When considering a real estate purchase, you may find that the property site faces a "covenant road." If you buy without properly understanding a covenant road, you may face unexpected disadvantages in home loan screening, fixed asset tax, and whether rebuilding is permitted. This article organizes the definition of a covenant road, how it is created, how it differs from a private road, and its advantages and disadvantages.
What is a covenant road?
A covenant road is a flag lot access arrangement in which two or more landowners, based on a written agreement, agree to use each other's residential land like a road. Strictly speaking, it is not a "road" but a "passage," and it is also called a "proviso road."
For example, when a large parcel of land is subdivided and sold as lots A, B, and C, the rear lot may not directly face a public road. To satisfy the Building Standards Act's "road access requirement" (at least 2 meters of frontage on a road that is 4 meters or wider), multiple owners enter into an agreement to use each other's land as a passage.
Why are covenant roads created?
It is a method used by residential land developers to maximize cost-effectiveness. Applying to have it recognized as a public road takes time and procedural cost with the local government, whereas a covenant road can be developed more quickly and at lower cost. It is often seen in newly built speculative housing developments and also exists in older urban residential neighborhoods.
Advantages of a covenant road
Land prices are lower than the surrounding market
Because it is treated similarly to a private road, the asset valuation tends to be lower than for land facing a public road, so the acquisition price can often be kept down. When a covenant road has been developed by a real estate company, the surrounding environment is often well maintained as well.
Disadvantages of a covenant road
Home loan screening may be more difficult
Land connected to a covenant road tends to be harder to sell than land facing a public road, and its real estate valuation also tends to be lower. If you want to borrow more than the appraised land value, some financial institutions may not approve the application.
Relationships with adjacent owners must be managed
A covenant road assumes that co-owners will use it in accordance with agreed rules. Unauthorized bicycle parking or the installation of flower beds can develop into disputes. It is important to confirm the contents of the existing agreement before purchasing.
What is the difference between a covenant road and a private road?
The legal position under the Building Standards Act is different
A private road (a designated road) is recognized under the Building Standards Act, so there is no issue with rebuilding. By contrast, a covenant road is a passage arranged among owners without application to or approval from the local government, so land that faces only a covenant road may in some cases be impossible to rebuild on. Rebuilding requires an application to the local government as an "Article 43 proviso road."
Fixed asset tax does not become exempt
Private roads are often exempt from fixed asset tax when they are treated as roads for public use. However, a covenant road remains taxable as owned land, and fixed asset tax and city planning tax are imposed. It is also excluded from the small residential land tax reduction, so the tax burden is relatively higher.
No subsidies are available for repairs
Private roads may in some cases receive municipal subsidies covering 50 to 80% of repair costs. By contrast, no municipal subsidy is available for a covenant road because it is a passage that has not been formally applied for with the city. Repair costs must be borne in full by the owners.
Related reading
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FAQ
- Q. Can a building be constructed on land facing a covenant road?
- A. It depends on the contents of the agreement and the road access conditions. If you plan to rebuild, an application to the local government as an "Article 43 proviso road" may be required.
- Q. What is the biggest risk when purchasing land on a covenant road?
- A. The main risks are being unable to rebuild, failing home loan screening, and disputes with adjacent owners.
- Q. Is the fixed asset tax on a covenant road higher than on a private road?
- A. Yes. Private roads are often tax-exempt, but covenant roads are taxed as owned land for both fixed asset tax and city planning tax.
- Q. Who bears the repair costs for a covenant road?
- A. Because no municipal subsidy is available, the owners who entered into the agreement bear the full cost. Before purchasing, confirm the rules for sharing repair expenses.
