Major problems with estate rentcharge

Estate rentcharges are increasingly found on new freehold developments. Many homeowners are not aware of the risks, which can be significant both legally and financially.

Estate rentcharges are usually used to pay for the upkeep of shared areas, but the law offers homeowners little protection.

If not managed, these risks can make it harder to get a mortgage, sell your home, or keep costs affordable in the long term. Here, we explain how estate rentcharges work, why they worry lenders and buyers, and what you can do to reduce their impact.

What Are Estate Rentcharges?

An estate rentcharge, sometimes called an estate charge, is a way for developers or management companies to collect money for looking after shared areas on a freehold estate.

Homeowners must pay this charge, and it should be clearly explained in the original paperwork so buyers know their responsibilities from the start.

Estate rentcharges commonly cover services such as:

• Street lighting within residential developments

• Maintenance of private roads, footpaths and grass verges

• Upkeep of landscaped communal areas

• Maintenance and repair of private drainage systems

Although these charges can help keep shared areas maintained, the law does not give homeowners much protection.

Understanding Rentcharges in Freehold Property

A rentcharge is an annual or periodic sum paid by a freehold property owner to a third party, known as the rent owner; the amount payable is often relatively modest, and the rent owner will usually have no other involvement with the property beyond the right to receive payment.

Despite this, a rentcharge is a legal interest in land under section 1(2) of the Law of Property Act 1925. The rent owner does not need to own any land, and there is no privity of estate between the rent owner and the homeowner.

Unlike a lease, there is no reversionary interest held by the rent owner.

What binds the homeowner and any future owners is not a positive covenant to pay, but the charge registered against the land and the statutory enforcement mechanisms available if payment is missed - this distinction is critical.

Abolition of Rentcharges: What to Know

Under section 2 of the Rentcharges Act 1977, no new rentcharges, whether legal or equitable, can be created on or after 22 August 1977, subject to limited exceptions.

If an agreement post-dates this point and does not fall within one of those exceptions, a rentcharge should not apply.

That said, certain categories of rentcharge remain lawful, including:

• Estate rentcharges

• Rentcharges created under statutory provisions connected with works on land or the commutation of obligations

• Rentcharges created by or pursuant to a court order

• Rentcharges included within family trust arrangements

• Estate rentcharges in particular still cause major legal and practical problems.

For Homeowners? Minimal Protection…

Leaseholders benefit from statutory protections under the Landlord and Tenant Act 1985, including safeguards against unreasonable service charges.

Freehold owners with estate rentcharges do not have these protections.

There is no legal requirement for homeowners to be consulted about the amount of the charge, and no formal way to challenge it if it becomes too high. This can leave owners facing rising costs with few options.

Why Freehold Owners Cannot Take Control of Estate Management

Leaseholders may, in certain circumstances, take over the management of their building under the right-to-manage provisions in the Commonhold and Leasehold Reform Act 2002.

Freehold owners with an estate rentcharge do not have a similar legal right. Unless the scheme specifically allows it, there is no easy way for homeowners to take over the management of shared areas like gardens or private roads.

How to Combat Harsh Statutory Enforcement Rights

Step-by-Step: How Rent Owners Can Enforce Non-Payment

Under section 121 of the Law of Property Act 1925, rent owners have powerful enforcement rights if an estate rentcharge remains unpaid for 40 days. These rights operate as follows:

Step 1: Non-payment of the Rentcharge

If the rentcharge is unpaid for 40 days, the rent owner is entitled to take enforcement action. No formal demand or notice is required.

Step 2: Right to Take Possession

Under section 121(3), the rent owner may enter into possession of the charged land, or part of it, and take the income from it.

Unlike leasehold forfeiture proceedings under section 146 of the Law of Property Act 1925:

• No notice needs to be served on the homeowner

• There is no requirement to allow time to remedy the breach

• The homeowner has no right to apply to the court for relief

Step 3: Grant of a Lease Over the Property

Alternatively, under section 121(4), the rent owner may grant a lease of the charged land to a trustee for a term of years. The purpose of the lease is to recover:

• The unpaid rentcharge

•  Any future rentcharge payments

• All associated costs and expenses

• Any surplus must be paid back to the homeowner.

Step 4: Registration at the Land Registry

The lease can be registered at the Land Registry without telling the homeowner. Once this happens, the property will usually be impossible to sell, even if the trustees do not take possession.

Judicial Confirmation of the Risks & Mortgage Lender Concerns

The Court of Appeal decision in Roberts v Lawton (2016) confirmed the seriousness of these enforcement powers.

The court held that once a lease is granted under section 121:

•  It continues even if arrears are later paid

• It continues even if the rentcharge itself is redeemed

• The only way it can be removed is if the rent owner voluntarily surrenders it

• The court also confirmed that these rights apply even where:

• The rent owner provided limited evidence of entitlement

• Demands were sent to the wrong address

• Arrears were refused after the lease was granted

These enforcement rights have caused understandable concern among mortgage lenders.

Many lenders will not lend against properties subject to an estate rentcharge unless the statutory rights have been excluded or suitably modified.

An alternative sometimes accepted is a requirement that the rent owner gives a minimum of 40 days’ notice to the lender before exercising enforcement rights, allowing the lender to clear any arrears.

Lender Requirements: What they’re looking for…

Step-by-Step: What Lenders Typically Look For

Lender requirements vary, but may include one or more of the following:

1. A provision requiring the rent owner to give notice to the borrower and/or lender before enforcement

2. Exclusion or modification of the statutory remedies under section 121 of the Law of Property Act 1925

3. A requirement that any lease granted under section 121(4) must be surrendered once arrears are paid

4. Covenants obliging the rent owner to provide specified services in return for the rentcharge

5. Limits on the amount payable and restrictions on how frequently the charge can increase

6. A deed of variation addressing problematic provisions

7. Confirmation that the rent owner is a resident-owned management company

8.  Indemnity insurance in limited circumstances (not always accepted as an alternative to variation)

Before you go…

If an estate rentcharge applies, it is important to check during conveyancing that the terms meet lender requirements and do not put the homeowner at unnecessary risk.

Clients should be clearly advised on:

• How estate rentcharges operate

• The consequences of non-payment

• The potential impact on future sales or remortgaging

They should also be aware of the financial impact and the fact there is no legal way to challenge the amount charged.

If you would like to speak confidentially with a property specialist, Orwins can provide legal advice that’s tailored to your circumstances; contact us today.