Buying free hold property with estate rent charge

Chloe010

If it’s any help, our current house has an annual  management charge and we had no issues buying it in 2017 (Halifax) and remortgaging in 2019 (NatWest). Almost every new build estate in England nowadays has an estate charge attached so I don’t think the mainstream lenders are massively concerned, otherwise there would be thousands of unsold new builds!

Slithery

Chloe010 said:

If it’s any help, our current house has an annual  management charge and we had no issues buying it in 2017 (Halifax) and remortgaging in 2019 (NatWest). Almost every new build estate in England nowadays has an estate charge attached so I don’t think the mainstream lenders are massively concerned, otherwise there would be thousands of unsold new builds!

An 'estate rent charge' is legally a completely different thing to a 'estate management charge'.

Troy_af

GDB2222 said:

Each lender has its  own rules.

Yes but are these rules laid down in the UK Finance Mortgage Lenders Handbook or is this handbook not to be relied upon?

simon_or

Troy_af said:

GDB2222 said:

Each lender has its  own rules.

Yes but are these rules laid down in the UK Finance Mortgage Lenders Handbook or is this handbook not to be relied upon?

The contents of the handbook are meant to be interpreted and relied upon by conveyancing solicitors.

I'm not stating that you are reading it incorrectly or that your solicitor hasn't made a mistake, but as a layperson you're more likely to be misinterpreting it than your conveyancer.

Troy_af

simon_or said:

Troy_af said:

GDB2222 said:

Each lender has its  own rules.

Yes but are these rules laid down in the UK Finance Mortgage Lenders Handbook or is this handbook not to be relied upon?

The contents of the handbook are meant to be interpreted and relied upon by conveyancing solicitors.

I'm not stating that you are reading it incorrectly or that your solicitor hasn't made a mistake, but as a layperson you're more likely to be misinterpreting it than your conveyancer.

I sure hope that I am somehow reading it incorrectly because if not I am going to be extremely concerned. Here is what the handbook says for my lender:

[“The second requirement”] In addition, the current annual amount payable under any rentcharge (or, if the property is affected by more than one rentcharge, the total amount payable under all of them) must not exceed £500 in present value and must not be capable of escalating such that the amount more than doubles every 25 years;

Having seen the deeds of other home owners on the estate, there is no mention of this requirement being met. In fact the deeds clearly state that the rentcharge figure will decided on a yearly basis by the management company, ie no figure is given.

Slithery

Troy_af said:

simon_or said:

Troy_af said:

GDB2222 said:

Each lender has its  own rules.

Yes but are these rules laid down in the UK Finance Mortgage Lenders Handbook or is this handbook not to be relied upon?

The contents of the handbook are meant to be interpreted and relied upon by conveyancing solicitors.

I'm not stating that you are reading it incorrectly or that your solicitor hasn't made a mistake, but as a layperson you're more likely to be misinterpreting it than your conveyancer.

I sure hope that I am somehow reading it incorrectly because if not I am going to be extremely concerned. Here is what the handbook says for my lender:

[“The second requirement”] In addition, the current annual amount payable under any rentcharge (or, if the property is affected by more than one rentcharge, the total amount payable under all of them) must not exceed £500 in present value and must not be capable of escalating such that the amount more than doubles every 25 years;

Having seen the deeds of other home owners on the estate, there is no mention of this requirement being met. In fact the deeds clearly state that the rentcharge figure will decided on a yearly basis by the management company, ie no figure is given.

Are your deeds the same as everyone else's on the estate?
Were these properties purchased before the Lenders Handbook was last updated?

Troy_af

Slithery said:

Troy_af said:

simon_or said:

Troy_af said:

GDB2222 said:

Each lender has its  own rules.

Yes but are these rules laid down in the UK Finance Mortgage Lenders Handbook or is this handbook not to be relied upon?

The contents of the handbook are meant to be interpreted and relied upon by conveyancing solicitors.

I'm not stating that you are reading it incorrectly or that your solicitor hasn't made a mistake, but as a layperson you're more likely to be misinterpreting it than your conveyancer.

I sure hope that I am somehow reading it incorrectly because if not I am going to be extremely concerned. Here is what the handbook says for my lender:

[“The second requirement”] In addition, the current annual amount payable under any rentcharge (or, if the property is affected by more than one rentcharge, the total amount payable under all of them) must not exceed £500 in present value and must not be capable of escalating such that the amount more than doubles every 25 years;

Having seen the deeds of other home owners on the estate, there is no mention of this requirement being met. In fact the deeds clearly state that the rentcharge figure will decided on a yearly basis by the management company, ie no figure is given.

