When you are looking to buy a home, most people know the basic differences between freehold and leasehold. You are aware that with leasehold properties you pay an annual service charge and, in most cases, ground rent. The service charge is a charge paid to cover the cost of works done to the building, plus a variable sum in respect of fees for the landlord or their agent organising the work. Whilst the ground rent is purely a payment to the landlord in a much lower value version of rent payable under a tenancy agreement.
Recently more and more freehold properties have been built where there is an annual charge in respect of upkeep and maintenance of retained common areas of the new estate. The developer will argue this is simply a payment for service which benefit all the properties on the estate. However, there are a number of issues which arise from this.
These include, but are not limited to:-
Annual Charges
If there is work being done then you are going to have to pay for it. In most cases the developer sets up a management company which you will have to become a member of. This company then employs another company, a managing agent. They organise the necessary maintenance work each year, the public liability insurance, etc.
In a number of new estates you will see from the accounts that the fee payable to the managing agent makes up a large proportion of the annual fee. Recent examples were around 50% in some cases as the administration costs on a new estate are often more than the initial maintenance costs. In older leases the fee that the landlord or their agent could charge was a set proportion of the cost of the works. This kept their fees to reasonable proportions.
As with a leasehold property the level of the annual charges are largely controlled by the managing agent. So there is little practical opportunity to challenge this. Whilst there are procedures available they are lengthy and costly.
Additional costs in resale
When you sell a property where there is a management company, whether it is freehold or leasehold, you will need to provide information in relation to the management to the buyer. This information comes from the managing agents. They charge a fee for providing this information. There has been recent guidance issued in June 2019 by the Ministry of Housing, Communities and Local Government which stated that the maximum charge for these packs should be limited to £200 plus VAT.
Unfortunately this guidance has not been put into law. Managing agents are still charging significant sums, often in excess of £450, for provision of these packs. In most cases the documents they send are electronic and they already have them readily to hand. The form which they complete is also a generic form. Which will likely have been prepared on other matters with only minor amendments being made to the specific property in question. Many managing agents do charge reasonable sums for their management packs and provide the pack very swiftly, but this is not always the case.
You should also be aware that on some estates there may be than one managing agent and, therefore, the fees are payable to more than one company.
Additional costs in purchase
When you purchase a property with a managing agent you will often have to pay significant administration fees post completion. These fees fall under a number of categories:-
- Notice fees. This is an administration fee which is payable to the managing agent for updating their records. In some cases you are required to pay a fee for both notifying the managing agent that you have purchased and a separate fee if you have a mortgage. This is payable even where the notice of the purchase and the mortgage is in the same document.
- Deed of Covenant. The obligation to make payment is not bound to the property. This is a personal contract between the first owner and the management company. To ensure that future owners pay their due the original transfer to the first buyer usually requires that any future owner enter into a Deed of Covenant with the management company. This is a personal contract between the new buyer and the management company that the management company can enforce if the new buyer does not make payment. Whilst the preparation of this document is usually left to a buyer’s solicitor the managing agent make a charge for receiving it.
- Certificate of Compliance. Where a Deed of Covenant is to be entered into there is often a Compliance Restriction placed in the title to the property. Which prohibits the Land Registry from transferring the property to a new owner until the requirements of the restriction have been complied with. This is often that the buyer has entered into the Deed of Covenant. The managing agent then issues a certificate of compliance once the Deed of Covenant has been entered into
The above are all necessary to ensure the smooth running of the estate. The costs, however, can quickly escalate. On one of the relatively new estates in Hailsham the administrative costs payable to the various managing agents are close to £700!
Estate Rentcharges
The above largely describes the situation which is akin to a leasehold property, where there is an annual service charge. This would be purely made up of the costs involved in the building’s maintenance and insurance, with an additional sum for the managing agent’s fees. These are often protected by the requirement for a Deed of Covenant.
An estate rentcharge differs in that there is an obligation contained within the title to the property to pay the annual charge. There are usually extremely punitive conditions contained within the original transfer if the estate rentcharge is not paid. Which in the worst cases allow the management company, or another nominated party, to take the property back. Either as if the transfer had never happened or by creating a lease over the property.
Mortgage Companies
Mortgage companies have been concerned by recent developments in case law and have changed their requirements in respect of such provisions within the last 6 months. If the powers held by the management company are considered too great then the mortgage companies have stated they will not lend against such properties.
Historically an insurance policy can be obtained to cover enforcement. With this particular issue, however, the mortgage companies have begun to reject indemnity insurance. In favour of requiring the problem to be resolved. If you have an estate rentcharge you will need to ensure this is compliant with mortgage companies’ requirements before you put your property on the market or remortgage as this could prohibit either from taking place. If you have any concerns in this regard please do contact us.
A difference
Please note that an estate rentcharge is slightly different from a standard rentcharge. Which in itself is a simple obligation to pay a set amount of rent to a former landowner. The level of rent is usually very small, a matter of pounds per year. However recent case law has highlighted how important it is to ensure that this is paid on time. Whether demanded or not. If you are concerned about a rentcharge please do contact us to discuss the matter.
Standard rentcharges will not be enforceable from 2037 whereas estate rentcharges currently will be. Both main political parties have stated that they will reform the law in this area. By removing the ability of the rentcharge owner to take or lease the property and instead forcing rentcharge owners to pursue debts through the small claims court.
Mortgage lender valuations
Lenders have begun to restrict lending on freehold properties where there is a service charge. We are required in certain circumstances to refer the matter to their lender. To ascertain whether we are still able to proceed with the purchase. This is not a common occurrence. But this could be an area which the mortgage companies tighten up on in the future.
Summary
As you can see it is not always plain sailing when purchasing a freehold property. There can be additional charges involved. So it is always worth checking with the estate agent before you commit to any costs.
If you have any concerns in respect of a charges being levied please do get in touch via our contact form below.
Please note the above is for information purposes only and is intended to be a short summary. It should not be treated as a comprehensive guide and should not be acted on without qualified legal advice.
