Lexsure e-ROT

Service Charges · Report on Title scenario

I am buying a freehold house — why is there a service charge?

Because the estate has communal areas that somebody has to maintain, and on a modern development the obligation to contribute is usually built into the freehold title by a deed of covenant. It is a real and binding obligation. What it is not is leasehold: the statutory protections that leaseholders have over service charges do not apply to you, and that absence is the substance of this page.

From the e-ROT archive

This scenario is drawn from Report on Title material dealing with this specific circumstance.

Lexsure master Report on Title paragraph: Freehold with Service Charge (protected by a Positive Covenant) · See the wording

Which describes you?

I’ve already bought the property The estate charge has risen or the management is poor, and I want to know what was explained. Check what this could mean →WhenIBought.com I’m a conveyancer I need Report on Title wording for this situation. View professional options →

How the obligation is made to stick

A positive obligation — an obligation to do something, such as pay — does not ordinarily bind a later owner of freehold land. Developers get round that with a deed of covenant: each buyer covenants directly with the management company, and a restriction on the title means the next buyer cannot register their purchase without doing the same.

The practical effect is a charge that behaves like a leasehold service charge and is enforced by an entirely different mechanism. You will also pay a notice fee on completion, and another on your mortgage, and the same again when you sell.

Already bought, and the estate charge has become a problem?

If the charge has risen sharply or the estate is poorly managed, what was explained to you about the arrangement when you bought is a reasonable place to start.

Find out what should have been explained → WhenIBought.com

Why lenders look at these carefully

The anxiety is about estate rentcharges rather than about deeds of covenant, and it is worth understanding the distinction because it explains the caution. Where an estate rentcharge is used, section 121 of the Law of Property Act 1925 gives the rentcharge owner remarkably strong remedies for unpaid sums.

A deed of covenant is not a rentcharge and section 121 does not apply to it in the same way. But some lenders and some practitioners treat the two arrangements as carrying similar risk, particularly where the charges are large or the management structure is thin — and that caution can affect both your mortgage and your eventual resale.

Whether your lender takes that view is a question about your lender's own current instructions.

The three protections you do not have

<b>No consultation requirement.</b> There is no equivalent of the Landlord and Tenant Act 1985 for freehold estate charges, so there is no statutory obligation to consult you before major expenditure.

<b>No tribunal challenge.</b> A leaseholder who thinks a service charge is unreasonable can apply to the First-tier Tribunal. You cannot, on the same basis.

<b>No right to manage.</b> Leaseholders can compel a transfer of management in defined circumstances. There is no equivalent route for freehold owners on an estate.

None of that makes the purchase unwise. It makes the identity and track record of the management company a much more important thing to look into than it would be on a leasehold flat, because your remedies if it is run badly are contractual and practical rather than statutory.

What your lender makes of a freehold service charge

Lender treatment of freehold estate arrangements is uneven, and the reason is the section 121 anxiety described above rather than the charge itself. Some lenders distinguish carefully between a deed of covenant and an estate rentcharge; some apply the same caution to both.

Where a lender is cautious, what it asks for varies — confirmation of the mechanism, a cap on the charge, or an indemnity policy against the rentcharge remedies.

The instruction that governs your purchase is the one in your lender's own current answers.

Research lender requirements → Lexsure Lender Archive

From the e-ROT archive

Report on Title paragraph

Freehold with Service Charge (protected by a Positive Covenant)

Master precedent Lexsure e-ROTScope Deed of covenant, not a rentchargeWord count 133Status Current master paragraph

Although we do not believe this arrangement to constitute an estate rent charge, some legal advisers and mortgage lenders take a cautious approach and may treat it as such for risk assessment purposes. This is primarily because of concerns relating to section 121 of the Law of Property Act 1925, which grants powerful enforcement rights to rent charge owners if sums remain unpaid. Whilst section 121 does not apply in the same way to this type of service charge arrangement, some practitioners and lenders consider that similar risks could arise in practice, depending on how the covenants are drafted and enforced. As a result, lenders may scrutinise these arrangements carefully, particularly where the annual charges are significant or the management structure lacks safeguards. This growing caution can affect both mortgageability and future resale. …

Master precedent wording. This is current Lexsure Report on Title material, shown here in extract and reproduced exactly. It is professional precedent wording and is not advice about any particular property. The statutory reference it makes is reproduced as written and is not a statement of the current law by this page.

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