Property buyers urged to beware of ‘draconian’ law which could threaten their future homes

Potential owners of new-build homes could find themselves unable to secure a mortgage thanks to an antiquated property law, a property expert has warned.

Section 121 of the Law of Property Act 1925 covers the imposition of a rentcharge or estate management fee to be paid by a freehold homeowner to a third party or rent owner (usually a property management company) who normally has no other interest in the property.

This charge usually covers maintenance of communal areas such as playgrounds, private roads or car parks.

According to Alan Draper, managing director of property management firm Common Ground, the problem comes if the rentcharge remains unpaid by an individual homeowner.

After just 40 days, under the terms of the Act, the residents management company could take possession of the freehold property, exclude the owner and make the house virtually unsaleable.

This action can also be taken without notice potentially leaving the house in negative equity and putting a lender’s security at risk.

Alternatively, the rentcharge owner can grant a long lease of the property affected to trustees for the purpose of raising income to recover the arrears, plus any associated costs.

In the case of Roberts v Lawton (2016), it was found landowners were being legally compelled to pay significant sums in return for surrender of the leases, making a sale very difficult.

Also, unlike a leaseholder, the homeowner can’t legally challenge the amount of rentcharge (other than to bring court proceedings) leaving developers able to impose potentially high charges.

Some high street banks are now refusing to offer mortgages on new-build homes if the developer has included uncapped management charges in the freehold contract.

The Intermediary Mortgage Lenders Association (IMLA) has also warned developers that more lenders could start to refuse to offer mortgages on these properties unless they are transparent on the charges.

Alan said: “This draconian law has become far less common in recent years but, as recent case law illustrates, it still continues in some developments, even new-build.

“As a result, it is vitally important that a potential homeowner takes proper professional advice when buying a property in this situation in order to avoid high ongoing costs, potential exclusion from the property or the risk of not being able to sell it in the future.”