Estate rentcharges: The charge to look out for when buying freehold

11 Dec 2019

Estate rentcharges: The charge to look out for when buying freehold

The potential charges you could face when buying a leasehold property have been covered in the press. We all know that leaseholders are likely to face ground rent, as well as service and maintenance charges, that could rise rapidly. But you might overlook estate rentcharges when purchasing a freehold.

When you purchase a leasehold property, you own the property for a fixed period but not the land it stands on. It’s often used for flats. As a result, extra charges on top of mortgage payments are to be expected. However, when purchasing a freehold property, you own the house and land with no time limit on the ownership. Usually, this means there aren’t any further charges. But some freeholders are finding they have to pay estate rentcharges.

What are estate rent charges?

Usually, when private developers build homes, the local council will ‘adopt’ the estate. This means taking responsibility for the upkeep of public spaces, maintaining roads and paying for other costs. But the local council aren’t forced to do this. With budgets coming under pressure some authorities won’t ‘adopt’ new developments. It’s becoming more common for this to happen.

The services a local council would usually provide need to be paid for in some way. As a result, developers establish a way to cover this; estate rentcharges.

Paying for the service you’ll be benefitting from as a freeholder may sound fair. But estate rentcharges are criticised for two key reasons:

  1. Freeholders have typically little say in the process and the charges. Often, what they are paying for and whether the decisions made offer good value for money are not transparent.
  2. Legally, developers or management companies can take possession of a property if homeowners fall just 40 days behind on their payments. Whilst used rarely, it could mean homeowners effectively lose thousands of pounds due to forgetting to pay a relatively small bill.

If you’re considering buying a property with estate rentcharges, it’s something that should be picked up by your solicitor. During the purchase transaction, your conveyancer should inform you of the charges and how these could change.

3 problems estate rentcharges can cause

Even if you’re happy to pay rentcharges on a property, it’s important to consider where it may cause problems in the future.

1. Securing a mortgage

There have been instances of mortgage applications being declined due to rentcharges. Often, it’s related to the fact that developers or management firms could take possession of a property, rather than the cost.

If you’ll be using a mortgage to purchase your home, it’s worth understanding if it’ll be a problem for lenders. Checking the criteria of lenders can help you pick a provider that’s right for you and the home you want. A mortgage application being declined, for any reason, could have a negative impact on your credit score.

This may not be an issue for you. For instance, you may be a cash buyer or have already spoken to your mortgage provider about the issue. However, you should consider what will happen if you want to sell in the future. Sales could fall through if the interested party is unable to secure a mortgage. This doesn’t necessarily mean you shouldn’t buy the property but its something to keep in mind.

2. Selling the property

Whilst you may be happy to pay rentcharges, remember other people may not be. When selling the property, you may find that the pool of potential buyers is smaller. As a result, it’s wise to anticipate that it’ll take longer to sell your home when the time comes.

An additional cost that they don’t have control over could put some prospective buyers off. Being transparent about what you pay, how it’s changed over time, and potential increase can help ensure time isn’t wasted on those that will be put off. It’s a step that can also highlight how it differs from the fast-rising costs that have become associated with leasehold properties.

3. Escalating estate rentcharges

Compared to the overall cost of running a home, estate rentcharges are usually nominal. However, you should always check how long they’ll be payable for and how they could increase in the future. This allows you to make an informed decision about whether purchasing the property is right for you and make allowances for potential costs that may arise long term.

Whilst transparency is an issue with rentcharges some management companies offer freeholders more insight. Being able to see how your money is spent and voice concerns can give you peace of mind about the future.



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