When should a covenant stop you purchasing?

Many properties have covenants on their title and this can be a positive, negative or moot point depending on the buyer’s intentions for the property and their understanding of the restriction that the covenant places upon the property.

What is a covenant?

It’s a restriction on the property and can range from affecting the dwelling type, dwelling construction, size of dwelling, set back of the dwelling and so on, or it can also place a limitation on the use of the land. 

Some covenants can protect streetscapes from being altered from an existing and consistent character and they can also sometimes limit subdivision activity. For any home owner who is particularly concerned about their street and neighbouring properties adversely altering their facades, yards, streetscapes or density, a covenant can be a welcome restriction.

For example, some of the legal reviews we have had conducted on past clients’ contracts have included covenants such as these;

• Covenant – Lot owners 1 & 2 may not develop the land other than in accordance with the Planning Permit.
• Single dwelling covenant
• Covenant restricts the construction more than one house on the property, nor can you further subdivide the block unless approved by the relevant authority.  

Any clients who have had dual tenancy, development or subdivision plans in mind would have reassessed the purchase after the discovery of a covenant such as these.

Interestingly though, some covenants relate to the construction, appearance, footprint or fencing of a property. For any buyer who plans to materially change the footprint or appearance of a property (or alter fencing), a covenant such as the following could challenge their plans:

• The property is subject to a covenant which states any dwelling built on the land must have external walls of brick or brick veneer.
• Set back covenant
• Covenant restricting a minimum of 75% brick on external walls

And some of the interesting covenants we have spotted relate to quarrying, mining and other activities that are restricted on the land. In cases like these our clients have generally been prepared to overlook the restriction, as quarrying, brick making and mining were not activities that they ever had in mind for their use.

• Covenant prohibits the removal of sand or gravel for anything other than foundations of a house
• Covenant prohibits quarrying or brick making. 

We did however have an interesting case last week and not only did it alarm our buyer, but she made the tough decision to exit the contract with the help of the special condition our solicitor had written for us after noting that a covenant may have been contravened.

The property in question ticked all of her criteria, however the covenant stated that the property had to have a minimum of 75% brick external walls.

The visible external walls were weatherboard.

Not wanting to give up on the purchase without further due diligence, we engaged the services of a building inspector to inspect and advise if any cladding could have been done subsequently, and we contacted relevant authorities to see if there was something we’d missed. Unfortunately our findings didn’t support the purchase.

Obviously the house had been like this for a long time, however our client had to think about risk and impact to her future saleability of the property. If subsequent buyers discovered the inconsistently too, would they be discouraged from purchasing?

Sometimes it’s discovering the invisible things on a contract that can save a buyer from making a mistake.

Had she proceeded with the purchase and decided to tackle the covenant, the steps she’d face in order to appeal to remove it could be time consuming and expensive. From applying to the Supreme Court to amending the relevant Planning Scheme, or applying or a Planning Permit, none of these actions guarantee a positive result and our Victorian Planning Authority recommends obtaining independent expert legal advice to begin with.

While it can be disappointing for buyers to discover a covenant that either challenges their intended purpose or worse still, is contravening the existing covenant and presenting challenges, it’s always better to discover it in the due diligence phase than after a purchase is unconditional.

This, and many, many other concerning possibilities are why we will never let a client sign a contract until a legal review is completed.