This land is my land: HSBC to decline mortgage applications for properties with restrictive covenants

In a county where some properties come with sprawling land investment potential, are Hertforshire property hunters about to hit a financial wall?

One of the draws of living in this part of the country is the choice Hertfordshire offers by way of property investment. There is a fantastic variety of property types in and around a green belt area. For those wanting city centre or suburban, there is a lot to choose from. But for those hoping to acquire space and land, the surrounding rural locations provide an abundance of opportunity.

But the house hunter must be aware that properties with added land will have to understand the laws applicable to it.

A restrictive covenant is a promise not to do something on land for the benefit of other land, imposed to govern the use of particular land being sold. It is ironed out by the original parties of a property or land deal, during the sales procedure.

This week, covenants of this nature have come under the spotlight. With regards to lending toward non-standard properties with land, HSBC have said the following:

“(covenant) restrictions impede HSBC’s ability, in the event of possession, to obtain a fair market value for the property and therefore compromises the integrity of our security. Therefore, where it becomes apparent that there is a restrictive covenant in place we are unable to lend and the application will be declined and returned to the branch.”

On Wednesday, East Hertfordshire estate agent William Wells told “Estate Agent Today” that this is “a relatively dramatic change” and that HSBC have demonstrated a lack of understanding in the matter.

“Effectively, the present owner is better off and the previous owner is better off and the bank is certainly no worse off” he says. “I accept that some purchasers may be nervous of buying a property with an uplift clause but evidence would suggest that this is a minority, because as an owner you are in control of the land and if you make no planning application, then nothing happens” he says.

An uplift clause gives the vendor of a property the right to share in any post-sale increase in value that will potentially occur should planning permission be awarded for the property itself.

“I suppose the simple explanation is that if a lending source has enough business, it can make up whatever rules it likes. But this is a serious issue for many home owners of the larger properties, particularly those with land. It is something estate agents need to be a lot more careful about now and in the future” he says.

There is a certain stigma surrounding this mentality, with a discussion on Mumsnet.com in June of this year declaring it a “grabby” way of conducting business. HSBC appear to have washed their hands of deals with a covenant agreement of this nature attached. But this could potentially drive away business. Are they shooting themselves in the foot, or are they sensible to steer themselves clear?