Manchester 0161 832 2500 | London City 0204 505 8080 | London Finchley 020 8349 0321
A rentcharge is an annual or periodic sum paid by a freehold homeowner to a third party or “Rent owner”. The amount paid can be nominal, and the rent owner typically has no other connection to the property apart from the rent reserved by lease or any interest.
A rentcharge can be an interest in land (section 1(2), LPA 1925) even though the rent owner may not hold any land. There is no privity of estate between the rent owner and the rent payer. Unlike a lease, the rent owner holds no reversionary interest in the charged land.
The rentcharge binds the original rent payer and their successors in the title by virtue of the charge over the charged land and the methods of enforcing that charge if payment is not made, rather than the positive covenant to pay the rentcharge that runs with the land.
In line with 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. So if your agreement post-dates this point – unless there are exceptions as laid out in your original agreement – you are not subject to rentcharges. However, there are still certain circumstances when this levy is applied, including:
An estate rentcharge is essentially a mechanism for a third party such as a management company or developers to secure contributions to the costs of maintaining communal areas.
Estate Rentcharge is usually also referred to as estate charge.
This charge is obligatory and should be included in the initial contract so that all homeowners are fully aware of their financial obligations. Estate rentcharge pays for a wide range of services that can include:
Most residential tenants and leaseholders benefit from protection under the Landlord and Tenant Act 1985 (LTA 1985) against excessive service charges. However, there is no provision for rent payers to be consulted in determining the estate rentcharge. There is also no process for challenging it if a resident feels that the estate rentcharge is unreasonable or excessive. This could leave property owners subject to very high estate rentcharges with no recourse.
Leaseholders of residential flats may be entitled to take responsibility for managing their building under the right-to-manage provisions in Part 2 of the Commonhold and Leasehold Reform Act 2002. However, unless there is a clear option for this in a rentcharge scheme, there is no way for rent payers to take control of the ownership or management of common parts such as communal gardens, for example.
Under Section 121 of the Law of Property Act 1925, there are two options available to rent owners:
The implication of this is that if the rentcharge goes unpaid for 40 days, the rent owner may grant a lease of the property to a trustee.
It is important to note that there is no need for any legal demand or notice, and the lease can be promptly registered against the title at the Land Registry. Once registered the existence of the leases will make each property unsaleable even if the trustees choose not to take possession.
The 2016 case of Roberts v Lawton demonstrated that once such a lease is granted on the Charged Land, it continues even when the arrears have been paid or if the rentcharge itself has been terminated. The only exception is if it has been surrendered voluntarily by the rent owner. The court further held that this right is unaffected even if the Appellants have provided no information about their entitlement to the rentcharge, even if they have sent demands to the wrong address, and even if they have refused arrears after the grant of the lease.
These issues have made mortgage lenders very nervous. Many mortgage lenders will not lend against properties subject to an estate rentcharge unless these statutory rights have been excluded or suitably modified in the property’s title. The only other alternative that will encourage mortgage lenders to consider this scenario is if there are provisions requiring the estate rentcharge owner to give a minimum period of 40 days’ notice to the mortgage lender. This allows them to pay the arrears of estate rentcharge.
Various lenders have different requirements regarding estate rentcharge. Lenders may require one or a combination of a different number of provisos, including:
On any conveyancing transaction where an estate rentcharge applies, appropriate steps need to be taken to rectify provisions, so they meet the mortgage lender’s requirements.
Clients should be informed of how rentcharge operates and the consequences if these are unpaid. They should also be advised that there may be issues or delays on a property sale if potential buyers’ mortgage lenders have strict requirements or require the amendment of existing rentcharge provisions.
It’s also important to advise clients of the financial implications and obligations regarding estate rentcharge. Unlike under a leasehold regime, there is currently no statutory method that allows property owners to challenge the level of charges imposed by an estate rentcharge.
If you would like to talk in confidence to a Property expert, please contact us or phone 020 8349 0321.