Rentcharges: What are they and what does their future look like?
A rentcharge is an annual payment paid by a freehold owner to a third party who usually has no other interest in the property known as a rentowner. You may also hear them referred to as ‘chief rents’. Here, Stephanie Nield discusses two types of rentcharge, historical and estate, what to expect if rentcharges are unpaid, and the future of the estate rentcharge.
Most rentcharges are historical charges, granted as landowners released part of their land for development. This would be done at a reduced cost, and instead they charged a regular payment to the people using the land, thereby providing them with some income. They were particularly popular in Manchester and Bristol.
As these charges were fixed, they have not increased with inflation and remain as low as £2 per year.
Sometimes, the rentcharge applies to a larger plot of land and therefore covers several houses. In this case, the rentowner can demand payment of the full amount from any of the properties and the homeowner would need to try and recover the other shares from the other property owners.
This can prove both timely and difficult, so another option is to apply for apportionment of the rentcharge. This is where the rentowner agrees to split the charge and collect each share from the individual owners.
These are more modern forms of rentcharge which are applied to new developments to recover the cost of maintaining shared areas, roads and services from the freehold owners within the development.
The requirement to contribute towards these costs is a positive obligation which would not run with the land and so an estate rentcharge allow developers to enforce the positive obligations against future homeowners and obtain contribution towards these costs.
Unlike with a service charge under a lease, there is no process for challenging the reasonableness of these charges.
What happens if a rentcharge remains unpaid?
If a rentcharge remains unpaid for over 40 days, (there is no requirement for the rentowner to demand the payment to start the 40-day period running) the rentowner has the following remedies.
- Action for recovery of the debt
- A right of entry onto the land and to take income from it until the charge is paid
- The right to grant a lease over the property to compel payment of the charge and the cost of recovery. This works to exclude the homeowner from the property and makes the property virtually unsaleable. Such a lease would continue to affect the property even after any arrears have been paid or the rentcharge has been terminated.
- The right to grant a lease has the potential to put a lender’s security at risk where there is a mortgage on the property, so in recent years the lending criteria has tightened. There is no requirement to notify the lender of the intention to create a lease, however the landmark case of Roberts & others v Lawton & others  has highlighted the potentially severe consequences of this process. In this particular case some of the 15000 rentcharges that Morgoed Estates Ltd (the rentowner) bought and managed were in arrears. They therefore granted leases to its directors for 99 years which meant the property owners were compelled to pay the arrears and also faced substantial administration costs in turn making the properties virtually unsaleable.
Dealing with Rentcharges:
If you have a rentcharge on a property or it is discovered that the property you are purchasing is subject to one, then there are a few options which your Beyond conveyancer will be able to advise you on further:
- An indemnity insurance policy can often be put in place to cover the risk of any arrears being demanded in the future and any lease being taken out on the property
- Alternatively, as a homeowner you can apply to redeem your rentcharge which will mean you pay a lump sum to the rentowner and then not have to pay the rentcharge anymore. This can be done by making an application to the Rentcharges Unit of the Ministry of Housing (this does not apply to estate rentcharges)
- Wait it out – the Rentcharges Act 1977 abolished the creation of new rentcharges, with the exception of estate rentcharges meaning that most will now expire automatically by 22nd July 2037 (or 60 years after they first became payable).
- If an estate rentcharge is suggested as part of a purchase of a new development, the purchaser should perhaps negotiate the use of a deed of covenant in place of this charge. At the very least they should insist that the rentowner is obliged to serve notice on any mortgage lender before taking enforcement action for arrears.
The future of estate rentcharges?
Whilst historical rentcharges will soon be a thing of the past, the governments intended move towards houses no longer being sold as leasehold may well see an increase in estate rentcharge. As the obligation to make contributions towards maintenance and services is a positive one, it does not run with freehold land meaning it would not automatically pass on to future landowners. This type of charge can therefore be used by developers to enforce covenants/obligations and obtain contribution towards the shared costs.
The significant powers of enforcement available for non-payment do not make them an attractive option for buyers or lenders and they will therefore likely be met with some resistance.
An alternative option would be for the developer to include a restriction in the sale requiring consent for any future purchase to be registered. The requirement of this would be for the new purchaser to enter into a deed of covenant directly with the management company agreeing to pay for the shared services and to be bound by the covenants. The management company would only provide their consent to the sale being registered upon receipt of this deed. Although this wouldn’t provide any right for the charges to be challenged on reasonableness, it does remove the outdated remedies currently available under S121 Law of Property Act 1925.
By Stephanie Nield