A management company with the benefit of an estate rentcharge on a freehold estate could take possession of a freehold house, lawfully exclude the homeowner from their house and make the house virtually unsaleable if the rentcharge, payable by the homeowner to the management company, remains unpaid for 40 days.
The particular cause for concern to homeowners and their lenders is that the management companies may not even need to serve a demand or notice before exercising these rights which could leave the house in negative equity and put a lender’s security at risk.
The Government has promised legislative reform but until then, is the way forward a service charge system supported by Deeds of Covenant and Restrictions rather than a rentcharge?
The plague
A rentcharge is an annual sum paid by a freehold homeowner to a third party (“Rent Owner“) who normally has no other interest in the property (“Charged Land”).
A freehold development will usually have communal areas (such as a playground, private roads and a car park) which may be managed by a management company. An estate rentcharge is an effective mechanism for the management company (as the Rent Owner) to enforce the performance of covenants by homeowners on the estate (which is the Charged Land) and to collect estate charges (for example for repair and maintenance of communal areas) from them.
Estate rentcharges create an obligation that is directly enforceable against successive homeowners without the need to enter into further agreements. However, a homeowner whose house is subject to an estate rentcharge does not have the same statutory protection as a leaseholder enjoys in relation to service charges payable under their lease being reasonable. There is no scope or mechanism to challenge the amount of rentcharge due (other than to bring court proceedings).
There are great risks to homeowners and their lenders if the homeowners fail to make payment of the rentcharge on time. Section 121 of the Law of Property Act 1925 (“LPA 1925”) implies two notable remedies into the rentcharge instrument (unless they are expressly excluded) for recovering monies owed to the Rent Owner.
1. a right to enter into possession of and hold the Charged Land or any part thereof, and take the income from the Charged Land (section 121(3) LPA 1925).
Unlike forfeiture proceedings against a leaseholder following a breach of a lease (under section 146 LPA 1925), there is no requirement for the Rent Owner to serve any notice to the homeowner giving them a reasonable period of time to remedy the breach, nor is there a right for the homeowner to apply to the courts for relief.
2. a right to demise the Charged Land or any part thereof to a trustee by deed for a term of years (a lease) (under section 121(4) LPA 1925).
This effectively means that if the rentcharge goes unpaid for 40 days, the Rent Owner may grant a lease of the Charged Land to a trustee. Again, there is no need for any legal demand to have been made or notice to be given, and the lease can be promptly registered at the Land Registry. This can allow the trustee to effectively ‘ransom’ the Charged Land and exclude the homeowner of their home.
The trustee can then collect any income received from the Charged Land or mortgage, sell or underlet the lease to raise the amount owed and any costs incurred. The 2016 case of Roberts v Lawton affirmed that once such a lease is granted on the Charge Land, it continues in existence even when the arrears have been paid or even if the rentcharge itself has been terminated, unless surrendered voluntarily by the Rent Owner.
The remedy
Estate rentcharges
In response to a public consultation, the Government said in December 2017 that it will look to reform the remedies under section 121 LPA where the rentcharge remains unpaid for a short period of time.
The UK Finance Mortgage Lenders’ Handbook (formerly CML Handbook) which provides instructions for conveyancers acting on behalf of lenders in residential conveyancing transactions, provides particular guidance for solicitors acting on behalf of some high street lenders (including Barclays and Nationwide) to seek to limit the effect of the remedies under section 121 LPA.
A number of developers/management companies setting up new residential (or mixed-use) freehold estates are moving away from estate rentcharges and are creating a ‘contract-based’ estate service charge regime which is not a rentcharge. Under this regime, each homeowner will have a Restriction noted on the title to their property at the Land Registry which prevents them from disposing of their property without the consent of the management company. The management company, in turn, will only give the necessary consent when the incoming-purchaser enters into a Deed of Covenant with the management company to contractually commit to pay the estate charge and to observe and perform the positive covenants which do not ordinarily run with the title to the land.
Whilst this estate service charge regime still does not give homeowners a right to challenge the amount claimed by the management company, the risk of enforcement of the draconian remedies in section 121 LPA is removed.
Historical rentcharges
Most rentcharges have their origins in the late 19th century and early 20th century. As Britain became the world’s first industrial society and as its population boomed, urban housing demand was at an all-time high. The creation of rentcharges, particularly popular in Manchester, Bristol and Bath, was one of the quirkier ways to make it financially possible to meet this housing need.
The purchaser (usually also a developer) would buy the freehold land for a capital sum less than the full market value and then make up the deficit by granting the seller a rentcharge – the right to receive a small periodic payment in perpetuity. So the purchaser, in effect, deferred some of the capital payment and, once it had built the houses on the Charged Land, was able to pass the liability to pay the rentcharge on to the new homeowners.
The Government’s last substantial reform in relation to rentcharges was to introduce the Rentcharges Act 1977 which:
1. prevented any new rentcharges being created subject to very limited exceptions (estate rentcharges being a notable exception);
2. put a shelf life on most existing rentcharges so they will terminate on 22 July 2037; and
3. made certain types of rentcharge redeemable on payment of a single lump sum.
For historic rentcharges (i.e. not estate rentcharges), purchasing conveyancers should consider whether these can be redeemed under the statutory process set out in Section 8 of the Rentcharges Act 1977 or consider putting on risk a defective title indemnity insurance to try to mitigate the risks (including financial losses) associated with enforcement of the rentcharge (or both).