Navigating Restrictive Covenants with Title Insurance
A restrictive covenant is an agreement between a property owner and another party which limits the way land can be used and/or developed. Restrictive covenants are recorded against the title to a property and bind current and future owners (unless the covenant itself specifies otherwise.)
If you purchase land that is the subject of a restrictive covenant and the terms of that covenant have not been complied with, you may inherit liability for these breaches. Title insurance can help safeguard against financial losses that may arise should the party with the benefit of the covenant seek to enforce its terms.
1. What do restrictive covenants typically include?
The scope of what can be included in a restrictive covenant is not set in stone, and it can vary greatly depending on the type of property that is the subject of a covenant. However, some common examples of restrictive covenants include:
1. A prohibition against constructing additional buildings or subdividing land (e.g. limiting development to only one building on a lot).
2. Restrictions preventing certain types of uses on a property (e.g. prohibiting industrial or noxious uses).
3. Restrictions on using certain building material or design elements other than those specified in the covenant (e.g. for new buildings and/or fences).
2. How can it impact on a sale or purchase?
Restrictive covenants can present significant challenges for both buyers and sellers in real estate transactions.
For buyers: despite not being at fault, they may inherit the legal and financial risks associated with historical breaches of the restrictive covenant. Future enforcement action from beneficiaries of the covenant could lead to costly legal disputes, expensive alterations or other constraints on how the property can be used. In some cases, the enforcement of a covenant could materially impact on the market value or marketability of the affected property.
For sellers: a breached covenant may require costly rectification works before a sale can proceed. If left unaddressed, it could complicate negations, impact on the sale price achieved or cause a transaction to fall over.
3. How can title insurance help?
At DUAL, our title insurance offering can insure against existing breached of restrictive covenants, protecting against enforcement action from a covenant's beneficiary.
Our policy can cover the legal costs to defend a claim, corrective measures such as demolition of the part of the property in breach, and any potential loss in property value. This provides a valuable safety net for buyers and sellers that may not have been available otherwise.
