The thought of buying your own home is exciting and you can look forward to doing what you want with it. Unless, that is, restrictive covenants are in place. You may have heard of them before but never had the need to find out exactly what they are and how they can affect buying a property. Now, however, you’re possibly wondering — should you buy a house with a restrictive covenant?
To help you make the right decision, we’ll explain what restrictive covenants are and how they’re viewed by lenders. We’ll also explain the consequences of breaching them and whether or not they can be removed.
What is a restrictive covenant?
A restrictive covenant is a legally binding condition that is included in the property’s deeds or contract. It stipulates the restrictions in place as to what can or can’t be done with the property or land in certain circumstances. As the covenant is written into the deeds, it remains with the property regardless of any changes in ownership.
Restrictive covenants can apply to a single property, a plot of land or multiple properties, such as on a development. They also apply to leasehold properties as well as freehold ones. Examples of restrictive covenants include:
- The property usage may be restricted. For example, you may be unable to run a business from home or use it for holiday lets.
- You may be unable to make alterations, such as building an extension, having a loft conversion or converting the house into flats.
- There may be building restrictions, preventing you from building certain structures on the land. For example, a conservatory or an additional garage.
Often used to maintain the standards of a development, restrictive covenants can be much smaller considerations but still ones that impact your use of the property. For example, a covenant may:
- ban the installation of satellite dishes
- restrict the heights of fencing and gates
- restrict the placement of security cameras or solar panels
- set certain standards for maintaining gardens so that they don’t look untidy
- restrict the types of vehicles that can be parked on the land, such as boats or caravans
- prevent you from having certain pets or keeping livestock
Will a restrictive covenant affect your mortgage application?
As restrictive covenants remain with a property, they pose a risk to lenders. They can put potential buyers off, making a property harder to sell. Some can also affect the market value of the property. For example, a covenant stipulating building restrictions, which may prohibit the building of an extension or the conversion of a loft.
Lenders have to consider any issues with reselling the property, particularly if you default on the mortgage in the future and the property has to be repossessed. In this case, they would rely on a quick sale to recoup their funds. A restrictive covenant on the property, however, would reduce the pool of interested buyers. This would increase the amount of time it takes to sell the property. It may also reduce the market value, putting the lender at risk of being unable to recoup the full amount owed to them.
Therefore, the risks attached to a property with a restrictive covenant can deter lenders from agreeing to a mortgage. This isn’t always the case, though, as the terms of a restrictive covenant will be specific to the property. As such, lenders look at applications in these circumstances on a case-by-case basis.
Lenders need to check the details of any covenants included in the deeds to determine whether or not they’re prepared to offer a mortgage. Some may refuse to lend. Others may agree but offer a lower loan-to-value (LTV) ratio and charge a higher interest rate to compensate for the risk.
What happens if you breach a restrictive covenant?
Once you own a property with a restrictive covenant, you are legally obliged to adhere to it. If you breach the restrictive covenant, whether knowingly or otherwise, there may be serious consequences. These can include having to:
- Rectify the work you have carried out. For example, if you have built an extension, you may have to pull it back down.
- Pay a fine, which may be extremely costly.
- Face legal action.
If you breach a covenant and it remains unchallenged for over 12 months, you can apply for restrictive covenant insurance. This indemnity insurance can be expensive. However, it provides cover for what you have already done and can be passed to future owners.
Can restrictive covenants be removed?
It is possible to remove a restrictive covenant but it can be a time-consuming, costly and complex process. You need to find out who benefits from the covenant and contact them to ask for retrospective consent for work.
If you’re unable to trace them or do so but they refuse to negotiate or agree but stipulate exorbitant compensation or fees, you can contact the Upper Tribunal Lands Chamber. This will enable you to apply to have the restrictive covenant modified or removed. If your case is successful, a court order may be issued to remove or modify the covenant. However, this can be an expensive process and the beneficiary of the covenant won’t be held liable to pay your costs. If the beneficiary of the covenant challenges the case and is successful, you may be liable to cover their costs.
Should you buy a house with a restrictive covenant?
It’s essential to seek the guidance of your solicitor on the restrictive covenant that’s in place. You need to fully understand the implications. These include the restrictions on what you can do with the property or how you can use it, the enforceability of the covenant and the risks involved in breaching it. Your solicitor can advise you further if you wish to negotiate on the removal or modification of the covenant.
If the restrictions don’t interfere with your plans for the property and you still wish to buy it, just bear in mind the immediate and future financial impact. When trying to secure a mortgage, you’ll have a smaller pool of lenders to choose from. You may also have to pay a higher deposit, fees and interest rate to mitigate their risk. When trying to sell the property in the future, there will be fewer interested buyers and the property’s value may be affected.
However, if your circumstances and intentions for the property mean that the restrictive covenant doesn’t present an issue, you can proceed with your purchase knowing that you’ve made an informed decision.
We can help you secure a mortgage on a property with a restrictive covenant
Our mortgage brokers work closely with specialist lenders who accept applications where restrictive covenants are in place. They will search for the lender most suited to your circumstances, the restrictive covenant and the type of property you’re buying. They will negotiate for the best deal on your behalf and guide you on how to improve your chances of having a successful application. Just give us a call on 01322 907 000 to get started and discover the mortgage options available to you.