Freehold means you hold your property outright for ever– but it’s often far from ‘free’. Inflated fees, rents and covenants can add hundreds to your annual bills, so ask your solicitor to check for hidden costs.
You’ve paid your deposit, arranged your mortgage and are looking forward to moving into your new freehold home – but is it really ‘free’ for you to hold? In theory, if you own the freehold of a property, it means you own the building and the land it stands on outright, in perpetuity. This means you won’t pay ground rent, services charges or any other landlord charges.
So where are these hidden costs?
But despite the legal definition, an increasing number of freehold owners are finding small print buried in their property deeds that’s there to create an income stream for a third party.
Covenants, estate maintenance contracts and obscure charges all obligate freeholders to pay unregulated fees to various bodies including developers and management companies. Campaigners have dubbed the practice ‘fleecehold’.
Beware restrictive covenants
Restrictive covenants are binding conditions written into a property’s deeds that determine what a homeowner can or cannot do with their house or land under particular circumstances. Common covenants prevent a trade or business being operated from a residential home, for example – so you can’t turn it into a pub or shop – while others prevent owners from extending or altering a property.
Being subject to this kind of condition is known as the burden of a covenant, and this burden will pass to successive owners or occupiers when a property is sold on. A covenant may also give a homeowner some say over what is allowed on neighbouring property: this is called the benefit of a covenant. Positive covenants are a promise to do something, such as maintain a wall or contribute money for maintenance of shared areas.
Traditionally, covenants were used to uphold certain standards for all residents or to maintain the uniform appearance of an area. Some popular covenants date back many years and forbid the keeping of chickens or livestock on the land. Some very old covenants are considered unenforceable because of ambiguous wording or because the character of the area has changed so much there is no value in enforcing the covenant.
But while many covenants may sound acceptable, some homeowners are finding they are preventing them from carrying out everyday activities. For example, some covenants prohibit homeowners from hanging washing outside, parking trade vehicles on their driveway or keeping pets.
More worryingly, some major housebuilders seem to be using covenants to extract more money from their customers. Many new-build homes have covenants written into their title deeds obligating the owner to seek permission from the original builder if they want to alter or extend their home.
Developers charge an often undisclosed fee for this permission, leading to these types of covenants being dubbed ‘permission fees’ by disgruntled homeowners. Some developers even charge homeowners a fee each time they remortgage or when they sell the property.
“Restrictive covenants on estates have been around a long time and used to be more about maintaining an overall appearance for the benefit of all residents. If you needed permission to extend, for instance, you had to ask the original landowner, if you could trace them. There was only a nominal charge, if any, for this,” says Cathy Priestley, spokesperson for campaign group the Homeowners Rights Network. “Nowadays, the existence of an estate management company, which can generate income from the estate, together with the lack of regulation, allows for these companies to charge excessive fees for permission, remortgage and exit fees.”
Make sure checks are run thoroughly
If you’re buying an older home, you should check if the property has any covenants before going ahead with the sale. You can do this by applying to the Land Registry for a copy of the registered title and title plan. Restrictive covenants will be listed in the section headed ‘charges register’ and positive covenants under ‘property register’.
Whether you’re buying a new-build property, or one already built, your conveyancer should give you a ‘report on title’, which should identify any covenants, and he or she should be able to answer any questions. If your solicitor doesn’t draw your attention to any covenants in your deeds and you later run into problems, you should complain to the law firm and then contact the Legal Ombudsman if you don’t get a satisfactory response.
If you breach a restrictive covenant, you could be sued by the person who benefits from it – such as a neighbour or the original developer. A solicitor will be able to advise you about whether the covenant is correctly written and enforceable. You could be forced to undo any offending work (such as having to take down an extension) or pay an inflated fee for retrospective consent.
Extra charges on private estates
Thousands of buyers purchase freehold homes on private estates each year and are told there is a small service charge to look after the communal open spaces. This is because patches of grass, play areas, electric gates and sometimes roads too, will not be adopted by the council and will remain in private ownership.
