Restrictive Covenant Insurance
A restrictive covenant creates a restriction on the title to the property that is intended to prevent a buyer from using or developing the land in a certain way. The restriction may continue to bind successors in title and the benefit may belong to defined people or groups of people, or to owners of benefiting land.
Common examples of restrictive covenants are:
- Not to erect any buildings or structures on the land
- Not to use the land for any business use
- Not to build or use the land for more than a specified number of dwellings
- Building line and height restrictions
- Restrictions in making alterations to a building without obtaining consent
- Not to cause a nuisance or annoyance
- Not to sell alcohol
Depending on the circumstances of a particular case, restrictive covenant insurance can be arranged for development of, or changes of use to, a property in potential or obvious breach of restrictive covenants.
Cover may be available pre-planning before planning costs are incurred, with a policy drafted to include cover for wasted planning costs if enforcement action arises to prevent development for which planning permission is obtained.
If a property is to be acquired with the benefit of a planning permission, cover might be taken up upon acquisition or prior to the development phase to protect against loss in land value and abortive costs of development works. The policy provides protection for successors in title to the developer, for example the individual purchasers of completed dwellings and their lender and successive owners.
Why take out restrictive covenant insurance?
For most developers arranging restrictive covenant indemnity insurance is now a routine part of the acquisition of a site and a cost factor that is built into the project.
In the case of some restrictive covenants a full copy of the document that created them may be missing and therefore the nature of the restrictive covenant and identity of benefiting parties is difficult to establish.
The existence of a restrictive covenant may be unknown, or the party with benefit may be unknown, or it may be argued that the restriction is obsolete. However, this does not mean that a third party will not attempt to take action to enforce the covenant. A third party may hold better information or be highly motivated to prevent or delay development of the property.
If it can be successfully argued that the restriction has become obsolete due to changes in the character of the property or the neighbourhood, or other circumstances that might be considered material, it may be possible to seek a modification of the restrictive covenants at the Lands Tribunal. However, this can be a costly and time consuming process, and the decision may go against the developer if their arguments are unsustainable.
Obtaining a restrictive covenant policy can be an efficient and cost effective way of dealing with the issue of the title to the property being subject to restrictive covenants. It can help remove future impediments and delays and mitigate increased costs in dealing with completed plot sales.
In order to facilitate quick and easy plot sales, a developer who is building multiple dwellings on a site that is subject to restrictive covenants will not want to have to deal with the issue of restrictive covenants with the solicitors of each individual plot purchaser, particularly when there are a high number of plots involved. A single policy covering the entire development will often represent the most efficient and cost effective solution for the developer.
Restrictive Covenant Insurance Benefits
Restrictive covenant insurance provides protection against financial losses that might arise in the event of enforcement or attempted enforcement of a possible breach of a restrictive covenant.
Generally, a policy will provide cover for loss relating to:
- Damages or compensation awarded against the insured by the courts
- Cost of altering, demolishing and/or reinstating all or any part of the property including any part of any building or other construction on or forming part of the property
- Reduction in market value
- Abortive costs of works
- Costs of settlement
- Defence costs
- Cost and expenses incurred with the insurer’s consent
Depending on the circumstances of an individual transaction and our assessment of the restrictive covenants, cover may be available to cover other losses such as business interruption losses.
A restrictive covenant insurance policy provides cover in perpetuity and as such can usually benefit successive owners of the property and their lenders.