Why Covenants are Important in Property Transactions

Covenants are a crucial element in property law that affect both property owners and prospective buyers. Whether you’re selling or buying property, understanding covenants and their implications is vital for ensuring a smooth transaction. This article will explain what covenants are, the responsibilities of sellers and buyers, and the potential consequences if correct disclosure is not made.

What is a Covenant?

A covenant is a legally binding restriction or obligation attached to a property, usually recorded in the Certificate of Title. These conditions are typically imposed to regulate how the land can be used, what structures may be built, and sometimes even how the property must be maintained. Covenants can be positive (requiring action such as maintaining a fence) or restrictive (prohibiting actions such as building a structure over a certain height).

Covenants are often introduced by developers, landowners, or local councils to protect the appearance, value, and general character of the land or surrounding area. Importantly, these conditions persist even after the property changes ownership, meaning they apply to future owners as well.

What Should a Seller Do if a Covenant Affects Their Property?

If you're selling a property, it is your responsibility to disclose any covenants that affect the property. Here’s how you can ensure compliance and avoid potential issues in the transaction:

1. Disclose the Covenant in the Section 32 Vendor Statement

Under the Sale of Land Act 1962 (Vic), as a seller, you are legally required to disclose any covenants that affect the property in the Section 32 Vendor Statement. This is a key document in any property transaction and provides the buyer with important information about the property’s legal status.

The Section 32 must specifically mention any restrictions or obligations associated with the property, including any covenants. The disclosure should describe the covenant’s terms, including what actions are restricted and any requirements imposed on the property owner. This ensures that the buyer is fully informed about the property before committing to the purchase.

Failure to disclose a covenant in the Section 32 can have serious legal consequences for the seller. If a buyer discovers a breach of covenant after purchase, they may seek to rescind the contract, claim compensation, or even take legal action against the seller.

2. Verify the Status of the Covenant

Before proceeding with the sale, you should verify the status of the covenant. Some covenants may no longer be enforceable, may have been amended, or may have been removed altogether over time. A covenant may no longer apply if it is outdated or if the terms have been legally modified.

Checking the Certificate of Title will help confirm whether the covenant is still active. If the covenant has been amended, discharged, or otherwise altered, provide evidence of these changes to the buyer. This can help avoid confusion and ensure that the buyer is aware of any modifications to the covenant.

3. Consider the Impact on the Sale

Covenants can sometimes affect the use of the property, such as restrictions on building, landscaping, or even types of fences. If the covenant is restrictive, it may deter potential buyers or affect the sale price. In some cases, buyers may be unwilling to proceed with the purchase if the covenant imposes limitations that they deem problematic.

Being proactive in disclosing and discussing the covenant with the buyer can help manage these concerns and prevent any disputes from arising later in the process.

What Should a Buyer Do if There is a Covenant Affecting the Property?

If you're buying property with a covenant attached, it’s crucial to carefully review the covenant and take steps to protect your interests:

1. Review the Covenant in the Section 32 Vendor Statement

When you receive the Section 32 Vendor Statement, ensure you carefully review it for any mention of covenants. The statement should clearly describe any restrictions or obligations that come with the property. Understanding the full extent of these covenants is essential, as it allows you to assess how they might impact your plans for the property.

Make sure the covenant includes clear terms that detail what is prohibited or required. This can help prevent any unpleasant surprises after the purchase.

2. Check the Status of the Covenant

Once you’ve identified the covenant, you need to verify its status. Some covenants may be outdated or unenforceable, while others may have been amended or removed. You should request confirmation from the seller or their conveyancer regarding whether the covenant is still valid.

If the covenant is still active, carefully assess its implications for your intended use of the property. For example, if the covenant prohibits certain types of development or construction, you need to determine whether this will impact your plans for the property.

3. Seek Legal Advice if Necessary

If you are uncertain about the implications of the covenant or believe it may impact your use of the property, consider seeking advice from a qualified conveyancer or property lawyer. In some cases, you may be able to apply to the Supreme Court of Victoria under Section 84 of the Property Law Act 1958 (Vic) to have the covenant removed or modified. However, this process can be complex, costly, and time-consuming, so it’s important to understand the legal and financial implications before proceeding.

What Happens if Correct Disclosure of Covenants is Not Made?

Failing to disclose a covenant in the Section 32 Vendor Statement can have serious consequences for both the seller and the buyer. Below are some potential outcomes:

1. Legal Consequences for the Seller

If a seller fails to disclose a covenant in the Section 32 Vendor Statement, they may face significant legal ramifications. The buyer may claim that they were misled or not fully informed about the property’s legal restrictions, and as a result, they may attempt to rescind the contract or seek damages.

Under the Sale of Land Act 1962 (Vic), the buyer is entitled to seek remedies if they were not properly informed about covenants or other material facts. In some cases, the seller may be required to pay compensation to the buyer for any financial loss incurred as a result of the failure to disclose the covenant.

Additionally, if the buyer discovers the breach after settlement, they may have grounds to take legal action. This can lead to costly disputes and may delay or even cancel the sale.

2. Impact on the Buyer’s Plans

If the buyer is unaware of a covenant and later discovers it after purchasing the property, they may find that their plans for the property are severely impacted. For example, if the covenant restricts certain types of building or development, the buyer may be unable to carry out renovations or improvements. This could result in significant financial loss or dissatisfaction with the property.

In some cases, the buyer may decide to take legal action or negotiate for compensation, particularly if the covenant restricts the buyer’s ability to use the land in the way they had intended.

3. Disputes and Delays

Failure to disclose a covenant can lead to disputes that may delay settlement or result in the termination of the contract. In some cases, the buyer may seek to renegotiate the purchase price or request that the seller remedy the situation. This can prolong the transaction process, leading to unnecessary delays and costs for both parties.

Conclusion

Covenants are an important aspect of property law and can significantly affect the use, value, and enjoyment of a property. As a seller, it is your legal obligation to disclose any covenants in the Section 32 Vendor Statement. Failure to do so can result in legal consequences, financial loss, and potential disputes. As a buyer, it is critical to review any covenants affecting the property before proceeding with the purchase to ensure they align with your plans for the property.

Both parties must fully understand the implications of covenants to avoid costly errors and ensure a smooth property transaction.