How does the developer manage this responsibility and ultimately the cost of maintaining these areas?
It is usual practice to set up a management company which is responsible for the maintenance of these shared facilities and will recover the costs of maintenance from each individual home owner.
How can the developer do this?
A popular method was to grant leases of houses rather than a transferring the freehold. This then made it easier for the developer to incorporate provisions in the leases for payment of ground rents and service charges from the leaseholder.There has been increasing concern about these charges, as there are no restrictions on the amount of ground rent that can be charged and in some cases these charges have been excessively high or regularly increasing. The leaseholder was often unaware of these charges when they initially acquired the property and/or that they were even purchasing only a leasehold rather than a freehold.
To eliminate this problem the Government has been looking at reform and on 30 June 2022 the Leasehold Reform (Ground Rent) Act 2022 came into effect. As a reuslt, it is no longer possible for developers to charge a ground rent of more than peppercorn (i.e. no rent) in residential leases. This only affects leases granted after this date (other than where there has been a contract before that date) and will not apply to leases granted before this date nor to business leases and community housing. Any leases renewed after this date may also be captured, depending on how they are being renewed.
This is a serious consideration for developers as anyone found to be in breach of this Act, may be subject to a fine of between £500 to £30,000. It is clear that developers need to consider other options for dealing with the maintenance charges on the development.
Another option open to developers, is to transfer the freehold with an estate rent charge. The rent charge effectively puts a charge over the land which is noted on the register of the property with the Land Registry. In the event of owner failing to pay the rent charge, the developer can effectively enter the property and take possession until the rent charge is paid.
For this reason, estate rent charges are considered draconian, and lenders do not particularly like them. Currently lenders will only agree to lend if certain criteria are met, such as provisions to allow mortgage lenders to be notified in the event that the developer is going to take possession and the opportunity to repay the debt in the event of default. Although it is possible to arrange a mortgage on a property with a rent charge, it is likely that lenders will eventually refuse.
As part of the Government considerations, they are looking at ways to make it easier to create legally binding arrangements for the maintenance of common areas and removing the remedy of possession where a rent charge remains unpaid, which would then satisfy lenders. We will have to see what arises out of the consultation reform, but we already know that developers need to consider other options to recover maintenance charges going forward.