Buying free hold property with estate rent charge

joland113

Hi all,

I am in thew process of buying a freehold property with estate rent charge. A deed of variation is requested by the bank and the solicitor is in the process of getting the approval from the management company. 

Please see the term to alter below:

1) The Management Company Covenants with the Transferee that before commencing any proceedings against the Transferee, either under section 121 of the Law of Property Act 1925 (“LPA 1925”) or otherwise, and arising from the non-payment of any rent-charge the Management Company shall:

 

2) notify the Transferee mortgagee where the rent charge remains unpaid and that no further action will be contemplated by the Management Company until the mortgagee has had two months of the date of notice of the breach to remedy the breach; and

 

3) where the statutory remedy of the grant of a lease of the Property on trust as provided for in Section 121(4) LPA 1925 is exercised for non-payment of any rent-charge such lease will be surrendered, within a premium, following the payment of all arrears together with all reasonable legal costs and court costs of creating and surrendering the lease.

The original deed includes a term mentioning that the service charge needs to be reasonable (so no variation is needed in relation to this).

The solicitor said this should be sufficient to address all the banks' requirements currently in relation to mortgage approval. 

So I guess subject to this deed of variation being approved by the management company, the estate rent charge issue should be resolved with this deed of variation and hopefully it will not affect the future remortgage ability and marketability of the house? (although I understand that there is a risk that the mortgage requirement may change)

I just want to see if there is any alternative view on this. Thanks!

eddddy

Para 2 says that if there are arrears, the management co must give the mortgage lender 2 months notice before taking action - so that the mortgage company has time to pay the arrears.  So that should satisfy the mortgage lender.

But maybe it would be good to have a protection for a cash buyer as well - who owns the property without a mortgage. i.e. the management co must give the home owner 2 months notice before taking action - so the owner has time to pay the arrears.

But maybe that's already covered elsewhere in the deed.

(And I'm no expert on those types of deeds.)

joland113

Thanks eddddy! It's a good point. I will check with my lawyer on this!

GDB2222

The words ‘within a premium' make no sense. It’s probably a typo for ‘without a premium', and it needs to be looked at by your solicitor.

joland113

Thank you all!!! All comments are very useful. To be honest this is drafted by my lawyer, although I doubt how careful are they doing their work and also how much they try to do to protect my right, I feel like they are just trying to do the minimal to fulfil what is required by the bank and that's it. I have gone back to the lawyer on this and see how it go. 

joland113

eddddy said:

Para 2 says that if there are arrears, the management co must give the mortgage lender 2 months notice before taking action - so that the mortgage company has time to pay the arrears.  So that should satisfy the mortgage lender.

But maybe it would be good to have a protection for a cash buyer as well - who owns the property without a mortgage. i.e. the management co must give the home owner 2 months notice before taking action - so the owner has time to pay the arrears.

But maybe that's already covered elsewhere in the deed.

(And I'm no expert on those types of deeds.)

And yea I actually read the bank's requirement again, they need the deed to be altered in the way that it gives notice to the mortgage provider and the owner as well. Thanks for spotting this. I don't think my solicitor is very careful on this anyway......

joland113

GDB2222 said:

The words ‘within a premium' make no sense. It’s probably a typo for ‘without a premium', and it needs to be looked at by your solicitor.

Thank you so much! The solicitor changed the terms based on the suggestion!

Troy_af

joland113 said:

Hi all,

I am in thew process of buying a freehold property with estate rent charge. A deed of variation is requested by the bank and the solicitor is in the process of getting the approval from the management company. 

Please see the term to alter below:

1) The Management Company Covenants with the Transferee that before commencing any proceedings against the Transferee, either under section 121 of the Law of Property Act 1925 (“LPA 1925”) or otherwise, and arising from the non-payment of any rent-charge the Management Company shall:

 

2) notify the Transferee mortgagee where the rent charge remains unpaid and that no further action will be contemplated by the Management Company until the mortgagee has had two months of the date of notice of the breach to remedy the breach; and

 

3) where the statutory remedy of the grant of a lease of the Property on trust as provided for in Section 121(4) LPA 1925 is exercised for non-payment of any rent-charge such lease will be surrendered, within a premium, following the payment of all arrears together with all reasonable legal costs and court costs of creating and surrendering the lease.

