What is a Rentcharge?
A rentcharge is an annual sum paid by a freehold homeowner to a third party who normally has no other interest in the Property. It is defined by section 1 of the Rentcharges Act 1977 as being 'any annual or other periodic sum charged on or issuing out of land except rent reserved by a lease or tenancy or any sum payable by way of interest'.
The person to whom the rentcharge is paid is called the "Rentowner".
Ground Rent is a similar concept but is only applicable to Leasehold Properties. It is essential that you are aware of the implications of owning - or buying - a property that is subject to a rentcharge.
Historical Rentcharges and Estate Rentcharges
Hisorical rentcharges were popular in the 1900s. When these charges were created, it was common for a Landowner to sell a plot of land at a reduced premium or for no money at all. The idea was that the Land Owner would then benefit from the sale by receiving an income from the owners of the new houses and their subsequent owners by way of a rentcharge being secured against the property and that these payments would provide an income forever. Due to the passage of time, the amount of these historical rentcharges are usually quite insignificant. With these older rentcharges, under section 8 of The Rentcharges Act of 1977, the owner of the land affected by the rentcharge may, subject to paying a redemption figure, apply for a redemption certificate to certify that the rentcharge has been redeemed. However, this does not apply to rentcharges still permitted to be created by section 2(3) of the RA 1977 ("estate rentcharges"). Furthermore, the RA 1977 provides that these historical rentcharges are to automatically be extinguished on 21 July 2037 or 60 years from the date on which the rentcharge first became payable, whichever is later.
Although these more historical rentcharges will eventually be extinct, the new "estate rentcharges" are becoming common on new developments.
These new 'estate rentcharges' are used to secure payments to privately maintain shared areas on new developments that on previous developments may have been adopted by the Local Authority, i.e. estate roads and open spaces. Often, a Management Company is appointed to collect payments to cover maintenance of these shared facilities and the cost is split between property owners on the estate. To secure that these payments are binding on future owners, an "estate rentcharge" can be created to enforce covenants and/or continuing contributions towards the costs of maintaining shared areas. When purchasing a Property, you should ask your Legal Advisor to check that there is not an estate rentcharge registerred against the Property and that if there is a service charge/estate charge payable, that this is binding on future owners by way of a requirement that the future owner enters into a Deed of Covenant with the Management Company to observe a positive covenant in the Transfer Deed to make payment of the Maintenance Charge, as opposed to by way of Estate Rentcharge.
Why are rentcharges an issue?
Despite the small amount to pay to the rentcharge owner, you should be aware of the serious implications should these nominal sums not be paid in full. There are various remedies available to either a historical rentcharge or new estate rentcharge owner pursuant to Section 121 of the Law of Property Act 1925 to recover arrears of rentcharges and these are quite signifcant. These include:
- The right to take posession of the Property, without notice, with no ability to apply to the Court for 'relief' from the Rentcharge owner's action.
- The ability to create a Lease of the property and register it at the Land Registry, without notice. This could mean that the homeowner could be excluded from their Property. It is important to note that there are no provisions for the surrender of the Lease, even if the homeowner settles the arrears, unless the rentcharge owner agrees to surrender the Lease to the homeowner. To trigger enforcement of the above remedies, the rentcharge payments must have been in arrears for over 40 days. There is no requirement for the rentcharge owner to raise a demand for payment and therefore it is extremely important that property owners make payment of the rentcharges even where no formal demand has been received.
Selling a Property with Rent Charges
You may only find out that your Property is affected by a Rentcharge when you come to sell.
In this situation, there are a few options available. For Estate Rentcharges, you could contact the Estate Rentcharge owner and ask them to enter into a Deed of Variation to amend the original Transfer Deed that created the rentcharge. This is often considered to take too long. Although, this is the only way to resolve the issue and provide complete protection for a purchaser.
Secondly, the transaction may be able to proceed where indemnity insurance is put in place. This does not remedy the situation but would provide a mortgage lender with some comfort that they would be protected in the event that the rentcharge was unpaid and the rentcharge owner wanted to seek a right of entry or create a lease over the Property.
It is also worth noting that most indemnity policies for Estate rentcharges only cover a mortgage lender, but would not cover the individual owner. The indemnity insurer would not cover individual owners in case the indemnity policy became an incentive for the rentcharge to not be paid and due to the fact that the owner will have caused the problem by failing to pay the Estate Rentcharge. If the Rentcharge Owner reposesses the property, the lender will be able to claim the amount of the mortgage loan.
Your Lawyer should check that they are able to comply with your Lender's Requierments in Part 2 of the UK Finance Mortgage Lenders' Handbook for Conveyancers before requesting any funds from your Mortgage Lender.
What should I do now?
To avoid being caught out, we would recommend that you check your Title Deeds to see whether your property is the subject of a rentcharge. If in doubt, we would recommend that you contact your Legal Advisor for advice. If your property is the subject of a rentcharge, it is important to pay it on time whether formally demanded or not (you should always ask for a receipt).
Our team would be happy to discuss the issue of rentcharges in more detail to evaluate how we can help. Our team can be contacted on 01444 235232.
