Restrictive Covenant Indemnity Insurance Bank conveyancing requirements

RBS and Barnsley BS, in common with many banks, have their own requirements when it comes to restrictive covenant indemnity insurance. This page sets out to enlighten property law practitioners on the different mortgage company conveyancing panel where the title to be charged contains restrictive covenant. It is not a substitute for checking the Council of Mortgage Lenders’ handbook requirements for each lender, be it Accord, Virgin Money or Barclays. The content on this page Is not to be read as restrictive covenant indemnity insurance advice.

Need help with restrictive covenant indemnity insurance from your lender?

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Being a conveyancing practitioner on a bank panel you must enquire whether the property has been built, altered or is currently used in breach of a restrictive covenant. Lenders such as RBS, Barnsley BS or Accord rely on you to check that the covenant is not enforceable. If you are unable to issue an unqualified certificate of title to the lender as a result of the risk of enforceability you must ensure (subject to the UK Finance Lenders’ Handbook paragraph 5.11.2) that indemnity insurance is in place on the completion date of the mortgage (see UK Finance Lenders’ Handbook section 9).

In the event that you conclude that there is proof that the restrictive covenant has been breached and, after having conducted reasonable investigations, you are assured that there is a good and marketable title ; you are able to issue an unconditional COT to the bank and the breach has continued for over 20 years unchallenged, then restrictive covenant indemnity insurance will not be mandated by the bank.

Chelsea BS and Leeds Building Society as with most lenders, obligations require that where restrictive covenant indemnity insurance is to be put on risk:

• the restrictive covenant indemnity insurance policy should be effected without charge to the bank
• you is duty bound to explain to the mortgagor that the borrower will need to adhere to any conditions of the restrictive covenant indemnity insurance policy and that the borrower should notify the mortgage company of any notice or potential claim in relation to the policy
• the restrictive covenant indemnity insurance policy must be for the benefit of the lender and, wherever possible, for the benefit of the borrower and any next registered proprietor or bank. Where the borrower will not be covered by the restrictive covenant indemnity insurance policy, the borrower must be informed accordingly.
• the restrictive covenant indemnity insurance policy must not contain terms which you are aware would void or prejudice the interests of the lender
• the level of indemnity must satisfy the requirements for the lender (see UK Finance Lenders’ Handbook Part 2 )
• your firm must reveal to the insurer all relevant information which you have acquired
• your practice must send a duplicate of the restrictive covenant indemnity insurance to the borrower and explain to the borrower why the restrictive covenant indemnity insurance policy was effected and that additional insurance might be necessary if there is additional borrowing against the mortgaged property
• your practice are responsible for approving the terms of the restrictive covenant policy on behalf of the bank

As to the level of cover for the restrictive covenant indemnity insurance policy (or for that matter any indemnity insurance), consider the following sampling of Section 9.2 of the Part 2 requirements for banks:

Non lender-specific considerations

The extent of the terms for restrictive covenant indemnity insurance are shown in the policy document. Conveyancing solicitors are obliged to direct your non-lender client to the restrictive covenant indemnity insurance policy itself. The intention of restrictive covenant indemnity insurance is to provide indemnity in respect of the risks set out in the policy schedule - so it’s important to check the schedule to determine that it is as it should be. The lifetime of this non-investment insurance agreement is in perpetuity unless otherwise stated in the restrictive covenant indemnity insurance policy. Adequacy in this regard should be checked.

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Important aspects and benefits of restrictive covenant indemnity insurance :

The insurance will normally cover where someone claims to be entitled to the benefit of the specified risks, stated in the restrictive covenant indemnity insurance schedule. Restrictive Covenant indemnity insurance Policies should be checked for the following

• Market value reduction resulting from the successful enforcement of the risks specified in the restrictive covenant indemnity insurance.
• Money paid with consent in writing from the insurance company to free the property from the risks specified in the restrictive covenant indemnity insurance.
• All ancillary costs and expenses incurred by the Insured with the written consent of the relevant insurer
• The cost of works (including professional fees) for the purpose of the development commenced, prior to proceedings for the enforcement of the risks specified in the restrictive covenant policy, to the extent that such costs are rendered abortive by court decision.
• Cover for compensation incurred in any proceedings regarding the risks specified in the restrictive covenant policy, including fees of a legal nature.
• The cost of altering or demolishing all, or part of the development and the reinstatement of the land, insofar as such alteration, demolition or re-instatement is made necessary by court order.

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Don't forget to check what is excluded from the restrictive covenant insurance e.g. does the policy cover any property that has been altered within the year prior to the commencement of the policy? Are legal costs covered?

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Other considerations for restrictive covenant indemnity insurance

Restrictive Covenant insurance may satisfy lenders such as Bank of Scotland or Godiva Mortgages and prevent clients from from suffering financially but it cannot compensate for the stress and inconvenience the emotional suffering - after all the value of a home cannot always be measured in cash in the eyes of the owner.

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A good example is an annex may have to be destroyed but indemnity insurance does not compensate for the loss of separate but adjoining accommodation for an elderly relative in need of care. the lender may not care about such consequences but your other client so consideration needs to be given to explain these potential implications.

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The content set out above covers to properties in England and Wales.