Hello, my name is Jade Smith and I am the Business’ Relationship Manager for Equilaw. Today I am joined by our Business Development Director Matthew Taylor. 

In today’s podcast we are discussing the special condition of Estate Rent Charges that can be raised when clients are taking out a lifetime mortgage. The content for today’s podcast has been provided by our associate solicitor Lucy Batten.

First question for you Matt, we have seen special conditions recently mentioning estate rent charges, what actually are they?

In brief they are an interest created over a property to secure a regular sum of money. Put another way, the land is charged with a burden to pay rent. So they sound like an innocent maintenance charge for an estate, but they actually operate in the same way in law as the old fashioned rent charges that were abolished in 1997.

Therefore if unpaid, they give the recipient of the charge (i.e. the developer or the management company) the same legal powers that the owner of a rent charge would have, namely: the right to re-enter the property or even grant themselves a lease over the property. So you can see why lenders wouldn’t like them.

Yes, because they represent a potential third party interest in the property that is being mortgaged. 

That’s right.

So what sort of properties have an estate rent charge?

They are most common on new build or relatively new build estates – think large housing developments built from 1990s onwards. The original type of rent charge I just referred to was actually abolished in 1977. However when larger new build estates started cropping up, an issue arose between the local authorities and developers….. who would maintain the communal spaces on these developments? Usually the council would maintain roads and lighting and green spaces, but local authorities don’t have the resource available to take on these new common areas on the new build estates. So they made it a condition of planning that the developer would need to make the development was self-sufficient.

Of course, developers don’t want to get stuck with the cost of this either. So they created estate rent charges, a type of maintenance charge to be borne by the people who own property on the estate; a bit like a service charge, but secured on the property. And this worked, so they became more and more prevalent. 

Great, could you please explain the difference between an estate rent charge and a service charge?

Well a service charge is usually what you pay when you are a leaseholder in a block of flats, the service charge funds the maintenance and running of the building and gardens. Likewise on new build estates there will be communal street lighting, green areas or sometimes private roads that need maintaining. In some cases the development will just have a service charge that new owners agree to pay by signing a deed when they purchase the property. These types of service or maintenance charges don’t present an issue because those powers of re-entry or claiming an interest in the property don’t apply to them. An estate rent charge is a formal secured interest that has been created in the original transfer from the developer to the first property owner who bought the plot, and the powers do apply. 

Thank you, so what are the lenders asking for in their special conditions?

Usually they want to know whether a property with any communal payment charge is burdened by an estate rent charge or whether it is just a service charge. If it is an estate rent charge they want to know whether the powers to re-enter or demise the property will apply in the event of non-payment. We can check this by examining the title documents at the land registry. Sometimes they want to know that any such charges are not too high or restrictive, again we can check this in the title documents or by asking the client about the costs.

Understood thank you Matt. Can the clients supply information at application stage to their financial advisers to help with this?

Unfortunately a lot of property owners won’t even know that they have an estate rent charge on their property and if they do they are unlikely to know what this means. When the developers started using estate rent charges, the lenders didn’t really take much notice. It is only more recently that lenders have started refusing to mortgage properties with these charges on and so only now are these issues coming to light. It was almost never explained to the clients when they bought the property that failure to make these payments could give a developer or Management Company rights over their property.

Oh wow, that doesn’t seem very fair?

No I completely agree, and so do the Law Society, who have promised to look into this. That might be a way off though, we are still waiting for the long promised leasehold reforms. However there have been recent rulings that sale of properties with these estate rent charges, carrying the powers they do, are actually in breach of consumer rights because the property owners now cannot sell or mortgage as a result of them. So far there have been findings against four major housing developers who are now being encouraged to help property owners rectify the situation and it is expected that more developers will be added into this action.

So legally, what can be done to rectify the situation?

If we examine the title deeds and there is an estate rent charge on the property, the next thing we need to do is to see if there any provisions in the deeds that protect a mortgage lender, in which case an indemnity policy could be a viable solution. Also if the company collecting the rent charge is resident owned it may be more likely that the lender would accept a policy. Otherwise the only option is to draft a deed of variation which will have the effect of varying the provisions of the rent charge so as to remove those powers of re-entry or interest in the property.

That certainly does sounds complicated. What sort of delay or cost would be involved for these clients?

It can be quite straight forward. Our in house lawyers are practised at drafting these deeds so we can do it or the developer may already have a template. My view is that the client should seek to recover costs from the developer but it is possible that the client may have to be responsible for the legal costs in drafting, which are on average £500 but can vary case by case. Time wise, it all depends on the response time of the parties who need to sign the deed, usually the developer and management company. If they respond in a timely manner then the process of drafting and signing the deed could be completed in a few weeks. However, if they take ages to reply or are being obstructive then the whole thing becomes more challenging.

So what would your take away message be on this topic for both clients and financial advisers?

Rent charges are problematic but we can usually sort it out with a little patience from those involved. The special conditions relating to them have become increasingly common over the past year so it is worth knowing about them as the problem won’t go away any time soon. If a property is on a new build estate it is likely that the lender will raise this, so it is important to instruct a lawyer who knows their requirements and to manage client expectations that we cannot advise on next steps until we have checked all the title documents. 

Great, thank you so much Matt, this will certainly help our advisers and clients understand the complexities around estate rent charges and the impact this has on completing their equity release transaction.

Thank you everyone for listening today, we do have more podcasts available for you to download and listen to.