Restrictive Covenant Indemnity Insurance

• If you purchase a property with a breached restrictive covenant, this insurance can provide financial protection against potential legal claims and damages for the mortgage lender.
• You cannot buy restrictive covenant indemnity insurance directly from an insurer, only through a conveyancing solicitor. They will help obtain quotes and purchase the appropriate policy.
• The insurance cost ranges from £200 to £2,000 and will depend on the severity of the covenant breach, the property's value, the location, and the insurer's risk assessment.

Imagine buying a home only to discover a hidden legal landmine. A restrictive covenant, a condition limiting how the property can be used, has been breached by a previous owner. For example, the owner could have extended the property, when the restrictive covenant on your title deeds stops any extensions to the property.

This breach could lead to costly legal battles with the original land owner, and future buyers may not pay full market price for your property for something that wasn't your fault. While you may take on this risk, mortgage lenders won't. Fortunately, there's a solution for your lender: restrictive covenant indemnity insurance.

What is restrictive covenant indemnity insurance?

It's a specialised insurance policy that provides financial protection to homeowners who have purchased a property with a breached restrictive covenant.

This type of policy is also called a 'breach of leasehold covenant indemnity policy'.

A restrictive covenant is a legal condition imposed on land that limits how it can be used. For example, a covenant might restrict the proposed development of certain types of buildings, commercial activities, or alterations to the property.

When a previous owner has violated a restrictive covenant, it can create legal risks for the current property owner. If the party with the right to enforce the covenant decides to take legal action, the property owner could face significant financial consequences, including legal fees, damages, and potential loss of property value.

For example, if the property owner operated a business from home, hadn't maintained the boundary to the property, or erected a tall chimney. The party with the right over the land could look to enforce their right through the courts which, in these cases, could mean stopping you from working from the property, getting the boundary maintained, or taking down the tall chimney. All of these could place the landowner in a financially unstable position.

This insurance acts as a safety net by providing coverage for:

• Legal fees: Costs of defending a legal claim related to the covenant breach. These fees have to be 'reasonable' and include costs for applications to a court, out-of-court settlements, or lands tribunal.
• Damages: The legal costs are covered in taking down an extension that shouldn't have been built. However, the costs to remove the extension are not, and neither is the premium to the original landowner to allow the extension to be there.
• Loss of property value: Property value reduction due to the covenant breach.
• Other costs: If you have the insurer's written consent, they will cover other expenses incurred (this will vary from policy to policy).

Depending entirely on the individual circumstance and only if you can get your freeholder to agree to it, a restrictive covenant can be varied or removed via a Deed of Variation.

How to get restrictive covenant indemnity insurance

You cannot pay to get it directly from an insurance provider. If you need to take out this insurance, your solicitor needs to do this for you. If you breach a restrictive covenant during your ownership of the property, you'll have to wait until you sell to take out the indemnity insurance.

• 1

  Consult a conveyancing solicitor

Expertise: A conveyancing solicitor specialises in property law, knows how to evaluate the situation, and will advise on the appropriate course of action.

Assessment: The solicitor will review the property's title deeds and other documents to identify the breached restrictive covenant. They will also assess the potential risks and potential legal consequences associated with the breach.

• 2

  Get a quote

Insurance provider: The solicitor will contact insurance providers that specialise in restrictive covenant insurance.

The cost of the insurance will depend on several factors, including:

• The severity of the breach: The extent to which the covenant has been violated.
• Property value: The market value of the property.
• Location: The property's location and the prevalence of restrictive covenants in the area.
• Risk assessment: The insurer's assessment of the potential risks associated with the breach.

• 3

  Purchase the insurance

Policy: Once you have a suitable quote, the solicitor will help the property owner purchase the insurance policy.

Coverage: The policy will outline the specific coverage provided, including the types of legal costs and damages covered.

• 4

  Review the policy

Understanding: It's important to carefully review the policy to ensure that it provides coverage for the specific circumstances of the property and the covenant breach.

Questions: If you have any questions about the policy, don't hesitate to ask your solicitor for further information or clarification.

• 5

  Notify the insurer

Claim: If a claim arises due to a legal dispute, the property owner should notify their insurer immediately.

Assistance: The insurer will provide guidance and assistance throughout the legal process.

Remember: Getting this insurance can be complex. Work with a qualified, experienced conveyancing solicitor to ensure you have the appropriate coverage in place.

Pros and cons of restrictive covenant indemnity insurance

Pros

• Peace of mind: This insurance can provide significant peace of mind for property owners concerned about potential legal disputes arising from covenant breaches.
• Financial protection: It covers legal fees, damages, and other costs associated with defending a legal claim.
• Avoidance of costly disputes: Property owners may be able to avoid lengthy and expensive legal battles.
• Preservation of property value: The insurance can help protect the value of the property by mitigating the financial impact of a covenant-related dispute.

Cons

• Cost: The upfront cost of an insurance policy can be significant, especially for high-value properties or severe covenant breaches.
• Limited coverage: While the insurance provides financial protection, it may have limitations or exclusions, such as certain types of damages or legal claims.
• Temporary solution: The insurance does not address the underlying issue of the breached covenant. It is a temporary solution that provides financial protection until the covenant is resolved or enforced.

How much does indemnity insurance cost?

The cost of buying indemnity insurance varies depending on the insurance provider and the value of the property. Indemnity insurance can't be purchased by you directly through the insurer as it requires the terms to be explained to you by a solicitor.

Generally, the more serious the breach, the higher the insurance premium will be. Also, higher-value properties will usually require higher premiums too.

The indemnity premium is a one-off payment and the value of the insurance depends on the value of the insured property and ranges from £150 to £500. You'll need to get your solicitor to arrange a quote for this.

Although the insurance is for the new buyer/owner of the property, the actual cost is often covered by the seller as they, or the previous owners, caused the breach.

The buyer should confirm with the seller on this. If the seller is paying for the indemnity insurance, the seller's solicitor may take out the indemnity insurance instead of the buyer's solicitor.