Investigating title is an essential part of the due diligence exercise in any property purchase.
The principle of caveat emptor, or “let the buyer beware”, means that it is the purchaser’s responsibility to investigate the property they’re proposing to buy. For developers, this starts with a review of the title to the property to identify the need for further investigations or enquiries, applications, or insurance well in advance of exchange of contracts.
This article discusses important considerations when reviewing the title register and any documents referred to on it, and highlights key points to consider when negotiating heads of terms.
Property identification and ownership
Verifying a seller’s ownership is necessary to ensure they have a clear and marketable title. Discrepancies in ownership history will become evident in the examination of the title documents; clarifying the capacity in which the seller is entitled to sell the property can avoid issues arising after the transaction. Overseas entity sellers now face additional registration requirements (see here) which will also need to be verified.
Whilst obvious, it is important to establish that the description of the property matches the actual property being sold. Inconsistencies here could lead to disputes over property boundaries which could have costly implications for the proposed development and its subsequent value.
Restrictive covenants
Restrictive covenants limit the use of land in some way for the benefit of another’s land. These might, for example, prevent certain uses of the land (e.g. the sale of alcohol) or what can be built on it. Such covenants bind a property and are, therefore, enforceable by one party’s successors in title against the other’s successors in title.
For developers acquiring a property, it is important to be aware of restrictive covenants, any known past breaches of them and whether the proposed development and future use of the property may be a breach.
Obtaining a release from restrictive covenants is possible, though relatively unusual. Often, historic or unknown covenants can be dealt with using title indemnity insurance.
Positive covenants
Unlike restrictive covenants, which operate to limit the use of a property in some way, positive covenants are obligations to perform an act upon or in relation to a property. Examples include requirements to:
- make payments towards the upkeep of estate roads and sewers;
- maintain boundary features; and
- procure that future purchasers enter into a deed of covenant.
Positive covenants do not run with the land, meaning the burden does not automatically bind a successor in title to the original party who gave the covenant. However, it is not uncommon for a purchaser to be required to give a covenant to comply with those positive covenants going forward. Compliance with positive covenants can impact on the feasibility and costs of a development project.
Therefore, it is important for commercial property buyers and developers to:
- identify the potential existence of a positive covenant;
- assess whether such covenants operate to bind a future purchaser and establish whether there is a chain of indemnity covenants; and
- seek advice on the need (if any) to enter into a deed of covenant in favour of the beneficiary to observe and perform the positive covenants.
Easements
An easement is the right of one landowner to make use of or exercise rights over another piece of land for the benefit of its own land. An easement can take many forms, but commonly encountered easements are rights of way, rights to light, rights of support and rights to lay and connect into services.
Investigation of title will reveal whether an easement benefits the property being acquired (giving it rights over third party land) or burdens it (where a third party benefits from rights over the property). Developers will want to ensure that the proposed site has the benefit of adequate rights for the existing use and that the property has the benefit of any other rights necessary to ensure that it can be fully developed and ultimately used for its proposed future use. Such rights may include usage of private roads and footpaths to access the property. This is of particular importance where the property does not abut an adopted highway as the owner will be reliant on those rights to gain access.
Any information revealed during the title investigation and a property survey can be used to identify the existence of rights over the proposed development site and the implications that may follow. In many cases, where the beneficiary or beneficiaries are unknown and/or the rights have not been exercised for a significant period of time, indemnity insurance can be obtained. This will insure the development against the risk of a third party attempting to enforce its rights, which serves to mitigate any loss in value to the property or impact on the proposed development.
Restrictions
Restrictions are entries on title that are entered by a third party in order to protect an interest and limit the owner’s ability to dispose of the property. The term “dispose” can be limited to certain types of transactions, such as a sale or the grant of a lease, but can frequently be wide enough to catch a charge or the grant of legal easements. Compliance with restrictions might require third party consent to the transaction, or the giving of a deed of covenant by the purchaser to comply with certain obligations going forwards.
Strict compliance with restrictions is essential in order to ensure that the property purchase is registered at the Land Registry and so that the buyer is able to deal with any onward disposals.
Summary
Title investigation can bring up unique challenges when purchasing commercial property. Thorough due diligence is crucial to assist developers with navigating constraints and third party rights, allowing for informed decisions to be made in order to secure a successful project outcome.