Estate Rent Charges – The Current Issues

  • Posted

By Maxine Heale

RESIDENTIAL CONVEYANCER

The Rent Charges Act 1977 provided that all existing rent charges are to be extinguished on 22 June 2037 and that no new rent charges could be created.  The exception is an Estate Rent Charge.

(This article deals with current issues with estate rent charges only and does not look at the other forms of rent charge covered by the Rent Charges Act 1977)

The Background

Estate Rent Charges affect freehold properties and are occasionally used by developers.

Estate Rent Charges impose a charge on the land which can be enforced to secure the obligations (normally being the obligations to pay towards the upkeep and maintenance of private common areas of the Estate) and create obligations that are directly enforceable against any successors in title to the original purchaser with the need for the successor to enter into a direct agreement with the Management Company or other owner of the rent charge.  There is no scope or mechanism to challenge the amount of rent charge due other than to bring Court proceedings.

Homeowners and their Lenders/compromise

Section 121 of the Law of Property Act 1925 advise two remedies which benefit the Management Company or rent charge owner unless they are expressly excluded.  These allow the rent charge owner to take possession of a freeholder property and lawfully exclude the owner from their house should the rent charge monies remain unpaid for 40 days.  This causes great concern to lenders as this could make a property unsaleable which would mean that a lender’s security and ability to sell the property should the owner default on their mortgage, could be at risk.

The two remedies as set out in Section 121 of the Law of Property Act 1925 are set out below:

  1. A right to enter into possession of and hold the property or any part thereof and to take the income from the property.
  2. A right to lease the property or any part thereof to a trustee.

This means that unlike forfeiture proceedings against a leaseholder following a breach of a lease there is no requirement for the rent charge owner to serve any notice to the owner or any lender giving them a reasonable period of time to remedy the breach nor is there a right for the owner to apply to the Courts for relief and if the rent charge does remain unpaid for 40 days the rent charge owner may take possession of the property or grant a lease of the property to a trustee which can be registered at the Land Registry meaning the owner could be excluded from their property without any remedy other than to pay any outstanding rent charge monies.

Furthermore the trustee can collect any income or mortgage, sell or underlet the lease to raise the required funds to cover the amount owing and any additional costs incurred.  The lease will continue for the full term of years it has been granted even if the rent charge arrears are paid or the rent charge is redeemed in full unless surrendered by the rent charge owner which would not be done automatically and could be at the cost of an additional premium.

The right of re-entry and the granting of such a lease would be binding on any future purchasers together with any lenders in possession and therefore could significantly affect the value of the property and is therefore having an effect on the number of lenders willing to offer mortgages on properties which have these provisions included.  When acquiring a property on a development that is subject to estate rent charges you would be advised to seek to limit or remove the remedies available to rent charge owners pursuant to Section 121 of the Law of Property Act entirely by way of a Deed of Variation.  The compromise on this would be to include a provision that notice would require to be given in particular to a lender etc prior to any of the remedies under Section 121 being exercised.  This would allow lenders to remedy the breach and to pay any rent charges due without any risk to their security.  Another comprise would be to ensure that there is a provision to provide that where the statutory remedy of the grant of a lease of the property on trust as provided for in Section 121(4) is exercised for non payment of estate rent charges the lease will be surrendered, without a premium, following the payment of all arrears together with the legal costs and court costs of creating and surrendering the lease.  This would again give lenders the comfort that such a lease would not have a detrimental effect on their security and could be removed on payment of the outstanding monies.

The Government has promised a legislative reform but since a consultation was opened in autumn 2018 little progress has been made and the law remains unchanged.    Given the current issues affecting us all at present it is not seen as a priority but hopefully reform may be forthcoming once things have got back to normal whatever that might be and of course next forgetting the occurrence of “Brexit” but in the meantime, the compromises mentioned should assist in resisting the measures implied under Section 121 of the Law of Property Act..