News and Publications

Estate charges on freehold properties

Posted: 23/12/2021

When housing associations acquire dwellings on new build estates, it is essential that they obtain a full understanding of the likely amount of the estate charge. The estate charge covers the expense of maintaining communal areas, landscaped and planted areas, open spaces, play areas, unadopted private roads footpaths and paved areas.

Where the housing association intends to rent such dwellings, the estate charge will have to be absorbed by the housing association. On shared ownership sales, where 100% of the estate charge will be passed onto the leaseholder, the amount the leaseholder has to pay will be a significant cost to the leaseholder and will be taken into account by the lender as part of its lending criteria.

When housing associations enter into ‘golden brick’ agreements, development agreements or turnkey arrangements with house builders, house builders will rarely have detailed estate charge information. Often, at best, they will have an estimate of what it is likely to be when completion takes place in two, three or more years’ time. We have experienced transactions where on completion or handover, the estate charge is much higher than expected.

So how can housing associations mitigate these risks?

Upfront information

Housing associations should insist on receiving as much upfront information as is possible. When a house builder has provided an estimate of the estate charge per dwelling, how reliable is this estimate? Demand to see draft management accounts and projections. Have managing agents been appointed? What information was provided to the managing agents? Request to see and review this because it will provide some comfort as to the accuracy of the projections

What services are to be provided?

The Transfer or Management Deed will create the obligation to pay the estate charge. Housing associations should carefully review the services to be provided. This may be challenging because the estate will not yet have been constructed. However, the estate layout plan can be checked to see what amenity facilities are to be provided, such as play and sport facilities, multi-use games areas, heating systems, unadopted shared accessways, bin stores and cycle storage facilities.

Additionally, the Transfer or Management Deed should provide that the housing association, its residents, leaseholders, and visitors shall have the right to use these facilities.

What costs are the housing association expected to contribute towards?

This will not be limited to the costs of providing the services. There will be other costs included within the estate charge such as public liability and other insurances; administration charges; the costs of employing managing agents and other consultants in the provision of services; and outgoings relating to amenity areas such as rates. There will also be a ‘sweeping up’ provision to catch any other costs incurred in the provision of services. These should be resisted.

What proportion of costs should the housing association pay?

You would assume the estate charges will be split equally between each of the owners of the estate. However, this might not be appropriate where a distinct part of the estate benefits to a greater degree than the remainder. For example, a cul-de-sac shared accessway which is not adopted and which is only used by those owners whose dwellings abut. The housing association should not expect to contribute towards the cost of any services which are not used by the housing association, its residents, leaseholders and visitors.

What are the dates on which payment is due?

Housing associations will need to approve the basis of payments. For example, monthly, quarterly or annual payments in advance, with an annual reconciliation. On estates where there are significant facilities to be provided (such as district heating systems), it may be necessary to contribute towards a reserve or sinking fund in anticipation of future unexpected or significant capital expenditure.

Will there be a residents management company?

Most house builders want to create resident-led management companies who will be responsible for the provision of the services.

This will benefit the housing association and the owners on the estate who will have significant input and control over the level and cost of services to be provided.

In the Transfer and Management Deed, the housing association should ensure it has the option (not an obligation) to appoint a director, that there is one vote per dwelling on the estate, and that the housing association has the right to become a member. When considering whether to become a member, the housing association should check its governance rules and avoid the management company being considered as a ‘subsidiary’ or ‘group’ company.

The development agreement should ensure that after the last dwelling on the estate has been sold, the house builder transfers all amenity land to the management company.

A cap on the estate charge?

We advise housing associations to seek a cap on the estate charge. We propose the initial service charge should be capped at the initial estimate, and thereafter for the first five years to be capped at the estimate, but that it can be increased in line with increases in inflation, as measured by the RPI/CPI. This can be a controversial proposal, but a real benefit to the housing association if achieved. It puts the risk of any underestimated estate charge onto the house builder. Even if it is rejected, it can be a useful way of challenging the robustness of the estimated estate charge

Future reform

Where long leaseholders in blocks of flats pay a service charge to cover the cost of maintaining the structure, common areas, and providing amenity facilities, the leaseholders have statutory rights in terms of obtaining information about the service charge. Such leaseholders also have the right to challenge the reasonableness of the service charge, and also the reasonable of the charges. Moreover, they can apply to the First Tier Tribunal to enforce a ‘Right to manage’ on the Landlord.

Owners of freehold dwellings have no equivalent rights. That is why the practice of freehold estate charges is sometimes referred to as ‘fleecehold’.

Consequently, the government has announced proposals for reform and legislation will be introduced ‘when parliamentary time allows’. We will report on this legislation when it is published.

Arrow GIFReturn to news headlines

Penningtons Manches Cooper LLP

Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP