Freehold properties on managed estates must sell with entering into a deed of covenant that is generally required under the terms of the transfer governing the use of the property and payment of estate or service charges.
The consequence of the above to a property management company can mean that they are unable to recover estate management charges from the new owners that would be payable under the terms of the Transfer.
Positive and Negative covenants
This is similar to residential long leases. Transfer deed that governs freehold properties contain a number of covenants, both positive and negative, that the owner of the property have to 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, where as a negative covenant, requires the owner to refrain from undertaking an action such as not to use the property for a specified purpose.
Both covenants are treated in law very differently.
Simply, a covenant is a form of contract. 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.
- Negative covenants
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.
- Positive covenants
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, the position is different where the management charges are payable as an estate rent charge.
The Deed of Covenant
In most Transfer deeds for residential freehold properties, there will often be a requirement that the selling 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 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 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 buyer to enter into the deed.
In order to comply 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.
What to do to ensure that the estate management charges are paid under such circumstances;
- Estate Rent charges
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 rent charge, 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 rent charge may be enforced under the provision of Section 121 of the Law of Property Act 1925.
- The previous owner
When the chain of covenants breaks, the last party to give the positive covenant will likely remain responsible 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 may be difficult.
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, a money claim could be made seeking a Judgment that could then be enforced against them.
The requirement to enter into a Deed of Covenant upon the sale of a freehold property is very important, it is mostly out of the hands of the estate management company and the managing agents that act on their behalf.
Managing agents are 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.
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.
Please contact Pelin Martin to book a 30-minute complimentary property consultation on +0208 994 7327 – firstname.lastname@example.org