Dealing With Rentcharges And Estate Rentcharges

What is a rentcharge?

A rentcharge, as defined by s1 Rentcharges Act 1977, is “any annual or other periodic sum charged on or issuing out of land, except—

(a)rent reserved by a lease or tenancy, or

(b)any sum payable by way of interest.”.

So in other words, it includes any payment that the owner of the land for the time being is obliged to pay to a third party by virtue only of being the owner of the land, not including ground rent payable in respect of a lease. There are three basic types – “traditional” rentcharges, estate rentcharges and regulated rentcharges.

Traditional Rentcharges

Traditionally, rentcharges were designed to help workers, such as gamekeepers, caretakers etc buy properties on the estates of their employers. Rather than paying the full purchase price, which they may be unable to afford, they would pay a lesser sum and supplement that with an annual fixed rent, payable in perpetuity.

The creation of new traditional rentcharges was banned under the Rentcharges Act 1977 although they fell out of fashion much earlier, so that the sums due are now very small, typically no more than a couple of pounds, and they are rarely collected. They will be automatically extinguished on 22^nd July 2037 (60 years from commencement of the Rentcharges Act 1977).

Regulated Rentcharges

RA 1977 expressly states that the prohibition and extinction provisions do not apply to estate rentcharges. Estate rentcharges are those which are created for the purpose of:

(a) of making covenants to be performed by the owner of the land affected by the rentcharge enforceable by the rent owner against the owner for the time being of the land; or

(b) of meeting, or contributing towards, the cost of the performance by the rent owner of covenants for the provision of services, the carrying out of maintenance or repairs, the effecting of insurance or the making of any payment by him for the benefit of the land affected by the rentcharge or for the benefit of that and other land.

Part 7 of the Leasehold and Freehold Reform Act 2024 introduced a new definition of “regulated rentcharge”, to refer to the type of fixed rentcharge which exists purely to allow the rentcharge owner to enforce covenants against landowners to contribute towards maintenance and repair of common parts of an estate for which the rentcharge owner is responsible. The rentcharge itself will be a nominal sum and will be collected along with the service charges.

Estate Rentcharges

An estate rentcharge, or variable rentcharge, is a variable sum which will be equal to the landowner’s share of maintenance costs incurred by the rentcharge owner in complying with his obligations to maintain and repair the common parts of the estate. As above these are still permitted under RA 1977.

Rights of a Rentcharge Owner under s121 Law of Property Act 1925

S121 of the Law of Property 1925 confers certain rights in favour of a person entitled to the money due under a rentcharge where it is not paid, including a right to enter into possession of the property until the arrears are paid (s121(3)) and a right to create a lease in favour of a nominee (s121(4)).

The right under s121(3) is relatively innocuous. Although it can be exercised without a demand being issued, a person cannot evict an occupier of a residential property without a court order, and since all the property owner need to do to bring the action to an end is to pay the arrears (which will be minimal) it is unlikely to be exercised in practice.

S121(4) is more onerous. This involves the rentcharge owner granting a lease to a nominee (it is not possible to grant a lease to oneself), for any term. The property owner’s title will then be subject to this lease and so will be greatly reduced in value (practically worthless in fact, if the lease is granted for 99 years or more). Once created, there is no obligation on the rentcharge owner to remove the lease even if the arrears are paid.

This is considered to be a particularly malicious tactic by a rentcharge owner, designed to extort a ransom payment from a homeowner rather than an innocent attempt to recover arrears, which are often nominal sums.

What is the impact of Part 7 of the Leasehold and Freehold Reform Act 2024?

Paragraph 113 of Part 7 of the Leasehold and Freehold Reform Act 2024, by inserting a new paragraph 1(A) into section 121 Law of Property Act 1925, takes away the right of the owner of a regulated rentcharge owner take possession or to grant a lease. That provision cam into effect on 24^th July 2024. It has retrospective effect, so that it effectively eliminates the problem as regards regulated rentcharges – but not estate rentcharges or traditional rentcharges.

Remedies – Traditional Rentcharges

Traditional rentcharges will, barring further legislation, remain an issue until 2037, when they are extinguished. In the meantime there are two options. They can be redeemed, so that pay a lump sum and the rentcharge is cancelled. This is a statutory process and the price you pay is set by the Rentcharges Unit of the Ministry of Housing, Communities and Local Government. It is though dependent on you being able to identify the rentcharge owner and that person or entity being able show they have legal title to the rentcharge. In practice that is often difficult or impossible, especially where the charge is no longer collected.

The alternative is indemnity insurance. Readily available and quite cheap, indemnity is often the only viable option. It will cover legal costs incurred and loss of value to the property in the event that a rentcharge owner exercises s121 rights (albeit it will not protect a property owner who received a demand for payment of the rentcharge and doesn’t pay).

Remedies – Estate Rentcharges

Although indemnity is also generally available to deal with estate rentcharges, and is often a legitimate option, there are a number of other possibilities to explore. First, consider whether the rentcharge owner is a company which is made up of the owners of the properties which are liable to pay the charge. If that is the case the risk is reduced, because the directors of the company cannot act in a manner which is contrary to the interests of the shareholders/members.

Otherwise, it might be possible to vary the deed that created the rentcharge so as to exclude s121 rights or to introduce a requirement to issue a demand and to give notice to any mortgagee before taking any enforcement action. That requires the involvement of the original parties to the deed. The rentcharge will usually be created in a transfer deed, so that means the original transferor and transferee. If that is impractical, the current rentcharge owner could be asked to enter into a deed of covenant, in which it covenants not to exercise s121 rights and/or to issue a demand and to serve notice on mortgagees before taking enforcement action.

Whatever the proposed solution, if acting for a lender a conveyancer will need to check the CML / BSA Handbook instructions and if necessary seek the lender’s instructions.

Are all Estate Charges Rentcharges?

There are differing opinions on this point. In some deeds, the original transfer contains covenants by the transferee to pay the charges and an obligation on future owners to enter into a deed of covenant, with a restriction on the title to ensure that they do. The argument goes that the liability does not issue out of the land but rather, it is a personal contractual obligation. There might be merit in this, but until it’s tested in the Courts (which isn’t hugely likely to happen) the situation is ambiguous, and it is safer for a buyer to treat all freehold estate charges as rentcharges.