With so many properties subject to an incredible variety of restrictive covenants imposed against them, some of which date back centuries, it’s no surprise that they’re one of the most common legal indemnity policies that we provide. Over time, both the ownership and the use of land and property can change, but any restrictions imposed relating to the development of land, or further extensions to a property remain in place, which, as the following case study highlights, makes covenants a live issue during a property transaction.
A straightforward beginning
In the autumn of 2019, we received an enquiry from solicitors acting on behalf of a developer. Their client had bought and converted a former chapel in Devon, renovating and sub-dividing it into two residential properties, which they now intended to sell. However, the property was subject to a covenant which had been put in place when it was sold by the Church back in 1977, restricting the use of the land to a single dwelling. The solicitor acting for the developer was concerned that the covenant may cause a problem when it came to selling the two properties, and contacted us to arrange indemnity policies to cover each house.
Our underwriters conducted some research and established that construction works had begun in 2017, with retrospective planning consent being granted in 2018. They were able to obtain confirmation that no issues relating to covenants had been raised during the conversion process, when we might have expected a dispute to arise, and were therefore happy to issue cover.
Staking a claim
In July 2022, one of the property owners, our policyholder, received a letter from solicitors representing the Church. The letter alleged that the sub-division and conversion of the chapel into two properties was a breach of the 1977 restrictive covenant, and that their clients were the beneficiaries of the restriction. It went on to outline their position, which indicated that they were prepared to go to court to seek an injunction to restore the properties to a single dwelling, or demand damages of £75,000.
As you would expect, the policyholder was alarmed to receive such a serious letter out of the blue, especially given the sums mentioned, and contacted us.
A quick turnaround
Our claims team immediately got to work, to help decide the best course of action for handling the claim. The first step was to assess the enforceability of the covenant, and the validity of the legal claim by the Church. We needed to investigate further to specifically confirm whether or not the benefit of the covenant had transferred to the current Church authorities bringing about the claim. At the same time, we also contacted the owner of the other property to check that they had also received a similar letter – they had. So, going forward, both claims could be dealt with in the same set of negotiations and covered under each insured’s policy.
To assist with the legal interpretation, our team instructed one of our panel solicitors, who concluded that the legal claim was valid, and the breach of covenant was enforceable by the current Church authorities, against our two insured property owners. As a result, we felt that our strategy should focus on trying to reach a settlement with the Church, with the minimum of delay.
The best course of action
As the Church was still threatening proceedings, the need to engage with them was increasingly pressing, but they had extended one possible olive branch. Their initial letter to the policyholders had also included an open and without prejudice offer (a Part 36 offer), seeking £55,000 to provide a Deed of Variation which would release the covenant on both properties. Keen to explore this option, we appointed a surveyor to assess the offer, based on the valuation of the development and any potential loss in value if it had to be returned to a single residential property. They reported that the potential loss would be around £140,000, which the team were then able to use as a basis to calculate what a reasonable damages figure might look like. The £55,000 sought in the settlement offer fell comfortably in this range, and after some negotiations over the technicalities of the wording of the Deed of Variation, we accepted the offer to pay the settlement.
Along with other legal fees, the total cost of the claim came to just under £63,500 – which, for policies that had been taken out for £180 each, really shows the value of the protection our cover provides. Successfully resolving a claim in these circumstances requires the correct strategy, and careful coordination with all the parties involved to avoid matters escalating. And the policyholders were very happy with the way our team put their experience to work, quickly resolving the claim, while providing support and advice throughout a stressful process.