What is a Deed of Covenant?
The phrase ‘deed of covenant’ sounds pretty grand and perhaps a little bit daunting, right? And it’s fair to say that the property world is full of terms that sound like this. It can make your head spin.
So let us set you straight: It’s nothing scary, but that’s not to say it isn’t important. So here, we’ll tell you all you need to know, like:
- What is a deed of covenant?
- Why are they used?
- What’s included?
- What does it mean when you sign one?
- How does it affect selling a property?
- Why pays for it?
- …and what happens if you don’t sign it.
Let’s get you up to speed.
What is a deed of covenant?
A deed of covenant is a legal document listing the responsibilities of the leaseholder, as set out by the freeholder.
Let’s use an example. Laura’s buying a flat. Fiona owns the land and the overall building that Katie’s flat is part of. Because Katie is essentially leasing part of Fiona’s building, Laura is the leaseholder, while Fiona is the freeholder.
As freeholder and leaseholder, Fiona and Laura sign a deed of covenant, in which Laura agrees to a set of legal obligations as laid out by Fiona. It sets out what Laura has to do, as well as what she can’t do.
Laura’s not alone. Nearly all flats are leasehold, and some houses too. In 2021/22, there were an estimated 4.98 million leasehold dwellings in England alone, so it’s a sizeable chunk of all properties out there.
Whatever type of leasehold property you’re buying, you’ll have to sign a deed of covenant when you agree to buy it.
What is usually included in a deed of covenant?
So, a deed of covenant is a legal document, but it’s basically a list of promises. A bit like marriage vows, it combines things the leaseholder promises to do, known as positive covenants. It also lists things they promise not to do, known as negative covenants.
What is a positive covenant?
A positive covenant is where a leaseholder is obliged to do something. Positive covenants exist because they improve or maintain the living conditions of everyone in the building/site, as well as maintaining the property’s value. For example, Laura might be required to:
- Pay service charges (and on time)
- Agree to co-fund larger works from time to time (though this would usually be based on the decision of a committee for fairness)
- Pay a specific amount of money into a maintenance fund on a regular basis
- Play a part in keeping communal areas clean and tidy
- Play a part in maintenance tasks, such as painting and decorating.
What is a negative covenant?
As you’d expect, a negative covenant is where the leaseholder is obliged not to do something. Again, this is to protect the living conditions of Laura’s neighbours, as well as Hannah’s freehold asset. For instance, the deed of covenant may prevent Laura from:
- Keeping pets (this can vary widely though, and some sites will simply ban exotic pets, or a large number in one flat)
- Running a business from her flat
- Making a lot of noise at certain times of day, or at all
- Subletting her flat to anyone
- Accessing certain parts of the overall site, for instance, if Laura needs to use a certain track to access the site.
Why do freeholders use a deed of covenant?
Freeholders like Fiona need a way to keep standards high. She wants to make sure her building doesn’t become run-down, and she has a responsibility to her leaseholders too, because their homes (and investments) are at stake.
A well-maintained building means better quality of life for all residents, as well as preserving the property’s value.
This is in the flat owners’ interests too. After all, where’s the fun in having a pristine, all-mod-cons flat if the building is crumbling, the garden is a jungle, and there’s a huge python on the loose?
That’s why deeds of covenant exist. They protect the building, its people, and the value of every flat. It should be a win-win for all involved.
What does it mean when I sign a deed of covenant?
As a deed of covenant is a legal contract, if you, as the leaseholder, sign it, you’re obliged to follow its terms.
If you breach those terms, the freeholder can take legal action, and the consequences can be serious. For example:
- If Laura refuses to carry out essential repairs to her windows and the leaks damage the property’s structure, Fiona could sue her for damages.
- If Laura refuses to pay her service charge, Fiona could take her to court to claim the money, leading to interest charges, legal costs and stress.
- If Laura has all-night parties with music blasting from her speakers, Fiona may issue a warning initially, but legal action is likely to follow, perhaps in the form of an injunction or a claim for the disturbance caused to other residents.
In all cases, things can escalate to forfeiture, where, through breaching the conditions Laura could lose her lease, and with it her property.
That’s why it’s so important to take a deed of covenant seriously. Also, it’s always a good idea to get it looked over by a property solicitor before you sign on the dotted line.
