When dealing with property transactions in the United Kingdom, particularly in the case of leasehold properties, a legal document known as a Deed of Covenant often comes into play. This document holds significant importance for both freeholders and leaseholders, especially when a leasehold flat or house is being sold. Understanding how this deed functions, what obligations it imposes, and why it is required can help buyers, sellers, and legal practitioners navigate leasehold transactions more confidently and accurately.
Understanding the Deed of Covenant in a Leasehold Context
A Deed of Covenant in leasehold property transactions is a legal agreement signed by a new leaseholder promising to observe and perform the covenants (or obligations) set out in the original lease. These covenants typically relate to matters such as maintaining the property, contributing to service charges, and refraining from certain types of alterations or behavior.
This deed ensures that the new leaseholder legally binds themselves to the same obligations that the outgoing leaseholder had, effectively maintaining the continuity of responsibility for all terms in the lease. It is a crucial step, particularly where the lease includes a clause requiring any assignee (new leaseholder) to enter into such a deed when the property is transferred.
Common Situations Requiring a Deed of Covenant
The requirement for a Deed of Covenant usually arises in the following circumstances:
- When a leasehold property is sold to a new owner
- When a lease is transferred as part of a gift or inheritance
- When a lender wants additional legal assurance from the borrower
In each case, the deed serves to ensure that the new owner upholds the responsibilities outlined in the original lease agreement, preventing any break in the chain of covenant enforcement.
Legal Implications of the Deed
Signing a Deed of Covenant carries substantial legal weight. The new leaseholder agrees to be bound by all the conditions stated in the lease, some of which may be decades old. These conditions can include:
- Paying ground rent and service charges
- Allowing access for maintenance or inspections
- Keeping the property in good repair
- Complying with restrictions on use or alterations
If the new leaseholder fails to comply, the landlord (or managing agent acting on behalf of the freeholder) may take legal action to enforce compliance, which could lead to penalties or even forfeiture of the lease in extreme cases. That is why solicitors typically review the lease carefully before advising a client to enter into such an agreement.
Connection with the Landlord’s Consent
Some leases include a requirement for landlord consent before a lease can be assigned or transferred. In these situations, the landlord may not grant consent unless a Deed of Covenant is signed and returned. Therefore, the deed often becomes part of a broader set of requirements needed to complete a leasehold property transaction, including obtaining a Licence to Assign if necessary.
Who Prepares and Signs the Deed?
Typically, the buyer’s solicitor will prepare the Deed of Covenant as part of the conveyancing process. This document is then signed by the buyer and sent to the landlord or managing agent. In some cases, the landlord or managing agent may require a specific format or provide a standard template for the deed, which must be followed.
After it is signed and returned, a notice is usually served to inform the landlord or management company of the completed transfer and the identity of the new leaseholder. This process helps maintain proper records and ensures that service charges and ground rent invoices are addressed to the correct person.
Cost and Timelines
There is usually a fee associated with processing and registering the Deed of Covenant. This fee is payable to the landlord, managing agent, or solicitor acting on behalf of the freeholder. The cost varies but generally ranges from £100 to £300, depending on the complexity of the lease and the requirements imposed by the freeholder.
The time needed to complete the deed also varies. If the required documents are prepared and returned promptly, and if there are no complications or delays from the landlord’s side, the process can be completed in a few days. However, any missing information, delays in signing, or disputes over the terms of the deed can cause delays in the completion of the property sale or transfer.
Deed of Covenant vs. Direct Enforceability
In some leases, covenants are directly enforceable by the landlord against new tenants through the principle of privity of estate. However, in older leases, this legal connection may not be automatic, particularly when the lease was originally created before the Landlord and Tenant (Covenants) Act 1995 came into force. In such cases, a Deed of Covenant is necessary to create a direct legal relationship between the new leaseholder and the landlord.
Alternatives and Exemptions
There are limited circumstances where a Deed of Covenant may not be required. For instance, in cases where the lease does not expressly require it, or where a landlord chooses to waive the requirement, the deed may be omitted. Additionally, when the landlord’s interest is held by a residents’ management company and the leaseholders collectively manage the property, the practical need for the deed may be lower, though it still remains a technical requirement under the lease terms.
Practical Tips for Buyers and Sellers
To ensure a smooth transaction when a leasehold property is being sold or transferred, consider the following tips:
- Check the lease early in the process to determine whether a Deed of Covenant is required
- Confirm the freeholder or managing agent’s specific requirements and templates
- Ensure all fees related to the deed are budgeted for in advance
- Instruct a solicitor experienced with leasehold transactions
Failing to complete the Deed of Covenant properly can delay the transaction or result in the landlord refusing to register the new owner, which may affect the buyer’s ability to sell or mortgage the property later.
The Deed of Covenant leasehold is an essential legal instrument in UK property law, specifically when transferring ownership of leasehold properties. By signing the deed, the incoming leaseholder commits to honoring the covenants set out in the original lease, protecting the landlord’s rights and ensuring continuity in the management of the building. Given its legal and practical implications, it’s vital for all parties involved buyers, sellers, solicitors, and landlords to understand the role, requirements, and responsibilities associated with this important document.