Developers: understanding estate rent charges - Kuits Solicitors Manchester

Developers: understanding estate rent charges

Developers: understanding estate rent charges

17th February 2020 - Published by

Leasehold houses, ground rents, service charges and estate rent charges are currently hot topics in the media. Whilst the political landscape is still currently dominated by Brexit, consultation regarding changing the law in these areas have been undertaken and legislative changes are anticipated sooner rather than later.

One of the issues being discussed in the consultation and in the media are estate rent charges.  There is nothing intrinsically wrong with estate rent charges, which are common on many developments where the responsibility to contribute to, for example, the repair and maintenance of common areas falls to the owners of the units.  Rather, it is the draconian enforcement measures available to estate rent charge owners in relation to the non-payment of those charges, which are set out in the Law of Property Act 1925.  The measures include the ability for the rent charge owner to grant itself a lease over a property which is in arrears in order to pay off arrears with rental income.

In the meantime, lender’s requirements as set out in the UK Finance Mortgage Lenders’ Handbook (formerly the CML Handbook) are developing all the time, so that the mortgage industry is in effect regulating what is acceptable.  Estate rent charges have now caught their attention and many lenders are insisting on certain provisions being inserted in documents that contain estate rent charges.  Some lenders are happy if the management company is controlled by the home owners but others are insisting on either a mortgagee protection clause or the exclusion of the ability to create a lease as a remedy for non-payment.

By way of example, Nationwide now has the following requirements:

“Where a charge … relates to the costs of services being provided, it will be acceptable providing that the collector/recipient of the charge must give the property owner and any  lender notice of arrears and give them 2 months’ notice to remedy the breach. Additionally, if further action is taken regarding non-payment the collector/recipient must notify the lender of such action. If the agreement doesn’t include these details a deed of variation is required.

Further, in the event of non-payment the agreement must either:

  1. Specifically prohibit the collector/recipient from being able to create a lease over the property, or
  2. If a lease is created the agreement must clearly state that on payment of: all arrears, costs of collecting arrears, all legal costs including court costs and costs of creating and surrendering the lease, then the lease must be surrendered. All costs must be reasonable. The agreement must specifically state no premium can be charged to surrender the lease.

If the agreement doesn’t include these details a deed of variation is required. Where a deed of variation is required, an indemnity policy is not an acceptable alternative.”

By contrast, Barclays states the following:

“Where a rent charge is payable on the property it will be acceptable where at least one of the following is satisfied:

  1. Where the rent charge owner is a management company owned by the residents of a private freehold development (as shareholders).
  2. Where the statutory remedies in section 121 of the Law of Property Act have been expressly excluded in the rent charge instrument.
  3. Where the rent charge instrument contains notification to the mortgagee of at least 21 days prior to any enforcement action by the rent charge owner.”

For properties not yet sold, the documentation provided to buyers should be amended to reflect the lenders’ new requirements, even where some units have already been sold.

For properties that have been sold but where you still have control of the estate rent charge, owners may approach you to request a Deed of Variation, as without the variation this may affect the mortgageability of their houses and it may be a good idea for you to prepare a standard reply to such enquiries for your after sales team.

To discuss estate rent charges with our specialist residential development team, please contact us or call Duncan McGregor on 0161 838 7874. 

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