What is a Deed of Covenant?
A Deed of Covenant is a legal document that is signed between two parties. The deed declares that one party will pay the other a certain amount of money. In most cases, this refers to the buyer of a leasehold property agreeing to pay the freeholder money for property-related costs. These costs include maintenance fees and ground rent.
In this guide, we’ll be taking you through everything you need to know about the Deed of Covenant. This will give you a better understanding of how the document works and whether you will need to sign one.
Deed of Covenant and Leasehold Properties
Deed of Covenants are typically associated with leasehold properties. They lay out the positive and negative obligations that a buyer has to abide by when purchasing a leasehold property. When buying a freehold property, the buyer is also purchasing the land that the property is on and therefore no covenants need to pass.
In the Deed of Covenant, the freeholder will lay out the various obligations that the buyer will agree with or negotiate. This can include paying maintenance fees and ground rent as well as rules regarding pets among others. The deed is viewed as a contract between the new buyer and the freeholder.
What does a Deed of Covenant Cover?
The Deed of Covenant is a legal contract that states that the buyer agrees to abide by the obligations laid out by the freeholder of the property. This usually includes making payments such as ground rent and maintenance fees. It can also include other conditions such as restrictions on pets and forbidding any subletting amongst others.
There are two types of covenants known as positive and negative covenants.
Positive Covenants
The first type of covenant is the positive covenant. These relate to obligations that will contribute to a positive environment for those in the residence. Some examples of positive covenants include the following:
- Agreeing to pay certain charges such as maintenance fees and ground rent
- Agreeing to any further work or renovation subject to committee discussions
- Ensuring that all communal areas are kept tidy
- Maintaining the exterior of the property when needed
Negative Covenants
Negative Covenants relate to the restrictions that freeholders can put on the leaseholders. The negative covenants can differ depending on the freeholder’s preferences. Here are some common negative covenants that you may come across:
- Restrictions against subletting the property or using it as a holiday let
- Restrictions on owning pets
- Forbidding any commercial business to run from the property
- Certain areas of the property may also be restricted depending on the development
Each Deed of Covenant is different, so it’s important to make sure that you read through the document thoroughly before signing.
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Why do I need a Deed of Covenant?
Deed of Covenants are a direct contract between the new buyer and the freeholder. The Landlord and Tenant (Covenants) Act 1995 states that assignees can sue based on the landlord's covenants. This is because they are liable for the tenant's covenants. This means that a Deed of Covenant is not a necessity on new leases.
However, if a Deed of Covenant is signed, the landlord can use it as a means to collect the charges stated in the agreement. The charges can include ground rent and maintenance fees. A lot of freeholders dictate that a Deed of Covenant must be signed in order to complete the transaction as a condition of the agreement. If you're buying the freehold, you should speak to your solicitor about the Deed of Covenant.
How is a Deed of Covenant Executed?
A Deed of Covenant is executed during the conveyancing process. This means that the buyer and freeholder will need to hire leasehold solicitors to assist with the transaction. Conveyancers are required due to the amount of paperwork that needs to be filled out regarding leasehold properties. It can be a complex process and therefore it is best to hire a conveyancer to prevent delays.
When a buyer is purchasing their leasehold property, the seller’s conveyancer will be instructed to draw up a Deed of Covenant draft. This draft is then reviewed by the buyer’s conveyancer who will then create the final copy of the deed that needs to be signed by all parties.
Each party that signs the deed must sign it in the presence of a witness. The witness must be someone who is not related to any party, over the age of 18, and is not living at the same address as the signee.
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Is it Legally Binding?
Once the Deed of Covenant is signed by all relevant parties with appropriate witnesses, it is then viewed as legally binding. This means that once signed, any breach of the Deed of Covenant will come with legal and financial ramifications.
The Deed of Covenant usually lasts for as long as the lease. However, the length of time will be clearly stated on the document so you are able to check over it before signing.
Who Pays For It?
The average Deed of Covenant cost is £280. It is paid for by the current owner of the property. The money is sent to the landlord who will then pay for the Deed of Covenant to be drafted. Paying the fee as soon as possible will prevent any delays and ensure that all paperwork can be submitted efficiently.
The Deed of Covenant is viewed as a disbursement and may appear as such on your bill. Therefore, it’s best to ask for a specific breakdown if you are unsure. This is especially important if you are making multiple payments at once.
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