Are rent charges the new service charge?
Developers are adopting new practices in response to the proposed ban on leasehold houses.
The problem with long leaseholds has been well documented over the last couple of years. It has become more and more common for developers to retain the freehold on residential developments and offer long leases (over 250 years) of the homes on the estate. These leases are subject to ground rents and service charges which can escalate over time, often in accordance with a formula set out in the lease. In some cases, homes eventually become unsaleable due to the level of charges they are subject to.
The proposed ban on leasehold houses aims to address this issue. However there have been reports in the press recently of developers using rent charges and restrictive covenants when selling freehold homes to impose similar a cost burden to the cost burden under leases. If left unregulated, this could result in a greater cost to buyers than under the leasehold regime.
Rent charges are akin to service charges in leasehold property, in that they oblige residents to pay a regular fee for the maintenance of common parts. In residential developments, these are usually areas such as private roads, private street lighting or grass verges.
Rent charges are not, however, subject to the same regulation and requirements of reasonableness as the charges that are made under leasehold legislation. For instance, there is no cap on the amount by which the rent charge can rise and no duty to consult residents on expenditure over certain limits. If you do not pay your rent charge, the rent charge owner has the right take back possession your home with no compensation.
This is also no right to relief from forfeiture as in leases. This means a court cannot step in to prevent a rent charge owner (normally the developer) from taking possession of a home if the rent charge is unpaid by the homeowner. This is very draconian indeed.
In addition, there are reports of residential developers imposing restrictive covenants to limit what a homeowner can do with their property. If, for instance, a homeowner wanted to add a conservatory, they may find that they need consent from the developer. The developer would usually require a fee to be paid before the consent is forthcoming.
Service charges in leaseholds and rent charges in freeholds are not necessarily unfair; it is reasonable to expect those living on a private estate to pay certain costs to maintain the common parts for the benefit of all.
Although the current leasehold system is open to abuse, there are systems in place to promote fair play, regulate exploitative behaviour and prevent forfeiture of leases for all but the most substantial of reasons. If developers switch to using rent charges on freehold titles, then this opens up the possibility of people losing their homes if minor payments are not made.
It seems that the proposed ban on leasehold houses may not resolve abuses of the system and may exacerbate them unless there are further developments within the law to address these issues.
Above all, this underlines the need for proper due diligence when buying a home, whether it is freehold or leasehold. A good lawyer should be able to provide advice so you know what you are getting into and help you to address any concerns.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.