Does a deed of covenant affect selling a property?
Yes, a deed of covenant can impact sellers of leasehold properties. Let’s say Laura’s ready to move on after many happy years in her flat. She’s selling to Liam.
This means Liam will need to sign a new deed of covenant with Fiona, agreeing to the same rules Laura followed. If Fiona’s got an exotic pet ban and Liam can’t part with his giant lizard, the sale could grind to a halt.
Even if there are no lizard dramas, a deed of covenant can slow things down. It takes time to prepare, review, and sign, so the sale might face delays.
In short: a deed of covenant isn’t always a deal-breaker, but it can mean a delay.
And it’s not just time, money’s on the line too, as we’ll explore next.
Who pays for a deed of covenant?
Freeholders often charge a fee for drawing up and registering the new deed, which usually falls to the buyer. So it’s an extra cost for Liam to budget for.
The exact terms can vary. In some cases, the seller and buyer may negotiate who covers the fee, especially if it’s a sticking point in the sale.
Either way, both parties should check the lease carefully. Some leases state clearly who is responsible for the cost of a new deed of covenant, but if nothing’s mentioned about this, the standard arrangement is that the buyer usually pays as part of the sale process.
The fee itself isn’t set, but it’s usually around £300, though this depends on the freeholder and the complexity of the property. And don’t forget, if Liam’s buying with a mortgage, his lender may want proof the deed of covenant has been signed before releasing the funds.
So while it might feel like just another piece of paperwork, a deed of covenant can carry both practical and financial weight. That’s why it’s always worth understanding it fully before you buy or sell a leasehold property.
What is the ‘direct deed of covenant’ meaning?
Let’s say Liam’s landed a role studying lizards in the rainforest for a year. Fiona gives him permission to let his property to Sue. This is known as a sublet.
When a freeholder permits subletting, a separate deed of covenant is often needed. So, Fiona and Sue need to draw up an agreement.
This agreement – legally binding like a standard deed of covenant – is known as a direct deed of covenant. It only applies to the person who signed it, and not on any other leaseholders.
The purpose of a direct deed of covenant is to ensure that the subtenant agrees to follow the same rules and responsibilities set out in the original lease and the main deed of covenant.
It’s a way for the freeholder to protect the building’s condition and ensure standards are upheld, even when the flat is let to someone new.
What does a deed of covenant look like?
The deed of covenant’s usually attached to the lease document, or it might form part of the leasehold management pack. Usually the deed of covenant will contain the following:
- details of the freehold and leasehold property (address, postcode, HM Land Registry title numbers)
- parties to the agreement (covenantor and covenantee with full names and addresses)
- definitions and references for key terms
- specific terms of the covenant (drafted by the conveyancer)
- execution clause and space for signatures
Do I have to sign a deed of covenant?
No, if you decide you don’t want the property.
This is because for most leasehold sales, signing a deed of covenant is compulsory. No signature, no sale.
Usually a ‘wet’ (done on hard copy) signature is needed (as opposed to a digital signature on a PDF file). This may also need to be independently witnessed by someone who is not related to you and who is over 18 years old.
However, remember not to sign until conveyancing is done and dusted, and until your solicitor has looked the deed of covenant over and given you the green light.
And remember also that you can negotiate with the freeholder, as they may be willing to compromise on their terms.
Selling with a deed of covenant
A deed of covenant might sound complicated and scary, but it’s simply a legal agreement that protects the property and the people living in it.
For leaseholders, it means sticking to certain rules, such as paying service charges or keeping the place in good shape. For freeholders, it’s a way of keeping standards high and protecting their investment.
If you’re buying a leasehold property, expect to sign a deed of covenant, make sure you budget for costs and get a solicitor to take a look.
And if you’re selling, be ready for the buyer to ask about the deed, and be prepared for delays or extra paperwork if a new one is needed.
At Sell House Fast, we know the world of property can feel overwhelming at times. That’s why we’re here to make things simple, clear, and hassle-free. If you’re looking for a fast house sale or fast flat sale, we can often help you complete the sale in a matter of days.
Get in touch today for a free, no-obligation cash offer and to see what a difference we could make to your sale.
