Deed of Covenant When Buying a Leasehold Property

Deed of Covenant is a term that may crop up when you are buying a new home if you are purchasing leasehold.

If you are buying a leasehold property, conveyancing may take a little longer, and this is because there is a third party involved - the landlord, who is the freeholder. When a leasehold property goes up for sale, they need to provide information to the buyers solicitor that only the landlord will be able to provide.

What is a Deed of Covenant?

When a buyer purchases a leasehold property, the new buyer may need to enter into what is known as a Deed of Covenant. A Deed of Covenant is a document that the buyer will sign to say that they agree with the lease terms.

It is also a legally binding agreement between two people that states that one person will pay the other an agreed amount - to pay ground rent and service charges, and to observe certain restrictions. In simple terms, the Deed states the things that the purchaser must and must not do with the property, for example, on the ‘positive’ side, being responsible for contributions to a maintenance fund, and on the ‘negative’ side, not using it as a business base, nor keeping a pet. A restrictive covenant is a clause in the Deed that limits or restricts what the leaseholder can do with the property.

Is there a fee for a Deed of Covenant?

The landlord may charge the buyer a fee for the Deed of Covenant, as well as fees for a Notice of Transfer and a Notice of Charge fee. When you find out if a Deed of Covenant is required, then it is a good idea to enquire as soon as possible about fees and about what is required.

The landlord also has to provide the buyer’s solicitors with information about the property, and the cost of providing this information is at the landlord’s discretion - usually around £300. This fee needs to be paid for by the seller.

Who can witness a Deed of Covenant?

Typically a witness needs to be unrelated to either party, over 18 and independent.

What is the process of a Deed of Covenant?

If a Deed of Covenant is required, a draft form will usually be given to the buyers solicitors by the seller’s solicitors during the conveyancing. The purchasers solicitors will then create the final Deed so the buyer can confirm that they agree to the terms of the lease.

What is a direct Deed of Covenant?

If a tenant sublets their property, their Deed of Covenant may insist that the new subtenant enters into their own Deed of Covenant with the landlord. This is why it is called ‘direct’. It is not an obligation on all leases, and may be open to negotiation when setting out the main Deed of Covenant if you ask the landlord why he feels a direct covenant is required.