Are your deeds the same as everyone else's on the estate?
Were these properties purchased before the Lenders Handbook was last updated?

I have not yet seen the deeds for the property I am buying. Is this something that my solicitor should definitely be providing me with, because I have been given to sign the contract, the transfer and the deed of covenant.

However the estate is fairly new and still not finished so I don't see how my deeds can be any different to those I have seen from others.

The properties were originally purchased before the handbook was updated yes, but this would still not explain why I have been offered a mortgage.

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. 

Finally got the transfer document which gives details of the rentcharge.

1. They do have full powers under the Law of Property Act and there is no mention of section 121 clause being removed. Although it does say in addition to this, if the payment has not been made for 3 month then they have the power to hold the property and do with it what they wish, etc.

2. There is a protection clause but it does not give a time frame. It states "PROVIDED that before any such right to enter the property is exercised the rentcharge owner shall have given notice of its intention to do so to any mortgagee of the property whose interest has been notified to the rentcharge owner in writing."

So, I'm just wanting to check that I understand this correctly. If payment is not made for 40 days then a lease can be put on the property (under section 121). The 3 month clause is "in addition" therefore is only referring to entering the property. The protection clause is not going to protect against the 40 day lease deadline, only the 3 month right of entry deadline. Does this sound correct?

princeofpounds

Troy_af said:

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.

Hi Troy, you might have been better off starting your own thread for your own question, but I'll answer it here.

I think the biggest point of confusion you face will be resolved by answering your first question. No, the lender does not go through the deeds before making an offer. That is the job of the solicitor, who will act for the mortgage lender as well as you, during the conveyancing. Sometimes very obvious legal issues might get picked up by the valuation survey, especially if they relate to some kind of physical problem with the property. But anything detailed will wait for the solicitor.

You are right there is a lot of confusing information about this. The problems around Section 121 powers and estate rentcharges only arose because of a surprising legal precendent set in the case of Roberts v Lawton (aka the 'Morgoed case') in 2016. Previously, almost everyone was of the opinion that the courts would not permit the use of those powers - even though they existed in law, there was an assumption they would be denied on other legal grounds

It then took several years for the issue to be properly understood by the rest of the industry, and for mortgage lenders to adopt new rules on how they intended to deal with it. They have only really started to converge on a kind of industry-standard solution in the last two years, and there are still variations. On top of plain differences in criteria, some lenders treat remortgages differently to new mortgages, and remember some properties will have 'corrected' title deeds that satisfy lenders and some won't.

Then there have also been lags because it takes time for properties to be developed, or sold on, or for mortgage terms of expire. So we seem to get more posts on the forum about this issue now than we did just prior to the pandemic, despite the fact that we are now 6 years on from the original case.

Even in the last year I have encountered solicitors (!) and estate management companies who didn't know about or understand the issue, and I doubt most estate agents do. I even know of a case where a solicitor waived through a mortgage in contravention of the lender's criteria, which is basically them not doing their job by applying the latest criteria!

The bottom line is that almost all banks are happy to mortgage these properties as long as they meet their criteria in the UK Finance handbook. You'll have seen from the relevant pages that there is now a lot of common agreement on what is required (principally giving up the instant access to Section 121 powers - either the deeds must be compliant or a deed of variation is require to correct it), but it's not 100% consistent. 

Once you have the solution in place there is probably little to worry about from the point of view of mortgagability, even in the future. That's not to say that there are no further issues with the legal framework (the biggest one being that there is no equivalent to a leaseholder's Tribunal to judge the validity of service charges - that may get solved by legislation one day), but the Section 121 problem is not something that recurs or develops - once it's deal with, it's done.

Nickinok75

Troy_af said:

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.

@troy_AF- How did you get on with the above clause being included in your Deed of Variation?
The Management Company of the Property we are hoping to buy has agreed to all the clauses apart from 'the charge must not be more than £500, or double in 25 years' and my Solicitor agrees that this clause is unreasonable.
We are waiting to hear back from the Mortgage company if they will waive this requirement, but i think i know what the answer will be, and potentially my sale will fall through. I was just wondering if your sale went ahead and your DoV included this clause or not