Estate Rentcharges – the hidden issues
The Rentcharges Act 1977 provided that all existing rentcharges are to be extinguished on 22 June 2037 and that no new rentcharges could be created. The exception is an estate rentcharge.
This article deals with current issues with estate rentcharges only and does not look at the other forms of rentcharge covered by the Rentcharges Act 1977.
Estate Rentcharges affect freehold properties and are occasionally used by developers.
Estate rentcharges impose a charge on the land which can be enforced to secure the obligations (normally being the obligations to pay towards the upkeep and maintenance of private common areas of the Estate) and create obligations that are directly enforceable against any successors in title to the original purchaser without the need for the successor to enter into any direct agreement with the management company (or other owner of the rentcharge). There is no scope or mechanism to challenge the amount of rentcharge due (other than to bring court proceedings).
The current issues for homeowners and their lenders
Section 121 of the Law of Property Act 1925 (“LPA 1925”) implies two remedies which benefit the management company (or other owner of the rentcharge) unless they are expressly excluded. These allow the rentcharge owner to take possession of a freehold house and lawfully exclude the owner from their house should the rentcharge monies remain unpaid for 40 days. This causes great concern to lenders as this could make a property unsaleable which would mean that a lenders security, and ability to sell the property should the owner default on their mortgage, could be at risk.
The 2 remedies as set out in Section 121 LPA 1925 are set out below:
This means that unlike forfeiture proceedings against a leaseholder following a breach of a lease there is no requirement for the rentcharge owner to serve any notice to the owner or any lender giving them a reasonable period of time to remedy the breach, nor is there a right for the owner to apply to the courts for relief and if the rentcharge does remain unpaid for 40 days, the rentcharge owner may take possession of the property or grant a lease of the property to a trustee which can be registered at the Land Registry, meaning the owner could be excluded from their property without any remedy other than to pay any outstanding rentcharge monies.
Furthermore, the trustee can collect any income or mortgage sell or underlet the lease to raise the required funds to cover the amount owing and any additional costs incurred. The lease will continue for the full term of years it has been granted for even if the rentcharge arrears are paid or the rentcharge is redeemed in full, unless surrendered by the rentcharge owner, which would not be done automatically and could be at the cost of an additional premium. This was confirmed in the case of Roberts and others V Lawton .
The right of re-entry and the granting of such a lease would be binding on any future purchasers together with any lenders in possession and therefore could significantly affect the value of the property and is therefore having an effect on the number of lenders willing to offer mortgages on properties which have these provisions included.
When instructed by client’s acquiring a number of plots on a development that is subject to estate rentcharges one should always seek to limit or remove the remedies available to rentcharge owners pursuant to section 121 LPA entirely and to include wording that ensures that specifically both s121(3) and s121(4) LPA 1925 are excluded.
However where this is not possible or accepted by developers (generally because the form of transfer has been used on their private plot sales or on previous disposals) one should seek to include additional wording which would act as a compromise between the parties.
One compromise would be to include a provision that notice would required to be given, in particular to a lender etc., prior to any of the remedies under s121 being exercised. This would allow lenders to remedy the breach and pay any rentcharges due without any risk to their security.
Another compromise would be to ensure that there is provision to provide that where the statutory remedy of the grant of a lease of the Property on trust as provided for in Section 121(4) LPA 1925 is exercised for non-payment of estate rentcharges the lease will be surrendered, without a premium, following the payment of all arrears together with legal costs and court costs of creating and surrendering the lease. This would again give lenders the comfort that such a lease would not have a detrimental effect on their security and could be removed on payment of the outstanding monies.
Is reform afoot?
The Government has promised legislative reform but since a consultation was opened in Autumn 2018 little progress has been made and the law remains unchanged. Perhaps once the big “B” has occurred reform may be more forthcoming but the compromises set out above should assist in resisting the measures implied under section 121 LPA in the interim period.