Do new build houses all come with a uncapped rentcharge on the title?

Remark92

As the title says. We’ve just gone ahead with a new build and there is a ‘rentcharge’ on the title as a means for the management company to get the roads, park etc maintained as the council won’t be adopting.

Absolutely fine happy to pay it, but my concern is about resale and if the fact the rentcharge is uncapped would put off buyers’ lenders. 

That being said we got a mortgage on it ourselves with no issues and they have excluded Section 121 of the Law of Property Act 1925 which I believe lenders have previously had an issue with in the past (which allowed management company to put a lease on the property). 

Has anyone has any issues reselling a new build with an uncapped rentcharge on the title or know if it’s just a standard thing across the board?

In England

princeofpounds

Ah estate rentcharges... a complicated topic!

Firstly - no, this is not a standard thing across the board. It isn't uncommon however.

You are right to say that the main issue historically has been S121 LPA1925. To be honest, many vendors aren't even aware of that problem - the test case that raised it as a problem was only in 2016 IIRC, and then it took another few years for all the mortgage lenders to decide it was unacceptable. So you still see vendors who have this problem saying 'well I got my mortgage so I don't see why it's a problem for you now'... So it's good that is sorted.

The issue of capping estate rentcharges is more recent. They weren't capped for a good reason - the management company doesn't know in advance what the costs of necessary work will be (a meteorite might hit the estate, as a comedy example!) and so they are always going to be reluctant to tie their hands when it comes to charging. 

As a result of the industry changes around ground rent on leaseholds, many lenders have also been moving to demanding caps on that figure. In the last couple of years, some lenders have started to apply similar cap requirements to estate rentcharges. Quite how such caps are meant to work in all circumstances given the variable nature of maintenance expenditure I don't know.

I don't personally quite understand where this is coming from - the function of estate rentcharges is more similar to service charges in a leasehold than it is to ground rent. But reading between the lines, it seems the level of lender caution has gone up since the Competition & Markets Authority report on exploitative leaseholds (even though estate rentcharges are a mechanism for freeholds). The industry is try to self-regulate to stamp out these practices before government steps in for them, but it means the decision-making is not always clear.

Here is an example:

https://www.mortgagesolutions.co.uk/news/2020/02/27/tsb-clamps-down-on-ground-rent-and-estate-fees-as-builders-and-agents-urged-to-be-upfront/

So, to the point of your question - yes, in the last year I have seen issues where an uncapped rentcharge has been an issue. Specifically, a solicitor refusing to advise proceeding on a purchase without a cap. 

Maybe someone here is more up to date than I am, but I don't think it's an issue for everyone yet. But the lenders tend to act like sheep - once one puts in a requirement, the others often follow. So maybe in a year or two we'll all be talking more about this specific issue. 

[Deleted User]

The reason they want a cap is as you speculate, builders see this as a source of revenue and if it's uncapped will find all sorts of work that "needs" to be done.

I'd steer clear if I were the OP.

princeofpounds

[Deleted User] said:

The reason they want a cap is as you speculate, builders see this as a source of revenue and if it's uncapped will find all sorts of work that "needs" to be done.

I'd steer clear if I were the OP.

I don't think it's right to be so broad-brush in your conclusions. Plus, that does mean you are ruling out almost every new build estate across the country. Which may work for some but not everyone has such an easy choice in their local markets.

For starters, who the rentcharge-holder and management company actually are can matter a lot. In many, many developments, the rentcharge is actually given over to a residents' association. Who clearly have no incentive to overcharge and never will. I would be totally happy with that situation.

In many other estates, the management company is actually quite responsible. If they have been around long enough and your get enough disclosure of estate rentcharge history, you can build up a decent degree of confidence in this. Believe it or not, not every developer is out there to rip people off in the worst ways. 

There have been serious examples of exploitation. But they aren't actually the most common in practice, even if they are a risk for some.

