Restrictive Covenant Indemnity Insurance Lender conveyancing requirements

RBS and Godiva Mortgages, in common with many banks, have their own requirements when it comes to restrictive covenant indemnity insurance. This page sets out to enlighten conveyancing solicitors on the various mortgage company conveyancing panel where the title to be charged contains restrictive covenant. Solicitors should still check the Council of Mortgage Lenders’ handbook requirements for each lender, for example Bank of Scotland, Nationwide or Barclays. The content on this page is not focused on restrictive covenant indemnity insurance requirements.

Need help with restrictive covenant indemnity insurance from your lender?

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Being a conveyancing practitioner on a bank panel you must investigate whether the property has been built, altered or is currently used in contravention of a restrictive covenant. Mortgage Companies such as RBS, Godiva Mortgages or Bank of Scotland rely on you to investigate whether the covenant is not enforceable. If you are unable to provide an unqualified COT to the mortgage company 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 on risk on the completion date of the mortgage (see UK Finance Lenders’ Handbook section 9).

Should your investigations reveal proof that the restrictive covenant has been breached and, following reasonable due diligence, you are content that there is a good and marketable title ; you are able to issue an unconditional COT to the lender and the breach has remained in existence for more than twenty years without challenge, then restrictive covenant indemnity insurance will not be mandated by the bank.

Chelsea BS and Skipton in common with the majority of banks, instructions are such that where restrictive covenant indemnity insurance is to be taken out:

• your practice must approve the terms of the restrictive covenant policy on behalf of the bank
• you must disclose to the insurer all relevant information which you have gathered
• the restrictive covenant indemnity insurance policy should not incorporate conditions which you recognise would invalidate or compromise the interests of the lender
• your firm must point out to the mortgagor that the borrower must comply with any conditions of the restrictive covenant indemnity insurance policy and that the mortgagor should notify the bank of any notice or potential claim in relation to the insurance
• the restrictive covenant indemnity insurance policy must be effected at no charge to the lender
• the minimum level of cover for the policy must satisfy the requirements for the mortgage company (see UK Finance Lenders’ Handbook Part 2 )
• the restrictive covenant indemnity insurance policy should always be for the benefit of the lender and, if possible, in favour of the mortgagor and any future owner or mortgagee. If the borrower will not be protected by the restrictive covenant indemnity insurance policy, you must advise the borrower of this fact.
• your practice must supply a duplicate of the restrictive covenant indemnity insurance to the mortgagor and explain to the mortgagor why the restrictive covenant indemnity insurance policy was effected and that a further policy may be mandatory if there is supplemental lending against the mortgaged property

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 CML handbook PII requirements for lenders:

Restrictive Covenant Contingency Insurance : Reflections

The full terms, conditions and exclusions for restrictive covenant indemnity insurance are shown in the policy document. Conveyancing Practitioners are obliged to point the borrower to the restrictive covenant indemnity insurance policy itself. The intention of restrictive covenant indemnity insurance is to grant indemnity in respect of the risks specified in the policy schedule - so it’s important to check any draft to ensure it is correct. The duration of this non-investment insurance agreement is in perpetuity unless the policy says something to the contrary. Again, please check that this is as you expected.

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Restrictive Covenant Contingency insurance: Important features and benefits:

This policy would usually provide protection from financial loss that might arise in the event of a third party making a cliam in respect of the risks identified in the policy document. Restrictive Covenant indemnity insurance Policies should be checked for the following

• Loss in market value resulting from the successful enforcement of the risks specified in the restrictive covenant indemnity insurance.
• The cost of altering or taking down 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.
• 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 begun, or contracted for, before the commencement of proceedings for the enforcement of the risks specified in the restrictive covenant indemnity insurance, to the extent that such costs are rendered abortive by court order.
• Reimbursement for compensation incurred in any action concerning the risks specified in the restrictive covenant indemnity insurance, including fees of a legal nature.
• All sums paid with the written consent of the insurance company to liberate the property from the risks specified in the restrictive covenant indemnity insurance.

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You also need to be sure that the answers on the application form are accurate. Regardless of how remote a claim on the mortgage company insurance policy might be you can rest assured that the insurer will check the details on any proposal form very carefully before any claim is admitted.

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Other considerations for restrictive covenant indemnity insurance

Restrictive Covenant Indemnity insurance isn’t a solution to all of the relevant problems.

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For example, extensions creating an annex may have to be removed but indemnity insurance does not recompense for the loss of separate but adjoining accommodation for an elderly relative in need of care. the mortgage company 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 above information is in relation to properties in England and Wales.