The original deed includes a term mentioning that the service charge needs to be reasonable (so no variation is needed in relation to this).

The solicitor said this should be sufficient to address all the banks' requirements currently in relation to mortgage approval. 

So I guess subject to this deed of variation being approved by the management company, the estate rent charge issue should be resolved with this deed of variation and hopefully it will not affect the future remortgage ability and marketability of the house? (although I understand that there is a risk that the mortgage requirement may change)

I just want to see if there is any alternative view on this. Thanks!

Hello 

I am in a similar situation myself. Can I ask did this come to light before or after your mortgage offer was made? I have had a mortgage offer, but having read my lenders requirements on rent charges, they are actually quite strict. They have requirements to lend on homes subject to a rent charge and I know for a fact having spoken to neighbours and having seen their deeds that these requirements are not in the deeds. My worry is that when the details of the rent charge finally come out (solicitor I think is still waiting for details) the lender may then withdraw. But I thought a lender would have thoroughly been through the deeds before making an offer?

There is very confusing and conflicting information out there. So many articles and websites are saying that lenders do not like these rent charges and it may be a problem to get a mortgage in the future. On the flip side correct me if I'm wrong but all of the home owners in these new build estates must currently have mortgages, so what is going on here with the confusion, are the banks happy to mortgage these properties or not? I can't seem to find an answer.


Hope everything goes well for you, keep us updated.

K_S

Troy_af said:

joland113 said:

Hi all,

I am in thew process of buying a freehold property with estate rent charge. A deed of variation is requested by the bank and the solicitor is in the process of getting the approval from the management company. 

Please see the term to alter below:

1) The Management Company Covenants with the Transferee that before commencing any proceedings against the Transferee, either under section 121 of the Law of Property Act 1925 (“LPA 1925”) or otherwise, and arising from the non-payment of any rent-charge the Management Company shall:

 

2) notify the Transferee mortgagee where the rent charge remains unpaid and that no further action will be contemplated by the Management Company until the mortgagee has had two months of the date of notice of the breach to remedy the breach; and

 

3) where the statutory remedy of the grant of a lease of the Property on trust as provided for in Section 121(4) LPA 1925 is exercised for non-payment of any rent-charge such lease will be surrendered, within a premium, following the payment of all arrears together with all reasonable legal costs and court costs of creating and surrendering the lease.

The original deed includes a term mentioning that the service charge needs to be reasonable (so no variation is needed in relation to this).

The solicitor said this should be sufficient to address all the banks' requirements currently in relation to mortgage approval. 

So I guess subject to this deed of variation being approved by the management company, the estate rent charge issue should be resolved with this deed of variation and hopefully it will not affect the future remortgage ability and marketability of the house? (although I understand that there is a risk that the mortgage requirement may change)

I just want to see if there is any alternative view on this. Thanks!

Hello 

I am in a similar situation myself. Can I ask did this come to light before or after your mortgage offer was made? I have had a mortgage offer, but having read my lenders requirements on rent charges, they are actually quite strict. They have requirements to lend on homes subject to a rent charge and I know for a fact having spoken to neighbours and having seen their deeds that these requirements are not in the deeds. My worry is that when the details of the rent charge finally come out (solicitor I think is still waiting for details) the lender may then withdraw. But I thought a lender would have thoroughly been through the deeds before making an offer?

There is very confusing and conflicting information out there. So many articles and websites are saying that lenders do not like these rent charges and it may be a problem to get a mortgage in the future. On the flip side correct me if I'm wrong but all of the home owners in these new build estates must currently have mortgages, so what is going on here with the confusion, are the banks happy to mortgage these properties or not? I can't seem to find an answer.


Hope everything goes well for you, keep us updated.

@troy_af Issues with rent charges (if any) usually only come up during conveyancing.

But rent charges by themselves aren't a huge issue. In a minority of cases they might be drafted in a sufficiently poor manner that most lenders will not lend without a variation and won't be satisfied with an indemnity insurance. In most cases they're fine and often the buyer doesn't even know that the property they're buying comes with a rent charge.