When freeholders buy their house, they sign a legal document called a deed of transfer setting out the contribution the homeowner will pay towards the cost of maintaining the estate. The charge may be referred to as an estate charge, maintenance charge or service charge.
In most cases, a managing agent will be employed by the developer to collect the service charge and organise maintenance. But although service charges may be reasonable initially, many homeowners have found fees can quickly rise while the service they receive deteriorates. Some even find themselves paying for the upkeep of areas still under construction.
To add insult to injury, some homeowners still have to pay full council tax, despite the council not maintaining their road, green spaces or children’s playgrounds. These areas are open to the public too, so not as private as you might think.
“This set-up is currently totally unregulated and homeowners have no rights of redress when they are charged excessively. Payment is enforced by having clauses in the legal transfer documents (deeds),” says Ms Priestley. “There is a huge variation in the way the deeds are written between builders and estates, which makes it harder to challenge them. What they have in common is an imbalance of rights in favour of the management companies.”
A key issue is that homeowners don’t have a recognised route of redress when challenging estate charges. “Unfortunately, freeholders do not have the same statutory protections as leaseholders, whose service charges are subject to legislation whereby the landlord’s service charges have to be reasonable (Landlord & Tenant Act 1985),” says Simon Wood, a barrister at law firm Hart Brown, “Accordingly, any claim would have to be made pursuant to general contractual principles. The freeholders will need to check their transfer deed and ensure that the charges are properly chargeable under its terms.”
Watch out for rentcharges
Another charge to look for in property deeds of freehold homes is a rentcharge (or chief rent, as it’s known in north-west England). Rentcharges date from the 13th century, when every freeholder (‘terre tenant’) had to pay a rent to the king, lord or other ultimate owner of the land. A statute of 1290 allowed the landowner to transfer or sell the right to collect rent, to a third party who otherwise had no interest in the land.
Especially from the 19th century onwards, rentcharges became a means for builders to develop land without paying a premium to the owner. Instead, the owner sold land to developers at a reduced price in return for an income from the property owners – and the subsequent owners.
Rentcharges are only attached to freehold properties and shouldn’t be confused with ground rents on leasehold properties. The person entitled to the rentcharge money is known as the rentowner.
The rentcharge and the rentowner should be detailed in the charges register of a property’s title deeds – these can be downloaded from the Land Registry for about £3. Because the amounts involved haven’t changed with decimalisation or inflation, rentcharges are normally a nominal amount between £2 and £10 a year.
While this amount of money might sound like nothing to worry about, homeowners can run into problems if they don’t pay it. Some property deeds state that the rentcharge will be payable annually “whether formally demanded or not”.
Often the rentcharge has been sold to a new rentowner who demands the money and, if asked for documentary proof they are the rightful rentowner, an administration fee for providing the proof. Failure to pay can result in heavy-handed tactics to pursue not only the overdue rentcharge, but a raft of penalties and legal fees, which can far exceed the original debt.
“If a rentcharge is more than 40 days overdue, the person or company to whom it is payable could enter into what’s known as a statutory lease to secure the outstanding debt against the property,” says Anthony Howarth, senior conveyancer at law firm Weightmans LLP. “They can do this even if they haven’t sent a demand for payment of the rentcharge. The homeowner could then be liable for the associated costs of this.”
The 1977 Rentcharges Act abolished the creation of most new rentcharges, and existing rentcharges were capped so they would expire in 2037. The 1977 act also provided a mechanism for freehold owners to buy out the rentcharge attached to their property. The cost is normally about 16 times the annual payment and can be done by completing an application form downloadable from the government’s website at Gov.uk/guidance/rentcharges#how-to-redeem-your-rentcharge.
Find loans likely to say ‘YES’. All circumstances welcome. You could receive money today!