As many more new build houses are being constructed by Developers, both locally and nationally, buyers need to be aware of the potential pitfall of “buying a freehold new build”.
With more developers now building freehold houses, due to the Governments reaction to leasehold new build houses which generated consultation proceedings in 2017, buyers need to be made aware that the majority of houses will still have an estate rentcharge to pay yearly. This is theoretically similar to how leasehold property works in that the tenant pays a yearly ground rent to their landlord. However, it is common for the development of land for housing to take place by a seller of a freehold piece of land to sell it for less than full market value and then make up the deficit by demanding an annual payment/rent. The word rentcharge differentiates this payment from payments made between tenant and landlord. With freehold properties, the owner of the property would pay the yearly rentcharge to the owner of the rentcharge i.e. the Management Company or builder.
Although it is good to know that new rentcharges cannot be created and that any historic rentcharges will continue until the year 2037 when they will no longer be enforceable; estate rentcharges are still permitted and will remain enforceable even after the year 2037. Estate rentcharges are popping up more and more on new build developments and catching a lot of buyers who did not know about the same.
In respect of new build properties, it is becoming more frequent for a management company to be appointed or created whose purpose is to maintain and repair the amenity areas serving the development and to carry out the performance of covenants for the provision of services i.e. effecting insurance, repairing and/or maintaining shared facilities etc. In return for this, the owner of the property is expected and liable to pay a yearly estate rentcharge and if not paid, the owner of the rentcharge has extensive rights to recover the outstanding sums. The owner of the rentcharge has the right to take possession of the property without notice and use the income from it to clear the outstanding sums. Another right the rentcharge owner has is to grant a lease of the property to trustees who would then raise the money to clear the sums.
The recent case of Roberts v Lawton is a fine example of where property owners ignored the estate rentcharge which resulted in the rentcharge owner creating leases of the properties to trustees for terms of 99 years. The court ruled in this case that the leases, once granted, were permanent and capable of registration against each property at the Land Registry. Once the leases were granted and registered, they made each property unsaleable and the freeholds worthless due to the lease being present. The only way to remove the leases was with the rentcharge owners permission which in this case would only be granted once the property owners had paid the rentcharge owners outstanding costs. Payment of the outstanding rentcharge however, is not enough on its own to discontinue the lease. Had the property owners simply paid their estate rentcharges in the first place, this would have been avoided.
It is also important to know that an estate rentcharge must only be collected purely from maintenance and must not be collected for profit. However, administration costs can be expensive and there is no statutory ability to question the reasonableness of the same. It is therefore paramount that purchases are aware of this as the administration costs incurred by a management company on a development/estate could result in the estate rentcharge increasing and this is quite often the case.
If you are therefore purchasing a freehold new build property, please ensure you know from the outset whether or not there is an estate rentcharge which you will have to pay on a yearly basis. This could be hundreds of pounds and may not be fixed and you must ensure you pay the same on time even if you never receive a demand for payment…still pay it and keep proof of the same!
On a final note, it is good practice for Conveyancers to refer the existence of rentcharges to a buyer’s mortgage lender to seek their approval to the same and this could have an impact on whether or not the lender is agreeable to lend or whether they will require further action to be taken or even not lend at all. Although there is no set guidance as to what lenders require; each lender having differing criteria, this may change in the coming years due to the prevalence of estate rentcharges on new build developments.