Estate Rent Charge and New Build Properties
With the government attempting to curb unscrupulous developers and freeholders charging exorbitant sums of money for leasehold service charges also known as an estate rent charge, it appears they have now turned their attention to the new-build freehold market.
A silent revolution is going on which no one seems to know much about, least of all homeowners and their solicitors. The legal term is known as ‘freeholders on private estates’ and is a new model that seems to have tiptoed in without democratic discussion or scrutiny, which over the last decade or so, has become industry standard.
But what is an Estate Rent Charge?
If you purchase a freehold property on a new build estate, it is becoming increasingly likely you will be informed there is a small service charge, known as an estate rent charge, to look after the landscaping and such. On the face of it, this appears reasonable. However, problems are rife, and it has been estimated to affect at least half a million freeholders in the UK, which continues to increase.
Issues include receiving high management bills for a less than adequate service or being charged before the estate has been finished. You might, at this point, start digging into the detail — you don’t have to pay this, right?
Wrong. An estate rent charge is likely to be bound to your property through its title deeds, so your only recourse is to put the house on the market and pay off the fees. If you decide to move, the management company may be involved with the property transfer, with more fees to pay and possible delays if you refuse. In effect, the management company can hold you and your property to ransom, as often happens with leasehold transactions.
If a freeholder wants to ask for justification for the spending or dispute the fees, unlike leaseholders who can seek redress in a tribunal, there is no dispute resolution available to freeholders. The only alternative is to bring the case to court. Let’s be honest, few of us have the available resources or legal knowhow to take on such a case. A freeholder has no consumer rights because the management companies are accountable to the landowner (usually the developer) and not the freeholder. There is no right to change the service provider and no right to manage it as a collective, either.
This means that freeholders on such estates find they have to pay whatever charge the management company sets for whatever service it decides to provide. The open space you pay through the nose to be manicured can also be used, and maybe even abused, by the general public.
How has this situation come about?
This situation has arisen because of negotiations between planning authorities and developers under Section 106 agreements. The original intention of Section 106 was to minimise the impact on the surrounding areas of the new build estate and ease the pressure on roads and schools, etc, which would otherwise lead to planning permission being refused.
However, over the years, it has turned into a mechanism for local authorities to squeeze funding from developers and use the funds elsewhere. Over recent years, so much money has been clawed back by 106 agreements, that build standards are being reduced to maintain developers’ profit margins. And homeowners being forced to pay for the management of open spaces, which are not theirs and over which they have no influence, is yet another way for developers to recoup costs.
If freeholders refuse to pay because they are dissatisfied, their concerns are likely to be ignored, and in some cases, they may even be bullied into paying with the real threat of court action. In the event any sums due under the service charge remain unpaid for 40 days or more, the owner of the charge can take possession of the property.
This may have the unintended consequence of mortgage providers not being willing to lend on a property with an estate rent charge, because of the risk that the charge owner can take possession if the borrower does not pay the fees. If this happens, the mortgage provider’s security is compromised.
It is not surprising that homeowners feel ripped off and extremely angry at the unfair and unreasonable way they are being treated. However, the Home Builders Federation says such charges are the ‘fairest way to make sure communal areas are paid for and maintained.’
Director of the Conveyancing Association, Beth Rudolf, has stated that the collapse of house sales because of estate rent charges is becoming more common. She has called for the government to intervene to change the law so that someone cannot lose their home simply because a rent charge hasn’t been paid. Ms Rudolf goes on to say: ‘it goes without saying that a rent charge owner should be able to collect monies owed to them, but in the normal debt collection way, not by being able to repossess the property’.
Solicitors acting for buyers of new build properties should warn their clients about the potential for unfair or excessive estate rent charges, however, in practice, this issue is often overlooked during conveyancing. Surveyors preparing valuations have no means, or time, to check if the estate rent charges will be acceptable or reasonable, so have to assume they are prior to submitting the valuation report.
The future value and indeed the saleability of new-build properties, will depend, at least to a certain degree, on the quality of the maintenance of communal spaces and the level of estate rent charges. If an estate gains a reputation for exorbitant charges and below par landscaped areas, it is likely to negatively impact on the resale value.
Additionally, another recent development affecting new-build freehold property is the imposition of restrictive covenants which require homeowners to pay fees in exchange for consent to undertake alterations. There is some evidence that homeowners are having to pay thousands of pounds for consent to build extensions.
Against this backdrop, it is clearly vital that buyers of new-build freehold property obtain legal advice and check they are dealing with reputable developers before signing on the dotted line.