Expert Offers Insight Into New Freehold Scandal

Onerous ground rents, excessive permission fees and unfair contract terms are issues only plaguing leasehold ownership…right?  

Well, according to recent media coverage, freehold homeowners of new build property are also coming to terms with toxic conditions with restrictive covenants hidden within their ownership terms.  

In total, it is thought that more than 1 million freehold homeowners are shackled to contracts insisting the owner is liable to contribute towards maintenance and upkeep of shared roads and green spaces.  

Whilst estate rentcharges and variable rentcharges are permissible under the Rentcharges Act 1977, developers now seem to be creating freehold properties with rentcharges attached to compensate for the leasehold abolition, tainting the concept of freehold ownership in the process.    

The total number of properties subject to a rentcharge, according to freedom of information request data obtained from HM Land Registry currently stands at 1,056,592.   

Since 2015, 178,768 rentcharges have been registered with 29,968 already registered in 2019 and likely to rise exponentially unless further controls are put in place.   

Despite spending thousands of pounds in council tax for services such as highway maintenance, some development freeholders are charging each property thousands, claiming councils can no longer afford the cost.  

Permission fees and other restrictive covenants are also imprisoning some homeowners, preventing them from making changes to their property unless a fee is paid to the developer.   

Some homeowners have also been banned from completing simple acts like parking their van in their own driveway because of hidden subclauses which were poorly explained to the owner prior to purchase.  

 As the UK prepares itself for the new Freehold scandal, Today’s Conveyancer asks Tom Bridge, head of conveyancing at Ramsdens Solicitors LLP, whether rentcharges, ‘upkeep fees’ or ‘service charges’ are about to become a constant in freehold new builds and what measures the Government should take to regulate this new practice impacting homeowners.  

“This is certainly an issue which is attracting increasing attention at the moment and I agree that it has the potential to become as important as the entire debate around leasehold properties. 

“In my view the origins of this issue are twofold. Firstly, the realisation by developers/builders that the leasehold “gravy train“ was likely to come to an end.  

“Secondly, years of austerity have left local authorities looking to find ways to cut expense which has led directly to the practice of planning applications being approved which included these types of arrangements, the results of which mean the local authorities have less exposure to maintenance costs of roads/footpaths/open areas and local residents receive no dispensation from the level of council tax payable. The developers/builders then either manage things themselves or pass on the responsibility to the same managing agents involved in the leasehold debate at the same time making an additional profit for themselves. 

“The issue for local residents is that under their deeds they are contractually bound to pay the estate rent charges. Quite often a restriction has been placed on the title register to the extent that no disposition is to be registered unless the transferee produces to the Land Registry the required documentation from the managing agents. 

“Legally, there is nothing actually wrong with the arrangements as long as they reasonably reflect the maintenance costs involved. The relevant provisions are: 

“Rentcharges Act 1977 s2 (3) ( d) under any Act of Parliament providing for the creation of rentcharges in connection with the execution of works on land (whether by way of improvements, repairs or otherwise) or the commutation of any obligation to do any such work; 

“S2 (4)(b) of meeting, or contributing towards, the cost of the performance by the rent owner of covenants for the provision of services, the carrying out of maintenance or repairs, the effecting of insurance or the making of any payment by him for the benefit of the land affected by the rentcharge or for the benefit of that and other land. 

“The real problems arise because even if the individual local residents do not actually benefit from use of a specific road/footpath/open space, it will still be regarded as valid as the maintenance need not be in relation to the particular piece of land of the resident. Cases have decided that the estate rentcharge was still reasonable even though it referred to maintenance of the estate and a private road that the property owner would never use. Equally, It seems that it can be very difficult to question apportionments of rent charges. 

“The reality for residents is that the administration charges involved in these arrangements can be expensive and clients should be warned of this. Unlike leasehold flats and the administration charges related to them, there is no statutory ability to question the reasonableness of estate administration charges. It must be made clear in the provisions that charges must be reasonable. Even then, application has to be made through the Courts, and not Land Tribunals, which means that to question reasonableness may be difficult.  

“Even more worrying is the fact that some estate rentcharges include an express right of entry but the effect of s121 (3) of the Act is to provide for the rent charge owner to have a statutory right anyway.  It would highly recommended that there should be a clause whereby the mortgagee of a client is given at least 28 days’ notice by the rent owner prior to proceedings being brought.  

“Almost inevitably some mortgagees e.g. Barclays are already requiring such a mortgagee protection clause and exclusion of s121, especially where the residents are not members of the management company. 

“I think more and more conveyancers are becoming aware that these arrangements are problematic and inevitably mortgage lenders are changing their CML instructions accordingly. Obviously, as with the leasehold issues previously, this does not assist with regards to the multitude of properties/ developments which have already been built using these arrangements over the last few years. 

“My view is that this type of arrangements should be included in any measures the new Government propose to implement in relation to leaseholds as the issues are similar in their nature and have the same detrimental effects on homeowners.”