Deeds of Covenant - Why are they needed and what happens if one is not completed?
7th October 2022
7th October 2022
In this Legal Update we consider an all too common scenario concerning freehold properties on managed estates that often sell without the incoming owner entering into a Deed of Covenant that is generally required under the terms of the Transfer governing the use of the property and, importantly, the payment of estate or service charges.
The consequence of the above to an estate management company tasked with managing a development of freehold properties, can mean that they are unable to recover estate management charges from the new owners that would ordinarily be payable under the terms of the Transfer.
In order to consider the options available to an estate management company in these circumstances, it is important to consider the applicable position in law.
Positive -v- Negative covenants
Similar to residential long leases, the Transfer deed that governs freehold properties contain a number of covenants, both positive and negative, that the owner of the property must abide by.
As the names suggest, a positive covenant places an obligation on the owner to do something, such as paying an estate maintenance charge, whereas a negative covenant, requires the owner to refrain from undertaking an action such as not to use the property for a specified purpose.
So far so good. However, how both covenants are treated in law is significantly different.
In its simplest form, a covenant is a form of contract. Generally, the rights and liabilities created by a contract can only be enforced by the parties to it but in the case of covenants relating to land, such covenants may be enforced by and/or against those who may not be an original party.
In English property law, negative restrictive covenants “run with the land” and as such, can be enforced by those other than the original parties i.e. successors in title. Here, it does not matter whether or not a Deed of Covenant has been entered into.
In terms of positive covenants, and in complete contrast to negative ones, they do not “run with the land” and crucially, do not bind any successor in title. However, please note that the position is different where the management charges are payable as an estate rentcharge (see here).
The Deed of Covenant
In most Transfer deeds for residential freehold properties, there will often be a requirement that the outgoing owner, upon an assignment, must procure that the incoming owner enters into a Deed of Covenant that is usually in a form annexed to the original Transfer.
The “procuring” of the entering into the Deed of Covenant is dealt with by the conveyancers acting on behalf of the parties upon a sale. A competent conveyancer will seek to ensure that the requirements for the Deed of Covenant are dealt with.
The purpose of the Deed of Covenant is a method used to compel a successor in title (the purchaser in a sale) to enter into a deed of covenant directly with the party who has the benefit of the positive covenant (often the management company with the obligation to manage the estate and, importantly, collect charges from the owners to facilitate that). The deed will contain a covenant in the same form as the original positive covenant. Each subsequent sale requires an obligation for the next successor in title to enter into the deed and so on.
More often than not, in order to compel compliance with the Deed of Covenant, the title to the property will usually have a restriction applied to it. The restriction will generally prevent a new owner from registering their interest unless a certificate is supplied to the Land Registry confirming that the requirements for the Deed of Covenant have been complied with. The form of restriction varies from property to property. Some will require a certificate signed by the management company confirming compliance whereas others are left to the conveyancer or a solicitor, usually of the purchaser, to certify that the Deed of Covenant has been entered into.
However, experience suggests that even in spite of the presence of a restriction, new owners frequently manage to register their interest without a Deed of Covenant having been entered into. When this happens, the chain of positive covenants is broken and it can be difficult to enforce the obligation due under a positive covenant.
So, when faced with such a scenario, what can be done to ensure that the estate management charges are paid:
First and foremost, it would be wise to consider how the maintenance charges are reserved under the terms of the Transfer. If they are reserved as an estate rentcharge, a Deed of Covenant may not necessarily be required as the obligation to pay in these circumstances attaches to the property and not the individual.
Provided that the Transfer obliges the estate management company to undertake a positive covenant to provide services, payment of the estate rentcharge may be enforced under the provision of Section 121 of the Law of Property Act 1925. See our legal update here
The previous owner
When the chain of covenants breaks, the last party to give the positive covenant will likely remain ‘on the hook’ to comply with the positive covenant to make payments. It would be most unusual for the chain of covenants to be broken on consecutive occasions so tracing the previous owner, whilst burdensome, is far from impossible.
Pursuing the previous owner will likely be a significant frustration for them when they are being asked to contribute towards charges for a property that they no longer own. Such a scenario will then likely compel the previous owner to at least seek to remedy the position concerning the Deed of Covenant or in the absence of doing so, a money claim could be made seeking a Judgment that could then be enforced against them.
The benefit and burden principle
Under common law, the “benefit and burden” principle provides that if a deed contains a positive covenant and a benefit, then it may be possible to enforce the burden of the positive covenant against a party who enjoys the benefit of it. For example, a new owner may have to contribute towards the maintenance of the estate roads because they enjoy a right of way over them, despite not having not entered into a Deed of Covenant to pay.
However, the scope to pursue this is limited because:
the benefit and burden have to be conferred in or by the same transaction;
there must be a reciprocal relationship between the benefit and the burden of the covenant;
a new owner must have the choice to enjoy the benefit and take on the burden of the covenant.
The requirement to enter into a Deed of Covenant upon the sale of a freehold property is very important, albeit it is largely out of the hands of the estate management company and the managing agents that act on their behalf.
Managing agents would be well advised to be fully aware of the transfer/assignment formalities for all of the units that they manage and ensure when responding to pre-sale enquires that they highlight the requirement to enter into a Deed of Covenant, if applicable, and to advise where the same should be sent. We can assist with clarifying what is and is not required across each development should you/your managers require assistance - see here.
Should the estate management company or their managing agent become aware of a sale having completed and a Deed of Covenant has not been received, immediate enquiries should be undertaken immediately to ascertain the position whilst the transaction is still “fresh” and the parties can be prompted to deal with the formalities.
However, in circumstances where a Deed of Covenant has been missed, all is not lost. The estate management company has the option to either:
Pursue the previous owner under their covenant; or
Seek to establish the “benefit and burden” principle.
Should you have any queries in relation to this week’s Legal Update, please feel free to contact a member of the team on 01435 897297 or firstname.lastname@example.org.
This legal update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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