Service charge payments are historically associated with leasehold properties, such as flats, in which leaseholders will pay a service charge to cover the cost of maintaining the building and its common areas.
It is becoming a lot more common for freehold houses on new build developments or private estates to also be subject to service charges.
Such charges are commonly referred to as "estate charges".
Freeholders subject to estate charges now refer to it as "Fleecehold" because they feel like they are being "fleeced" with the charges.
Many of these charges are outside their control, and homeowners are finding themselves in a difficult position when they escalate, or the management companies involved do not seemingly carry out the supposed functions.
What is the purpose of the estate charges?
Estate charges are most commonly seen on new-build development sites privately owned by the developer (or a management company).
Property owners on privately owned estates are usually required to contribute towards the upkeep of communal areas as the Local Authority does not carry out this work.
Estate charges are levied to help fund services, repairs, and maintenance on the estate.
These costs are shared out amongst the property owners on the estates.
The estate charge is not used to pay for the repair and maintenance of individual properties on the estate but is used to fund services that benefit the whole estate, such as street lighting, maintenance of children's play areas, the landscaping of gardens and the upkeep of the private roads.
Estate charges are typical in new-build developments, which consist of a mixture of leasehold flats and freehold homes.
A lease allows leaseholders to contribute to maintenance costs, including estate charges, and the transfer will provide similar provisions to freeholders.
Who is responsible for collecting estate charges?
If a new-build estate is “unadopted”, it means communal areas such as roads, grass verges, pavements and playgrounds are retained by the developer.
It is usually the case that the developer will subcontract the day-to-day management to a management company that will be responsible for collecting the estate charges, who will then arrange for the maintenance of the communal areas.
The developer usually enters into a contract with a management company to organise the necessary work on the estate and recover the cost from the property owners.
It is sometimes the case that the developer will set up a Residents' Management Company (“RMC”) to take over the ownership of the communal areas of an estate.
Where this happens, the RMC can appoint a management company to work on its behalf.
However, in some cases, there is no mechanism for the property owners to take control of how the development is managed, which can also be frustrating.
Are there restrictions on estate charges?
There is no restriction on what such companies can charge, and property owners are seeing dramatic rises year on year of their estate charges, especially that inflation is currently driving up prices all around.
Sometimes all the property owners on a private estate pay the same charge, but the figure can vary too.
For instance, estate charges can be calculated according to the number of rooms a property has or its floor area.
The charges can also include a management fee for the estate.
The transfer deed for the property should confirm the amount of the estate charge payable, the date upon which payment is due, to whom the payment should be made, and what services the charge covers.
There would usually be a provision in the transfer to allow the management company to review these charges as necessary without a cap on what they could charge for and how much they could charge.
If you are a leaseholder on a new estate, you have significant legal protection; you must be consulted before being charged, the charge must be ‘reasonable', and you can refer a dispute to the Property Chamber tribunal if necessary.
However, the same protection is not afforded to freeholders.
There is no test of ‘reasonableness', and any dispute must be referred to the small claims court – a process which can rack up significant legal fees.
This is another reason why the term “Fleecehold” is commonly used, as it can be seen that management companies are hiking up the estate charges with no recourse by freeholders to challenge the amounts charged.
What happens if you do not pay new build estate charges?
If you refuse to pay new build estate charges because you are dissatisfied, you may be threatened with court action and additional debt collection charges by the management company, who will most likely actively seek to recover the outstanding sums.
In the worst cases, you may also be at risk of repossession depending on how the estate charge was created in the transfer deed.
The 1925 Property Act states that a lease can be created on your home if you refuse to pay.
Mortgage lenders will often insist on a Deed of Variation to protect themselves if this happens.
Freehold owners should therefore be aware that they have very few options and limited ability to investigate or challenge any charges demanded from them.
Other problems with service charges
As well as having no rights to challenge these payments or the level of service, property owners may also find that other members of the public use their estate.
Nothing in practice could stop the general public from entering the estate to use the facilities.
For example, neighbouring properties off the estate use the children's playground or green areas for leisure.
Is this likely to change?
The Competition and Markets Authority announced in February 2023 that they would launch a market study into housebuilding and would look at freehold estate charges as part of this.
They would be looking at home management companies are selected and transparency in general around the whole process.
The government has stated that they intend to introduce legislation to regulate the sector; however, no action has been taken to date.
Other groups are also campaigning for regulation in this area, demanding that new build estates be built to a standard so that the local authority should adopt them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.