We’ve been searching for a new home in Surrey for our young family. We recently had our first baby and with the stamp duty holiday, we decided now was a good time to upsize.
We found a four-bedroom house on a managed estate which we fell in love with, so we made an offer and were over the moon when it was accepted.
However, since then we have found out that the house, which we would be buying freehold, is subject to something called estate rent charges.
This family found their dream home – only to be told that it was subject to estate rent charges
The house is not brand new, but I have read online that the original developer of the property could take possession of our home without notice if we forgot to pay the charge. I have also heard that there is no limit on how much money they can ask for.
I am worried that it will affect our ability to get a mortgage, or to sell the home in future.
Should we pull out of the sale and find another place? Via email.
Helen Crane, This is Money, replies: Congratulations on your new arrival. These complicated-sounding charges are far from child’s play.
Estate rent charges are often a source of confusion for home buyers. So why do they exist?
There was a time when local authorities would take on responsibility for maintaining things like roads and green areas after an estate was built.
Since the 1970s, they have sought to limit their spending on this and the buck has been passed to developers.
The housebuilding industry came up with estate rent charges as a way of ensuring the communal areas of these estates were maintained and therefore remained attractive to future buyers, protecting the value of the homes.
These charges might be paid to the original developer of the estate, or to a management company.
Estate rent charges are a way of ensuring that residents on new estates pay for maintenance
Their function is similar to the service charges you might pay on a leasehold property. However, they are subject to fewer legal checks and balances.
Leaseholders have statutory protections which ensure that service charges must be of a ‘reasonable’ level – but freeholders subject to estate rent charges have no way to challenge the amount they are asked for other than by bringing court proceedings.
The real problem, however, comes when freeholders do not pay the rent charge for 40 days.
The developer or management company is legally allowed to enter into possession of the home without serving notice, and to grant a lease on it to a trustee – effectively evicting the homeowner from their property.
Understandably, this ability to take away possession of a home is seen as a big risk by mortgage lenders because it poses a threat to their security.
I asked Lucy Barber, partner and head of residential property at law firm Forsters, for her opinion on what buyers should do when faced with an estate rent charge.
Lucy Barber, property lawyer at Forsters
She said: If you are buying a property on which there is an estate rent charge you should always seek expert advice, as it can affect the value and marketability of the property.
An estate rent charge is usually registered against a property as a way of ensuring that property owners observe a positive obligation related to their property ownership.
For example, an obligation to pay towards the costs of the maintenance and repair of the communal areas on a housing estate could be secured by an estate rent charge.
The problem with estate rent charges for property owners is that there is no procedure for challenging the sums requested under a rent charge, other than through the court.
In addition, the owner of the rent charge, i.e. the person with the benefit of it, can take possession of the property in the event that any sums due under the estate rent charge remain unpaid for 40 days.
This means that lenders may not be willing to lend on a property with an estate rent charge, because of the risk that the rent charge owner takes possession of the property if the borrower does not pay the estate rent charge. If this happens, the lender’s security would be compromised.
As a property owner you should seek advice as to whether there is any way to vary the estate rent charge to make it more acceptable to lenders.
An alternative way of ensuring that the obligation to pay towards any communal costs is secured is requiring property owners to enter into deeds of covenant, where they covenant to pay the charges due and future owners can be compelled to enter into similar deeds by entering a restriction at the land registry.
Helen Crane, This is Money, added: Lucy’s advice shows that, while estate rent charges do not necessarily have to be a barrier to buying a home, they certainly do not make the process any easier.
You have since told me that you have decided to pull out of the transaction and have made an offer on another home.
Sadly, you felt that the potential problems with remortgaging or selling the property in the future were too big a risk to take.
And as you wanted to complete before the stamp duty holiday ended on 31 March if possible, you did not want to waste any time.
Although it does not remedy your situation, it is heartening to hear that some property developers and estate managers are moving away from estate rent charges.
Instead, they are asking home buyers to enter into a covenant where they commit to paying maintenance charges up until the point that they sell the home, at which point the next buyer would enter into a new covenant as a condition of buying the property.
Drafted correctly, these agreements could ensure that buyers pay for maintenance of the areas around their homes, while avoiding some of the more drastic measures involved in an estate rent charge.
