlord where they have failed to comply with the terms of the lease — although this can be complex and costly.

Where a dispute arises, seeking legal advice at the earliest possible opportunity is often the best way forward. In this way, your legal advisor can help you to explore your options, either to sue or defend being sued, or other possible solutions without recourse to legal proceedings.

Deed of covenant FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

Author

Deed of Covenant on a Leasehold Property? 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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