(In a way, that's kind of a problem of its own, because it means the government has dragged its feet for years in providing a proper regulatory framework for this area. I have no idea what the civil service is doing as these issues have been on their desk for what, a decade now? It hasn't even got up to the political stage of draft legislation yet) 

PlumLuck

We pulled out of a new build because of these same concerns.

However, what tipped us over the edge was when we found out the name of the management company and looked them up, they had the worst reviews of any company I'd ever seen. Why would I put myself in a situation where I'm relying on the services of a company I know to be dreadful?

The whole thing just ended up feeling very unsettling.

Remark92

Appreciate the detailed response. I’m trying to realistically ascertain the risks with regards the uncapped nature of these charges. I appreciate the info on TSB adding that to their requirements.

If the lenders do decide to follow suit and put their own provisions in RE the un-capped charges, our resale value may be potentially affected then. However, I envision if this happens with ALL the lenders, no one with uncapped estate rentcharges (which appears to me to be many people - ?) will be able to sell and it may become standard procedure for a deed of variation to be drawn up to add a reasonable cap.

On that note, I have asked the solicitor if they can add a cap that matches what some of the lenders are asking for and have essentially been told no they will not change any provisions in the transfer as everyone on the estate needs to be under the same contract. Not surprised to be honest, I guess not everything is open to negotiation after all…

So we are trying to weigh up the risks whether or not to proceed. We do have some positives in the fact that A. We did get a mortgage ourselves with no issues and people have sold in the same estate recently, and B. We do indeed have a residents association where we can vote out the management company. This doesn’t help though if we can’t get a 51% vote for whatever reason to push out an externally appointed director taking an over-the-top salary though.

So really it all comes down to speculation on whether the lenders are likely to change their criteria. I guess there’s always some risk with these things, and we do love the house. 

GDB2222

Suppose that your estate charge is capped at £200, but the actual cost works out at £400 per home. In what way would it be fair that you pay half of everyone else? It would make you remarkably unpopular.

So, unless the whole estate moves to a capped charge, it can’t change on an individual property. 

That still leaves the question as to how this works if the actual cost is more than the cap?  

Remark92

GDB2222 said:

Suppose that your estate charge is capped at £200, but the actual cost works out at £400 per home. In what way would it be fair that you pay half of everyone else? It would make you remarkably unpopular.

So, unless the whole estate moves to a capped charge, it can’t change on an individual property. 

That still leaves the question as to how this works if the actual cost is more than the cap?  

Yeah to be honest I agree that would be unfair, and that's a good point about the need for the whole estate to move to capped.

For me, it's not I don't want to pay the charge at all, but am concerned about resale and the lenders wanting caps. In that scenario though and if the lenders do all decide they want caps, I suppose the houses may have to try and push for new agreements somehow.

goodwithsaving

I have always steered clear of new builds due to estate charges and management companies, but just out of interest really, do they base it on the value of your home? 

princeofpounds

Remark92 said:

they will not change any provisions in the transfer as everyone on the estate needs to be under the same contract. Not surprised to be honest, I guess not everything is open to negotiation after all

For the reasons that GDB2222 outlines, it's not really surprising they won't agree.

Personally, I would be ok to buy a property where the estate rentcharge is held by a residents' association. If the lenders really do go nuts on the caps, then there should be a lot of pressure on the Directors to make necessary changes.

I don't think a situation where almost all newbuild freehold houses on unadopted estates (which is probably a majority) become unmortgageable will be a situation that will be permitted to exist by the government. And the rationale for those lenders that have set caps similarly to ground rents is logically weak. 

Remark92

goodwithsaving said:

I have always steered clear of new builds due to estate charges and management companies, but just out of interest really, do they base it on the value of your home? 

No, it's purely done on what needs to be done work-wise. If the residents don't hire their own director one is appointed and can take a salary. This is I believe where the amount can get ramped up.

Ours will be about £300 per year. To be honest, I'm happy to pay that and just hope it stays at about that level.