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What is a rentcharge?
A rentcharge is a fixed annual payment or ‘rent’ payable by the owner of freehold property to a third party (the rentcharge owner) who has no other legal interest in the property.
Subject to a few exceptions, the creation of new rentcharges was banned in 1977. However, rentcharges remain a major issue for homeowners. Here’s what you should know if you consider buying a house with a rentcharge.
Buying a house with a rentcharge: types of rentcharges
There are two types: historic rentcharges and estate rentcharges.
Historic Rentcharges
In the early 1900s, it was commonplace for landowners to sell their freehold land subject to a rentcharge secured on the property. The purpose was to provide the original seller (the Rentcharge Owner) with a permanent income by ensuring payments from the new property owner and their successors. However, these payments were unindexed, so, over time, the amounts involved have generally become insignificant.
The Rentcharges Act 1977 (“the 1977 Act”) provides that no new historic rentcharges can be created. The 1977 Act also stipulates that all historic rentcharges are automatically extinguished on 21 July 2037 or 60 years after the rentcharge became payable, whichever occurs later.
Estate Rentcharges
While new legislation means that historic rentcharges will disappear, “estate rentcharges” have become increasingly common in new developments.
Typically, a developer of a new-build estate sets up an estate rentcharge, collected by a management company appointed by them. The charge’s purpose is contributing towards the maintenance and upkeep of common areas on the estate not adopted by the Local Authority. Owners buying a plot on the development must pay this service charge, and when they sell the property, the responsibility to pay these charges passes to the new owner.
When purchasing a property, your conveyancer should advise you whether an estate rentcharge is registered against the property. If a service charge or estate charge is required, it is essential to check whether this obligation is secured through a positive covenant in the Transfer Deed, enforceable by a Deed of Covenant with the management company, rather than by way of an estate rentcharge.
The problems of buying a house with a rentcharge
Although the amounts payable to a rentcharge owner may be small, the consequences of failing to pay these sums in full can be pretty drastic. Section 121 of the Law of Property Act 1925 gives historic and estate rentcharge owners significant powers to recover unpaid charges. These include:
- The right to take possession of the property without prior notice and without the homeowner having the ability to seek relief through the courts.
- The authority to create a lease over the property and register it with the Land Registry, also without notice. This can potentially exclude the homeowner from their own property! Importantly, there are no provisions for automatically surrendering this lease, even on payment of the arrears, unless the charge owner agrees to release it.
To pursue these Section 121 remedies, the rentcharge must remain unpaid for more than 40 days. Crucially, the rentcharge owner is not required to issue a formal demand for payment. As such, property owners need to ensure rentcharges are paid promptly, even if no payment request has been received.
Mortgage lenders’ attitude to buying a house with a rentcharge
A major hurdle to buying a house with a rentcharge is that mortgage lenders often hesitate to lend money on properties subject to such a charge due to the significant powers granted to the rentcharge owner and the risks noted above. Actions taken by a rentcharge owner can make the property much harder to sell, increasing the difficulty for a lender to recover their loan.
New legislation
The Leasehold and Freehold Refrm Act 2024 (LFRA 2024) introduced a new definition of a “regulated rentcharge” meaning those rentcharges banned by the Rentcharges Act 1977 but existing before FLRA 2024 came into effect.
For regulated rentcharges only, the LRFA 2024 removed the Section 121 remedies of taking possession and/or granting a lease. This means that historic rentcharges can still be demanded, but only following a detailed and fair procedure.
However, estate rentcharges do not fall within the definition of a “regulated rentcharge” so, potentially, the remedies for failure to pay still include the right to take possession or to grant a lease of the property (see above).
Estate Rentcharge Solutions to Section 121 Remedies
Express Release
The release of an estate rentcharge can only be negotiated with the charge owner, but such requests are almost always refused. This is because multiple properties within the estate contribute to the maintenance of shared areas, and releasing one property from the charge disrupts this system.
Rentcharge indemnity policy
Indemnity insurance for estate rentcharges does not resolve the underlying issue, and not all mortgage lenders accept a policy. Each lender has different rules and requirements.
As a buyer, you should consider potential future problems. Even if your current mortgage lender will accept indemnity insurance, you may still encounter difficulties should you wish to re-mortgage or sell the property.
It is also worth noting that most indemnity policies only cover the mortgage lender, not the owner. Typically, owners are not covered in case the indemnity policy becomes an incentive for not paying the charge, i.e. the owner will have caused the problem. A policy covers claims for the reduction in market value and regulated expenses if the rentcharge owner creates a lease over the property.
Deed of Variation
The only way to fully resolve the issues surrounding an estate rentcharge and provide complete protection for a buyer is to contact the rentcharge owner and request a Deed of Variation to amend the original Transfer Deed establishing the Rentcharge.
Call Siân on 01225 755656 or complete the Contact Form below.