Deed of Covenant
A long lease brings obligations for both freeholders and leaseholders in the form of the covenants (promises) they make to each other. In other words, what the leaseholder contracts to do and what the freeholder is bound to do. There have always been two types of covenants: positive, which is a promise to do something, and restrictive which is a promise not to do something.
How many covenants (and what they are) depend on how the lease is drawn and they are either going to expressly written into the lease or implied and its important to be aware that the latter have just as much force in law as the former.
Deed of Covenant
Most leases (both old and new) will contain an obligation for the selling leaseholder to get the purchaser to enter into a deed of covenant with the freeholder/managing agent/management company.This will act to confer rights between the parties and protect what is known as ‘Privity of Contract’ which can only confer rights or impose obligations upon those who are party to the contract.
The solicitors acting for the seller will usually provide a draft form of the Deed of Covenant to the purchaser’s Conveyancing Solicitors during the course of the conveyancing process. The latter will then produce the final deed to be executed by the buyer to confirm they will comply with the terms of the existing lease.
However, under s12 of the Landlord & Tenant (Covenants) Act 1995, (covenants with management companies etc) it essentially states that on any assignment of the lease, the benefit and burden of covenants made by the tenant with the third party pass to the tenant’s assignee. The 1995 Act therefore still maintains what is known as privity of contract between the new leaseholder and the landlord/management company so to all intents and purposes, the Deed of Covenant is rendered unnecessary.
Having said that, the Deed of Covenant is one of the obligations contained within the lease. There will be a restriction placed on the register of title to the flat to prevent registration of any disposition unless it has been certified that the buyer has complied with this requirement. Failure to do so amounts to a lease breach and in many cases, the freeholders/managing agents will not accept any payments for service charges or ground rent.
Why? Because the acceptance of such payments could mean that the right of the freeholder to enforce any of the leasehold covenants later on could be ‘waived’ in other words unenforceable. Until the Deed of Covenant is completed, additional arrears and penalties could also accrue, alongside the charging of interest (if the lease permits this).
So, if legislation overrides the necessity of a Deed of Covenent, why do developers still keep writing leases that require this?