Rentcharges are rapidly becoming a ‘red flag’ issue for buyers and mortgage lenders alike. This is having an impact on the property market, as people are discovering that their property may not be as easy to sell as they might anticipate.
What is a rentcharge?
In the simplest terms, a rentcharge is an agreement where a property owner is liable to pay a sum to a third party (known as the ‘rent owner’) who, otherwise, has no interest in the property.
Historically, rentcharges were created against newly-built properties so that the original developer would be able to collect rents despite the property being a freehold. The law has long since changed to prevent this practice from continuing, although older properties may still be subject to historic rentcharges.
Estate rentcharges are, however, still capable of being created. They are generally used in estates where the properties are liable to pay a contribution towards the maintenance of communal areas. The estate rentcharge creates an obligation which the rent owner (normally the company responsible for the management of the communal areas) can enforce directly against the property owner without any further obligations being created each time the property is bought and sold. This can save time and costs both for the home owner and the rent owner.
Why are rentcharges considered problematic by home owners and lenders?
Whilst the concept of an estate rentcharge may seem to be a sensible one, both purchasers and lenders are increasingly cautious about properties subject to a rentcharge.
Unlike service charges payable under the terms of a long lease which are highly regulated, there are no mechanisms (other than court action) allowing the level of the estate charge to be challenged. There are no obligations for the rentcharge figure to be reasonable, and unscrupulous rent owners might seek to take advantage of this.
More significant (from a lender’s perspective particularly) is the draconian law surrounding the enforcement of rentcharges. Where a home owner fails to pay the rentcharge on time (even when the sum has not been demanded or where no notice of the non-payment has been given), the Law of Property Act 1925 allows the rent owner to recover the monies owed to them using disproportionately harsh methods.
The rent owner can enter the property, to the exclusion of the owner of the property (i.e. lock the homeowner out of the property). The rent owner may then grant a lease of the property to a third party in order to generate rental income to cover the debt. The lease can be registered at the Land Registry leaving the home owner unable to live in their own property. Naturally, this can significantly affect the value of the property – after all, what value does a house have that you are unable to live in?
Once the lease has been granted, it does not matter if the homeowner clears their rentcharge arrears, or if the rentcharge is removed from the title of the property. The only way that the lease can be terminated is voluntarily by the rent owner. This leaves the rent owner in a position of great power – they may only decide to terminate the lease once the homeowner has paid them a significant sum to do so, allowing them to hold both the property owner and their lender to ransom.
These remedies apply regardless of the sum of money owed, and how long ago the sum become due.
From the perspective of a lender, the existence of a rentcharge has the potential to leave them very vulnerable. Their mortgage would be against a property which has significantly reduced in value as a result of the lease. The rent owner has (under the law) no obligation to notify the lender that they intend to seek enforcement action so the lender would be unable to do anything until it is effectively ’too late’.
What can be done to prevent issues when a new rentcharge is being created?
As with many things in life, prevention is better than cure in relation to the creation of a rentcharge.
It is possible to draft the provisions of a rentcharge to take away the ‘teeth’ which have been detailed above. After all, estate rent charges are a legitimate and useful way to run a scheme of maintenance on an estate if not abused. Your solicitor will be able to advise you on some of the most common methods of preventing issues as well as explaining how existing issues can be resolved.
Clearly the issue of rentcharges is a complicated one, and requires specialist legal expertise to ensure that you (as the buyer or seller of a property subject to a rentcharge) are adequately protected. If you have any questions about rentcharges, please contact Eleanor Lister, or another member of the property team, all of whom are fully qualified to deal with your enquiries, on 01892 526344 or email firstname.lastname@example.org
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.