From what lenders have told me, generally speaking, if the rent-charge falls within one of the following categories, it's usually acceptable to most lenders -

1. The provisions under section 121 of the Law of Property Act have been excluded under the estate rent charge clause.

2. The estate rent charge clause includes a mortgagee protection clause, which states that notice of at least 28 days is to be given to the mortgagee prior to any enforcement action being taken by the owner of the estate rent charge.

3. The owner of the estate rent charge is a management company comprising of the residents, who are the shareholders of a private freehold development. 

Troy_af

K_S said:

Troy_af said:

joland113 said:

Hi all,

I am in thew process of buying a freehold property with estate rent charge. A deed of variation is requested by the bank and the solicitor is in the process of getting the approval from the management company. 

Please see the term to alter below:

1) The Management Company Covenants with the Transferee that before commencing any proceedings against the Transferee, either under section 121 of the Law of Property Act 1925 (“LPA 1925”) or otherwise, and arising from the non-payment of any rent-charge the Management Company shall:

 

2) notify the Transferee mortgagee where the rent charge remains unpaid and that no further action will be contemplated by the Management Company until the mortgagee has had two months of the date of notice of the breach to remedy the breach; and

 

3) where the statutory remedy of the grant of a lease of the Property on trust as provided for in Section 121(4) LPA 1925 is exercised for non-payment of any rent-charge such lease will be surrendered, within a premium, following the payment of all arrears together with all reasonable legal costs and court costs of creating and surrendering the lease.

The original deed includes a term mentioning that the service charge needs to be reasonable (so no variation is needed in relation to this).

The solicitor said this should be sufficient to address all the banks' requirements currently in relation to mortgage approval. 

So I guess subject to this deed of variation being approved by the management company, the estate rent charge issue should be resolved with this deed of variation and hopefully it will not affect the future remortgage ability and marketability of the house? (although I understand that there is a risk that the mortgage requirement may change)

I just want to see if there is any alternative view on this. Thanks!

Hello 

I am in a similar situation myself. Can I ask did this come to light before or after your mortgage offer was made? I have had a mortgage offer, but having read my lenders requirements on rent charges, they are actually quite strict. They have requirements to lend on homes subject to a rent charge and I know for a fact having spoken to neighbours and having seen their deeds that these requirements are not in the deeds. My worry is that when the details of the rent charge finally come out (solicitor I think is still waiting for details) the lender may then withdraw. But I thought a lender would have thoroughly been through the deeds before making an offer?

There is very confusing and conflicting information out there. So many articles and websites are saying that lenders do not like these rent charges and it may be a problem to get a mortgage in the future. On the flip side correct me if I'm wrong but all of the home owners in these new build estates must currently have mortgages, so what is going on here with the confusion, are the banks happy to mortgage these properties or not? I can't seem to find an answer.


Hope everything goes well for you, keep us updated.

@troy_af Issues with rent charges (if any) usually only come up during conveyancing.

But rent charges by themselves aren't a huge issue. In a minority of cases they might be drafted in a sufficiently poor manner that most lenders will not lend without a variation and won't be satisfied with an indemnity insurance. In most cases they're fine and often the buyer doesn't even know that the property they're buying comes with a rent charge.

From what lenders have told me, generally speaking, if the rent-charge falls within one of the following categories, it's usually acceptable to most lenders -

1. The provisions under section 121 of the Law of Property Act have been excluded under the estate rent charge clause.

2. The estate rent charge clause includes a mortgagee protection clause, which states that notice of at least 28 days is to be given to the mortgagee prior to any enforcement action being taken by the owner of the estate rent charge.

3. The owner of the estate rent charge is a management company comprising of the residents, who are the shareholders of a private freehold development. 

Thank you for the information.

What I still don't understand though is how the UK Finance Mortgage Lenders Handbook (which my conveyancer says they must follow), clearly states that my lender has 3 requirements that must be met. I know these requirements are not met because having seen the deeds for other properties on the estate, there is no mention of any of these requirements. For example one requirements is that the charge must not be more then £500, the deed however does not give an amount, it just says it will be decided by the company each year. Is the UK Finance Mortgage Lenders Handbook just more of a guide or is it hard rules?

Maybe this is already being dealt with behind the scenes between my solicitor and the lender but I haven't heard anything. Maybe I am trying to get too involved I don't know.

GDB2222

Each lender has its  own rules.