Lender treating service charge like ground rent

Tammy8889

Hi there

We've run into a bit of an issue during a house purchase, and I just wanted to know how this compares to others.

We are purchasing a new build (small development, 30 or so houses) 3-bed detached house with garage, it has unadopted roads and drains. There's also a fairly large green area within and around the properties, which we must maintain. The development is complete and we're buying one of the last remaining plots.

There's a management company setup by the developers, which has a managing agent appointed. Once all plots are sold it will be transferred to the home owners. Our management fee will be £550 per annum.

However, our lender has the following policy: The service charge must not be above £500 and must not more than double every 25 years.

I was a bit surprised to hear this, especially as we already had the full mortgage offer and were on the brink of exchanging. They just suddenly decided to bring this up out of nowhere.

Our broker and the developer seem to think this is a bit weird, but I wanted to get thoughts of others before we decide what to do here.

DullGreyGuy

Is the house freehold or leasehold?

Ground rent is normally the problem rather than service charges. Service charges are typically your share of what the actual costs are and therefore move with inflation/depending on what work needs doing rather than being either a fixed amount or fixed escalation (though I think in some cases they can be fixed in new builds for the first few years).

eddddy

Tammy8889 said:

However, our lender has the following policy: The service charge must not be above £500 and must not more than double every 25 years.

Who told you about that policy?

That sounds suspiciously like somebody is confusing Service Charge and Ground Rent.



It's impossible to predict how a service charge will increase in the next 25 years, 75 years, 100 years etc.

Nobody would be daft enough to try to guarantee in a legal document what a service charge will be in a 100 years time.

(Who is able to guess what labour charges and material charges will be for repairing roads and drains in 100 years plus?)



But it's very possible that a lender won't accept Ground Rents over £500 or that more than double every 25 years

Tammy8889

It's a freehold. It's not ground rent, which is what we initially thought the lender was confused about to begin with.

I agree that it's not really something you can fix the increase of. We may agree to re-surface the road in 15 years time, it'll be a one-off cost but may mean our service charge goes over the "no more than double every 25 years". It's just a bit weird the lender wants this clause for a maintenance charge.

eddddy

Tammy8889 said:

It's a freehold. It's not ground rent, which is what we initially thought the lender was confused about to begin with.

I agree that it's not really something you can fix the increase of. We may agree to re-surface the road in 15 years time, it'll be a one-off cost but may mean our service charge goes over the "no more than double every 25 years". It's just a bit weird the lender wants this clause for a maintenance charge.

It's almost certainly a mistake. What document says that?  Is it a letter from the lender, a letter from the broker, or something else?

Who is the lender?

Tammy8889

eddddy said:

Tammy8889 said:

It's a freehold. It's not ground rent, which is what we initially thought the lender was confused about to begin with.

I agree that it's not really something you can fix the increase of. We may agree to re-surface the road in 15 years time, it'll be a one-off cost but may mean our service charge goes over the "no more than double every 25 years". It's just a bit weird the lender wants this clause for a maintenance charge.

It's almost certainly a mistake. What document says that?  Is it a letter from the lender, a letter from the broker, or something else?

Who is the lender?

It's directly from an underwriter of the lender (YBS). They have the following policy (word for word):

Maximum initial estate charge to be no more than £500 per annum in present value and must be no more than double every 25 years.

Our solicitor has mentioned to them multiple times that it is not ground rent. So as far as we are aware, they are not getting confused. It's a bit weird though.

I don't know what criteria there is around that £500 pa value, as surely it depends on land size, what the charges cover etc. It just seems like something you can't bundle up into a single policy like that.

user1977

Nonsensical though the bit about "not doubling every 25 years" might be, that does appear to be what YBS's policy is - see here (answer 5.15.2a).

That just doesn't work - you can't cap service charges like that, because nobody else is going to be stepping in after 25 years to make up the shortfall. Either the full cost is met by the proprietors, or the services don't get carried out. Normal rates of general inflation (like those at the moment) could easily lead to costs more than doubling every 25 years.

eddddy

I just took a look and you're correct - YBS plus other lenders owned by YBS (like Accord, Barnsley, Chelsea) and one or two others seem to have that requirement.

See: https://lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1865/

But many other lenders don't seem to mention that requirement.

Tammy8889

user1977 said:

Nonsensical though the bit about "not doubling every 25 years" might be, that does appear to be what YBS's policy is - see here (answer 5.15.2a).

That just doesn't work - you can't cap service charges like that, because nobody else is going to be stepping in after 25 years to make up the shortfall. Either the full cost is met by the proprietors, or the services don't get carried out. Normal rates of general inflation (like those at the moment) could easily lead to costs more than doubling every 25 years.

That's interesting. So it's just a blanket policy for the whole of YBS. Thanks for finding that.

So what we're thinking is, if we can somehow get the maintenance charge below £500 initially, then they may not care for the "more than doubling every 25 years" aspect of the policy.

We are considering just using another lender, but interest rates have risen twice I think since we got the mortgage offer, and developer may be unwilling to wait that long. So we're between a rock and a hard place at the moment.

YBS must provide mortgages for freeholds with service charges, so my question is how have people got round this clause if "not more than doubling every 25 years" is not normally something a maintenance company/developer would promise?

K_S

@tammy8889 I vaguely remember coming up against something similar rent-charge related in the past for a client I'd placed with Accord. Had to place with another mainstream lender, but this was when mortgage rates didn't change every few days so wasn't too much of a hassle.

Though I know now to ask from experience, unfortunately, these kind of issues often come to light during conveyancing, hopefully you can find a solution that works for you, good luck!

Tammy8889 said:

user1977 said:

Nonsensical though the bit about "not doubling every 25 years" might be, that does appear to be what YBS's policy is - see here (answer 5.15.2a).

That just doesn't work - you can't cap service charges like that, because nobody else is going to be stepping in after 25 years to make up the shortfall. Either the full cost is met by the proprietors, or the services don't get carried out. Normal rates of general inflation (like those at the moment) could easily lead to costs more than doubling every 25 years.

That's interesting. So it's just a blanket policy for the whole of YBS. Thanks for finding that.

So what we're thinking is, if we can somehow get the maintenance charge below £500 initially, then they may not care for the "more than doubling every 25 years" aspect of the policy.

We are considering just using another lender, but interest rates have risen twice I think since we got the mortgage offer, and developer may be unwilling to wait that long. So we're between a rock and a hard place at the moment.

YBS must provide mortgages for freeholds with service charges, so my question is how have people got round this clause if "not more than doubling every 25 years" is not normally something a maintenance company/developer would promise?

Tammy8889

Just thought I'd provide an update for anyone in a similar position. The lender offered an alternative, where as long as we have the reasonable right to contest the maintenance charge (and a few other small things), then all is okay and we don't need the doubling every 25 years clause. Our developer was happy to add these into the title. Took 6 weeks to come to this point, but I'm glad we got there in the end.

We have a new issue now, our buyer is trying to gazunder us a week before we were planning to exchange (after being happy with all our query replies 2 months ago). Moving homes is an absolute joke sometimes.