Lender conveyancing panel conditions re Restrictive Covenant Indemnity Insurance

Barnsley BS and Leeds Building Society, as with the majority of banks, set their own requirements when it comes to restrictive covenant indemnity insurance. The content herein aims to help conveyancing practitioners on the various lender solicitors panel where the title to be charged incorporates restrictive covenant. It is not a alternative for checking the CML handbook requirements for each lender, for example Yorkshire Bank Home Loans, Chelsea BS or Godiva Mortgages. The content on this page is not focused on restrictive covenant indemnity insurance requirements.

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Being a solicitor on a mortgage company panel you must conduct due diligence as to whether the property has been built, altered or is currently used in breach of a restrictive covenant. Banks such as Barnsley BS, Leeds Building Society or Yorkshire Bank Home Loans rely on you to investigate whether 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 Contingency insurance is in place on the completion date of the mortgage (see section 9 of the Council of Mortgage Lenders’ Handbook).

Should your investigations reveal proof that the restrictive covenant has been breached and, following reasonable enquiries, you are satisfied that there is a good and marketable title ; you are in a position to submit an unqualified COT to the mortgage company and the breach has continued for more than 20 years without challenge, then restrictive covenant indemnity insurance will not be insisted upon by the mortgage company.

Natwest and Coventry BS as with most banks, obligations require that where restrictive covenant indemnity insurance is to be taken out:

the restrictive covenant indemnity insurance policy needs to be in favor of the mortgage company and, wherever possible, in favour of the borrower and any next registered proprietor or bank. If the borrower will not be protected by the restrictive covenant indemnity insurance policy, the mortgagor needs to be informed accordingly.
your firm must approve the terms of the restrictive covenant policy on behalf of the bank
your firm is duty bound to explain to the mortgagor that the borrower is obliged to comply with any conditions of the restrictive covenant indemnity insurance policy and that the mortgagor should notify the lender of any notice or potential claim in relation to the insurance
the limit of indemnity must satisfy the requirements for the bank (see UK Finance Lenders’ Handbook Part 2 )
the restrictive covenant indemnity insurance policy must be effected without expense to the mortgage company
the restrictive covenant indemnity insurance policy should not incorporate terms which you know would invalidate or compromise the interests of the mortgage company
your practice must supply a duplicate of the restrictive covenant indemnity insurance to the borrower and explain to the mortgagor why the restrictive covenant indemnity insurance policy was effected and that a further policy may be necessary if there is further lending against the security of the property
your firm is required to disclose to the insurer all relevant information which you have acquired

Regarding the extent of cover for the restrictive covenant indemnity insurance policy (or for that matter any indemnity insurance), consider the following sampling of Paragraph 9.2 of the Part 2 requirements for mortgage companies:

Lender	Requirement
Aviva Equity Release	Full value of the property.
Bank of China	Cover to full value of the property or the Mortgage Advance, whichever is the higher.
Bank of Scotland Private	[This lender has not published an answer to this question. Please contact the lender.]
Barclays plc	Higher of purchase price or valuation
Better HomeOwnership	An amount to cover the mortgage advance as a minimum.
Birmingham Bank	Please contact Head of Operations to discuss (Gareth Allen)
Danske Bank	The limit of indemnity insurance should be the purchase price or valuation - whichever is higher
Godiva Mortgages	Minimum of the value of the property.
HSBC UK Bank	The value of the insurance must be for at least the full value of the property
Leeds Building Society	An amount at least equal to the amount of the mortgage advance plus 10%. Any indemnity insurance policy must protect the borrowers, any successor in title and any Mortgagee.
M&S Bank	the value of the insurance must be for at least the full value of the property
Nedbank	You are to refer to us for specific instructions on any matter involving indemnity insurance.
Paragon Residential	An amount at least equal to the stated value of the Property.
Pepper Money	An amount equal to at least 110% of the purchase price or value, whichever is higher. Any indemnity insurance policy must be for our benefit, that of any transferee/assignee (legal or equitable) of the mortgage and also the borrower(s).
Pepper Money (UK)	An amount equal to at least 110% of the purchase price or value, whichever is higher. Any indemnity insurance policy must be for our benefit, that of any transferee/assignee (legal or equitable) of the mortgage and also the borrower(s).
The Mortgage Business	An amount at least equal to the mortgage advance/credit limit - whichever is the highest.
RBS - Direct Line	An amount equal to the value of the property.
RBS - Direct Line One	An amount equal to the value of the property.
Royal Bank of Scotland -Natwest One	An amount equal to the value of the property.
RBS - Virgin One	An amount equal to the value of the property.

Non lender-specific considerations

The full terms, conditions and exclusions for restrictive covenant indemnity insurance are identified in the policy paperwork. Property lawyers are obliged to direct the borrower to the restrictive covenant indemnity insurance policy document. The intention of restrictive covenant indemnity insurance is to grant indemnity in respect of the risks specified in the policy schedule - so it is essential check the document to ensure it is correct. The continuance of this non-investment insurance contract is in perpetuity unless the policy says something to the contrary. Again, please check that this is as you expected.

Restrictive Covenant Contingency insurance: Significant 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 Cover normally includes

Loss in market value resulting from the successful enforcement of the risks specified in the restrictive covenant policy.
All ancillary costs and expenses incurred by the Insured with the written consent of the relevant insurer
The out of pocket expenses 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.
Money paid with consent in writing from the insurance company to free the land from the risks specified in the restrictive covenant indemnity insurance.
Liability for damages or compensation incurred in any action in respect of the risks specified in the restrictive covenant indemnity insurance, as well as solicitors charges.
Expenses for works (including architects’ and surveyors’ 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.

As is the case with all conventional insurance, all material information needs to be disclosed to the insurance company at the outset and throughout the policy term, otherwise the restrictive covenant policy will not be valid.

Restrictive Covenant Indemnity Insurance has limitations - Further considerations

Restrictive Covenant Indemnity policies can provide effective protection, but non-lender clients should be asked to give pause for thought and consider that the consequences of not being able to enjoy the property as anticipated may mean that restrictive covenant indemnity cover will not necessarily be the answer.

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

Content on this webpage is for general information for conveyancers and solicitors in England and Wales on the the mortgage company solicitor panel, it does not constitute advice for members of the public who should contact their lawyer for advice relating to the lender indemnity insurance. Whilst we endeavour to keep the information up to date and correct we do not make any representation or warranties of any kind about its completeness, accuracy, reliability or suitability. Any reliance you place on the information is strictly at your own risk. Lexsure will not be liable for any direct or indirect loss or damage arising out of or in connection with the use of this information. Do not attempt to contact the person who you think may have the benefit of the restrictive covenant as insurers will almost always invariably refuse to insure if there has been any attempt in this respect. Once you have approached the other party insurance may well become impossible and this would in all likelihood close down indemnity insurance as an option of addressing the restrictive covenant problem.

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