“I’m buying a 40% share in a shared ownership home. But my solicitor has flagged up an estate service charge in the lease. What is this, and should I be concerned?”
Zahrah Aullybocus is a Consultant Solicitor with Nexa Law (and Shared Ownership Resources sponsor). The following represents Zahrah’s personal opinion in respect of this query. However, it’s essential to seek your own independent legal advice in relation to your own specific situation.
You state that your lease includes an estate service charge, and that your solicitor has flagged up that this could create a problem for mortgage lenders. You’d like to understand what an estate service charge is. And, of course, you need to know what options are available to deal with any associated costs and risks. I’ll run through each of these aspects in turn. As I have not had sight of your lease, please do not place reliance on this information for decision-making. This feature is simply to help you – and other shared owners in a similar position – to have an informed discussion with your own solicitor.
What are estate service charges?
Say, you are buying a house or a flat via the shared ownership scheme. It’s a lovely new estate with communal grassed areas, a park, and private roads. But who’s paying for maintenance and repair? You are!
Before we get into the detail, it’s probably helpful to understand the differences between rent, ground rent, service charges and estate service charges. So, I’ll start by briefly explaining each of these.
Rent
Unless you staircase to 100%, you will have to pay your landlord rent on the share they own. This is paid monthly and is sometimes referred to as ‘specified rent’.
Ground rent
Ground rent is an annual payment made by (some) residential leaseholders – including (some) shared owners – to their landlord. The landlord does not have to provide a service in return. If your shared ownership lease is configured under a complex legal structure, and your housing association has a Head Lease where they are liable for ground rent, they can charge you for the ground rent they pay. Not all shared owners pay ground rent. Your solicitor should advise if you are liable for ground rent, either now or after staircasing to 100%.
The Leasehold Reform (Ground Rent) Act 2022 put an end to ground rents for most new long residential leasehold properties in England and Wales. In 2023, the previous Conservative government carried out a consultation on proposals to to cap ground rents for existing leaseholders. This did not make it into statute. However, the new Labour government has stated that they will: ‘further reform the leasehold system…. tackling unregulated and unaffordable ground rents’.
Service charges
If you buy a share in a flat, service charges cover the costs of maintenance and repairs to the exterior, structure and shared areas of your building: for example, the roof and lifts. Your lease will provide details of what your service charge includes, and how it is apportioned between different flats.
If you buy a share in a shared ownership house, your service charges could be limited to buildings insurance and, perhaps, a management fee.
The important thing to be aware of is that, although they sound similar, leasehold service charges are not the same thing as estate service charges (though if you are buying a flat, it may all be encompassed under the words ‘service charge’). We explain further in the following section.
Estate service charges
So, what exactly is an estate service charge? In short, it is a mechanism for a third party – for example, a management company or developer – to fund the costs of maintaining communal areas of a residential estate. These might include private roads, paths, green areas and parks, lighting and insurance.
Housing associations also sometimes maintain and repair communal areas or private roadways themselves, where the developer has transferred ownership to them,
Estate service charges are sometimes referred to as rentcharges, rent charges (two words) or estate rentcharges. Estate service charges are, in fact, a subset of estate rentcharges more generally. To keep things relatively simple, in this feature I focus solely on estate service charges.
Different housing associations have different ways of dealing with estate service charges. Frequently, shared owners do not have anything to do with the estate management company until they staircase to 100%. However, this is not always the case.
Generally speaking, estate service charges are paid in advance based on estimated expenditure. However, if there is a shortfall against actual expenditure, you will have to pay the difference. (You may not notice if you are paying a shortfall where you are paying to the housing association, as these are normally absorbed into the monthly payment calculations on rent review.)
Why are estate service charges a problem?
There are several, inter-related, reasons why estate service charges can be a problem .
Unpredictability of future costs
You mention that your lease describes your estate service charges as a “fixed and variable rentcharge”. The fixed element is predictable. In fact, it is often nominal – usually £1 annually. But the variable part is not predictable. There is no upper limit on what you might be charged in any particular year,
Unaffordability of future costs
As we’ve said, there is no upper limit on estate service charges. Consequently, there is a risk they could become unaffordable in the future.
Lack of regulation of estate service charges
Unlike leasehold service charges, estate service charges are largely unregulated because they are applied against the freehold.
There is no legal requirement for the management company/developer to consult with you – or your housing association – before commencing major repairs and maintenance on external areas, which you will pay for via your estate service charges. And there is no statutory mechanism for you to challenge the amount of estate service charges you have to pay. Except going to court, with a risk the legal costs may outweigh the sum being challenged.
Compare this with service charges where – if a landlord proposes to carry out works that will cost any one leaseholder more than £250, they are required to go through a consultation procedure under section 20 of the Landlord and Tenant Act 1985.
Mortgages and lenders
The law gives management companies draconian measures to enable them to recover estate service charge debts owning to them. Compare this with leasehold service charges where – under Section 121 of the Law of Property Act 1925 – your management company may have a right to apply for a court order to take possession of your home to recover estate service charges which have remained unpaid for 40 days.
This will depend on the wording of the original transfer creating the estate service charge and whether it includes a ‘right of re-entry’. This section of law also allows for the creation of a lease. If a lease is registered against your title, you may be held to ransom (i.e. have to pay lots of money) for it to be removed. If so, any new lease continues until the end of the agreed term, regardless of whether your arrears have been cleared or not.
What would concern mortgage lenders is the management company’s ability to register a lease against your title. This would make the property virtually unsellable until the management company’s lease is removed. In theory, this could be costly – unless the wording of the original estate service charge transfer states that – once the debt has been cleared – the extra lease will be removed for no monetary compensation.
