The risks of rentcharges – and how to deal with them
Categories: NewsSian Wolstenholme, property law expert at ORJ, explains how rentcharges can be small in money, but big on problems.
Rentcharges are often viewed as an insignificant quirk of a bygone era. With typical charges of around just £10 a year, it might appear nothing more than an admin annoyance – but rentcharges can cause significant problems if they are not properly adhered to.
A rentcharge is essentially a periodic payment a landowner must make to the rentcharge holder. Unlike with other land interests, the rentcharge holder does not need to hold any land to be the beneficiary of the payment. They may have no other legal interest in the land or the property.
For context, rentcharges were popular in the Victorian and Edwardian eras. They came about as a means for builders to develop land at a discounted rate. Landowners would sell the land to the developer for a reduced rate – or even for nothing at all – in return for a regular rentcharge payment from the owner of the house and subsequent owner.
These Rentcharges were a fairly significant expense when they were introduced but, as they were a fixed amount, inflation means their value is now negligible.
The Rentcharges Act 1977 prohibits the creation of such rentcharges and most will expire by 2037, 60 years after they first became payable.
However, in recent times new Estate Rentcharges are still permissible and are relatively common. Similar to traditional rentcharges, an estate rentcharge is a mechanism for a third party – such as a management company or a developer – to secure contributions towards the cost of maintaining communal services, such as street lights, private roads, gardens or drainage systems.
The Land Registry estimate there are around 100,000 registered titles that are subject to an estate rentcharge and this figure is likely to increase.
Estate rentcharges are typically seen on residential developments, but rentcharges can also exist on commercial properties and must be paid in the same way.
So, rentcharges and state rentcharges are not inherently bad and can be a useful way of raising money to pay for communal interests.
The problems we see as property lawyers relate to the remedies that can be enforced if the rentcharge has not been paid for a period of 40 days – without any notice and regardless of how small the debt is.
What are the risks of not paying a rentcharge?
Section 121 of the Law of Property Act 1925 contains some draconian remedies that can be enforced should the rentcharge not be paid – even if that the outstanding debt is less than £20.
These remedies do not apply to all rentcharges, but they could include:
- A right to enter into possession of and hold the property or any part thereof, and to take the income from the property (section 121(3) LPA 1925).
- A right to lease the property or any part thereof to a trustee (section 121(4) LPA 1925).
A right to lease allows the owner of the rentcharge to enter on to the land and grant a lease of the land in favour of the trustees. It could also mean the lease granted continues to subsist even once the arrears have been recovered, which would require an agreed surrender between the property owner and the rentcharge owner, often requiring a significant surrender premium.
These are dramatic steps and, unlike forfeiture proceedings against a leaseholder following a breach of a lease, there is no requirement for the rentcharge owner to serve any notice beforehand. Action can be taken immediately without giving the property owner any opportunity to remedy the breach. Nor is there any right for the owner to apply to the courts for relief – the property owner can be simply excluded from their property until the money is paid.
What’s more, the appointed trustee can mortgage, sell or underlet the lease to raise the required funds – and any additional costs incurred.
As well as being an administrative pain should this action be taken, the right of re-entry would have to be declared to future purchasers, significantly affecting the value of the property and reducing the number of lenders willing to offer a mortgage.
All this for a nominal debt.
How to protect yourself against rentcharge problems
The most important thingis to always know and understand what you are buying. Ensure you know whether there is a rentcharge or an estate rentcharge hanging over the property before you decide to purchase. Lenders are becoming increasingly nervous about offering a mortgage on properties which include rentcharges, so be aware that rates may be higher.
It might be possible to purchase an indemnity insurance policy – but insurance companies are also becoming reluctant to engage over rentcharges. Recently, we were instructed on a commercial unit purchase where an estate rentcharge had been implemented in 2007 but the seller had never been called upon to pay this. Our usual indemnity provider was unwilling to insure against this as the risk was simply too high
If you decide to go ahead and purchase a property with a rentcharge, ensure that all payments are made properly and promptly. Speak to an expert to ensure all administrative requirements are being met.
Where the rentcharge incorporates Section 121 of the Law of Property Act 1925, try to negotiate a variation of the rentcharge to remove these remedies. Often the rentcharge owner will request a payment in order to remove the rentcharge.
It is possible to apply to the Ministry of Housing, Communities and Local Government to redeem the Rentcharge – but this comes at a cost of around 16 times the annual payment. Even so, this could prove to be a prudent move as it will remove all threat of future action and will put you in a far stronger position when the time comes to sell the property.
Make sure you speak to a property law expert before making decisions that can have serious consequences.
At ORJ, we have years of experience in this area and would be happy to help. Email team@orj.co.uk or call 01785 223440.