Not so long ago buying a freehold property was the safest of safe investments. Unlike leaseholds, freeholds weren’t traditionally subject to ground rents. Nor could buyers expect to pay service charges, excessive permission fees or the small fortune required to extend a lease.
In short, buying a freehold meant your own little slice of Britain, with which you could do more or less as you liked.
Not anymore. According to a raft of recent media coverage, purchasers of new-build freeholds are becoming subject to the same punitive conditions as leaseholders, as some developers sneak restrictive covenants into ownership terms.
As many as 1 million UK freeholders are shackled to contracts insisting the owner is liable to pay services and permissions charges. And this figure is only growing. Since 2015, 178,768 rentcharges have been registered with the Land Registry, with 29,968 of them logged in 2019.
Most of these covenants are obligations to pay for the upkeep of shared roads, green spaces, and communal areas. However, there have been instances of freeholders being charged for the privilege of being ‘permitted’ to build a garden shed or make improvements to their own property.
Worse still, there have even been a few cases where freeholders have discovered an obligation to pay an administration fee for selling their home.
The problem is not just that these fees are often arbitrary and unreasonable, they’re also potentially crippling. The fees for estate services can run to thousands of pounds and make it incredibly difficult to sell the property, leaving buyers trapped in essentially worthless homes.
In much the same way as Chancel repair liability, freehold charges have the potential to inflict misery and debt on thousands of people. The only difference is that one is a hangover from the reformation and the other has recently been concocted by unscrupulous developers.
How has this happened?
Christened ‘the new PPI’ by some MPs, the move towards inserting service and permission charges into freehold contracts is actually an unwanted consequence of attempts to get tough on leasehold charges. The last few years have seen a tightening of the rules around leasehold and attempts to protect leaseholders from exploitative landlords.
Obviously, this is welcome; leasehold has needed wholesale reform for decades. However, an unintended consequence is that in denying developers the extra source of revenue rentcharges provide, it’s pushed some developers to start getting creative with freehold law to compensate.
Estate rentcharges and variable rentcharges are permissible under the Rentcharges Act 1977. So for now, at least, it’s completely legal for developers to subsidise the money lost to leasehold abolition by creating freehold properties with rentcharges attached – even if this does make a mockery of the whole concept of freehold property.
Of course, this has no long-term future. Were this extractive and, frankly, crooked trend to continue, new-build freeholds would cease to be a worthwhile investment for anyone and we’d quickly see demand for them dry-up, plunging the country even deeper into its affordable homes crisis.
With all that said, action to stop developers skimming more off the top of freehold property sales has been moving at a glacial pace. A cross-party group of 30 MPs had drawn up a bill to tackle the issue, with proposals to force developers to build estates on areas that could be adopted by local authorities and the regulation of service charges. But this bill was stalled by the prorogation of parliament earlier this year and has shown no sign of returning.
Alongside the aborted bill, there is also a House of Commons paper briefing from August 2019 which sets out plans to reform freehold within a year but, like the cross-party bill, it’s difficult to see when this will happen amid the chaos of Brexit.
With the regulatory route closed, at least temporarily, is there any way around the issue? Well, some within the industry have suggested that homebuyers need to learn to see benefitting from shared spaces and facilities as an ongoing expense attached to a property, and budget accordingly.
While this looks like a commendable idea on the face of it – after all, we really could do with a little more community spirit in our society – you only need dig a little deeper to hit problems. Fostering a more public-spirited approach to property is a noble aim, however, the money extracted in rentcharges doesn’t usually go into a community fund and saved for a rainy day or the next time the communal garden needs sprucing up. Instead, it goes straight into the pockets of developers who do little or nothing to justify that money.
And this is before you even consider things like permission fees for selling the property. It’s hard to see how adding an extra few thousand pounds onto the cost of moving home can ever be a public good.
So it’s clear the answer doesn’t lie with changing the perspectives of buyers. In the short term, conveyancers need to be making clear to buyers their obligations and the likely costs involved in the future should they move into a new-build property.
In the medium-to-long-term, we need government action and firmer regulation to stop what amounts to penalising first-time buyers.
Although labelling it ‘the new PPI’ might be pushing it a little, there’s no doubt rentcharges strain the credibility of freehold property. Buying a property outright, only to discover that many of things homeowners usually take for granted come with extra fees is not what freehold was intended for. We can only hope that with the self-styled ‘party of property’ in power, things may be about to change.