How do I find out whether estate service charges apply to my development, and what works are covered?
Your solicitor should establish this, and inform you accordingly.
If your housing association is the freeholder, information on estate service charges will be in the Transfer Deed (which transfers ownership to your housing association). If there is a more complex ownership arrangement (i.e. if your housing association is also merely a leaseholder rather than the freeholder) then this information will be in the housing association’s Head Lease.
The Transfer Deed/Head Lease should include:
- items that are chargeable as estate service charges;
- any contributions towards a reserve fund; and
- when payment is required (annually, bi-annually or quarterly).
I pay council tax. Am I paying twice for roads, parks and lighting?
It’s a good question. In the past, residential housing developments were often ‘adopted’ by local councils. Consequently, the costs of infrastructure – such as roads and lighting – would be met by public funds. Your lease will include estate service charges if your development has not been, and will not be, adopted by the local council.
Estate service charges are becoming more common. This is, perhaps a reflection of increasing financial pressures faced by local councils.
However, you will not get any discount on your council tax bill, no matter how much you pay in estate service charges.
Government response (2020) to petition: Council tax reduction for people paying estate management fees
What are my options to deal with an estate service charge?
In this section, I will focus on the options most likely to make your shared ownership lease acceptable to a mortgage lender. Every lender has different rules, so your solicitor will need to check with your own lender as to their preferred option.
A Deed of Variation
A Deed of Variation is a legal document. Its purpose is to allow a landlord and tenant to change the terms of a property lease. In this case, the Deed of Variation would exclude the provisions under Section 121 of of the Law of Property Act 1925 which give the developer/management company legal rights over your home. (Including any right to repossess your home and let it to a tenant in order to recover arrears).
This is generally the most preferable option.
However, the Deed of Variation would need to be between the housing association and the original developer. You will therefore need the cooperation of your landlord, and will almost certainly have to pay their legal costs.
Mortgagee Protection Clause
A Mortgagee Protection Clause gives your mortgage lender (the mortgagee) notice of at least 28 days before any action being taken by the owner of the estate service charge. The intention here is to allow your lender to pay any arrears before the developer/management company commences legal action. Your mortgage lender would, of course, add these arrears to your existing mortgage.
This option is only available if you pay estate service charges to your housing association, rather than directly to the management company. This is because a Mortgagee Protection Clause forms part of the contract between the housing association and the shared owner, so there is no obligation on the management company to comply with it.
What about indemnity insurance?
It might be possible to purchase indemnity insurance. This would compensate your mortgage lender for any outstanding mortgage payments, in the event that your developer/management company repossessed your home.
Although indemnity insurance could protect your mortgage lender, it wouldn’t protect you from potentially losing your home.
Additionally, indemnity insurance might be an acceptable option to your own mortgage lender, but not to your buyer’s lender when you come to sell. In this case, you might need to pay to rectify the legal situation. Which could be costly, and delay the selling process.
Management company
A estate service charge may be less risky if the ‘owner’ is a management company made up of residents. If residents are shareholders of a private freehold development, drastic legal action is – perhaps – less likely.
Sometimes, the housing association is required to be a member of the management company which owns the estate service charge. In theory, this is acceptable; so long as the right to become a member passes to the shared owner on 100% staircasing.
Will leasehold reform help me?
The Rentcharges Act 1977 introduced reform to most rentcharges. But it does not cover estate service charges. The previous Conservative government stated that it would introduce legislation to ensure enhanced rights to challenge the reasonableness of estate management fees. Following a snap General Election, leasehold reform is ongoing under the new Labour government but the details, and timing, are yet to be confirmed.
Zahrah Aullybocus is a Consultant Solicitor with Nexa and Shared Ownership Resources sponsor.
Mobile: 07740 775 345 | zahrah.aullybocus@nexa.law
This article is the personal opinion of the author and without any liability to Nexa. Any concerns should be checked with the solicitor that is acting for you.
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Estate service charges are an absolute scam in my opinion, to date buyers have not been presented with important information at the right time during transactions.
Solicitors have not explained to their clients the important details of a contract, this is prevalent in the areas where there is a rent charge and/or management company. Majority of buyers, buy without knowing the legality of what they are buying into.
Estate agents do not give all the information needed, for instance, when buying a home with a maintenance company attached, it’s often not mentioned or glossed over by the agent, and/or the building company.
Far too much misinformation is given verbally by sales teams at point of sale.
What is never mentioned when referring to increasing financial pressures faced by local councils, is that for every new development the council receives council tax from every single new home, and the people who buy them pay for public use areas through the maintenance fee, which they also pay for in their council tax, therefore they pay twice when those in older properties pay once.
The CMA recognised all this in its report, its recommendations should be responded to and put into practice.
Rant over – buyer beware!
Thanks for your comment, Susan. I completely agree that too many buyers don’t fully understand what they’re getting into.
This is a great piece of information and so true to our circumstances of purchase. We have always bought Freehold Property. We were told at point of reservation a small sum of £118 for grass cutting; no idea of this before purchase. We had lived in our old house from new for 28 years – a true Freehold! So mis-ssold this house now in.
So wrong the council are getting council tax year on year from over 100 houses !!!
Thanks for your comment, Barbara. I’m sorry that you’ve been caught out by estate charges. You might be interested to know that the HomeOwners Alliance is also working to raise awareness of this issue. See the article below.
https://hoa.org.uk/advice/guides-for-homeowners/for-owners/problems-new-build-estate-management-fees/