Deed of variation for variable rent fee

lottiestyles01

Hi, 

I just wanted to see if anyone could shed some light on this situation we find ourselves in- currently in the process of purchasing a property which is 14 years old on a new development area, living on this area comes with a variable rent fee for the common green areas , which is owned by a management company. 

We have come to a standstill as our solicitors are very adamant on obtaining a deed of variation - the sellers solicitor does not agree and here we are in the middle. 

Please could someone explain to me what this deed of variation will provide us with and does it actually give us any protection for this variable rent fee?
 Many thanks 

eddddy

Is it a leasehold property - in which case you might mean ground rent?

Or is it a freehold property - in which case you might (or might not) mean a rentcharge?

canaldumidi

'Variable' suggests a service charge for the common areas, which can obviously vary eg if the gardeners increase their charges.

But yes,otherwise ground rent or rent charge, both of which should be either fixed, or subject to a defined increase every year/7 years/whatever.

More info needed.

princeofpounds

It is quite likely that the problem you have is as follows (but I'm making plenty of assumptions pending further details):

- This is an estate rentcharge on a freehold property. It is basically an agreement to pay a fee for the maintenance of common areas and anything else covered by the clause. It basically mimics the function of a service charge for a leasehold property, but for freeholds.

- For the avoidance of doubt, an estate rentcharge is not the same thing as a 'normal' rentcharge, which is a fixed payment and trivial to deal with as it can be redeemed.

- Estate rentcharges didn't used to be particularly problematic until a landmark court case in 2016 (Roberts v Lawton, the 'Morgoed Case'; google it for details). In that case, it was established that in the event of an unpaid estate rentcharge, the rentcharge owner could re-enter the property and set up a lease to recover the payments - basically selling the right to use the property out from under the owner.

No-one really thought that the courts would rule that way, but they did (describing the powers as 'draconian' in the process). That is what your solicitor is trying to protect you (and more importantly the mortgage lender) from.

- In the following years, mortgage lenders slowly woke up to the issue and most decided this was too big a risk to take. If a borrower were to end up in this situation there is no requirement for the rentcharge owner to warn the mortgage company, so they cannot defend their own security for the loan. What normally happens with leaseholds/service charge is that the mortgage company steps in, pays the service charge to prevent the lease being forfeited, and then adds the amount plus penalties onto the mortgage. Ultimately then the lender can repossess the property when appropriate and recover their loan.

So the mortgage companies became increasingly reluctant to lend, and now most will not do so without protection from this problem. 

- The solution to this is to agree a Deed of Variation where the rentcharge owner basically agrees not to use these powers. Specifically, the protection required concerns Section 121 of the Law of Property Act 1925, so you may see mention of that.

- Unfortunately, this is all causing quite a bit of confusion in the market. You will still see lots of sellers who don't understand this issue. Most estate agents don't understand this. Even more remarkably, you will still see some solicitors who don't understand or are even aware of this issue (my family have encountered some in a recent transaction).

It's not helped by the fact that the mortgage lenders' response to all this has been piecemeal and developing for a few years. Some would initially lend, some wouldn't. Some initially accepted indemnity, others wouldn't etc. Now pretty much every lender will not lend without variation, but you'll still get sellers saying things like 'well, I managed to get a mortgage so I don't see why it's a problem'.

- IF all this is the case, be guided by your solicitor. They know what they are dealing with. For some reason the sellers don't.

lottiestyles01

Thank you very much for your response, Prince of pounds that was very informative and supported some other advice I have heard today. 

Sadly I think we will end up withdrawing from this sale which is such a shame as meant to be our first house before getting married later this year. I hope in the future this gets resolved because is causing a lot of issues! 

princeofpounds

lottiestyles01 said:

Thank you very much for your response, Prince of pounds that was very informative and supported some other advice I have heard today. 

Sadly I think we will end up withdrawing from this sale which is such a shame as meant to be our first house before getting married later this year. I hope in the future this gets resolved because is causing a lot of issues! 

It would be a lot easier if the government had legislated to amend Section 121. But by the time sluggish civil servants and politicians get around to it, the problem will probably largely be resolved by the market. I don't know how many years we have been waiting for progress on what is supposed to be the next round of leasehold reform, for example. It's not even particularly contentious legislation.

The sellers will have to figure it out the hard way.

peter3hg

Since the problems with rentcharges, some developers recently have started placing a restriction on the title that stops a sale being registered without a certificate from the management company allowing it.
This means they can stop a sale if the maintenance payments aren't up to date.

As far as I know lenders are ok with this approach, but it still has problems in that it lacks the legal powers to challenge the payment that leasehold charges have.

princeofpounds

peter3hg said:

but it still has problems in that it lacks the legal powers to challenge the payment that leasehold charges have.

Yes, the Tribunal is an expensive and unwieldy too, but it does serve as a check on the biggest abuses.

Generally with estate rentcharges it's a good idea to look at who owns the rentcharge. If it's a residents' association, then that's usually an acceptable scenario is there isn't the same incentive to overcharge. If it's a management company (as distinct from a managing agent for whoever the owner is) then it's wise to tread more carefully and, at the very least, look at the track record.

Again, this should be an easy fix for government, I expect the civil servants will get around to it sometime in 2030.