Rentcharges - What are they and how might they affect you?

Most legal professionals view Rentcharges as an annoying quirk of a bygone era and while they may well be correct it is essential that you are aware of the implications of owning – or buying – a property which is subject to a Rentcharge.

Rentcharges were popular in the Victorian and Edwardian eras and were a means for builders to develop land without paying a premium to the owner of the land. Landowners would sell land to the developers at a reduced capital sum or for no money at all in return for an income from the owners of the new houses and their subsequent owners. The person entitled to the Rentcharge is known as the ‘rentowner’.

Rentcharges are especially prevalent in Bristol, Weston super Mare and other parts of North Somerset.

You should be aware that a Rentcharge only relates to freehold property and is often confused with Ground Rents which only relate to leasehold properties especially, although not exclusively, to flats.

So what is a Rentcharge? 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’.

But what does that actually mean? Essentially a rentcharge is an annual sum paid by the owner of land or property to another person who has no other legal interest in the land or property.  

Rentcharges normally range between £2 and £10 per annum with the most expensive at around £12.60.The passage of time and inflation means that they are, in most instances, quite insignificant.

Ignore Rentcharges at your peril, however. There are various remedies available to a rentowner to recover arrears of Rentcharges created after 1881, including:-

• A right of entry onto the land to hold the land and take income from it until the arrears have been discharged; and

• The grant of a lease of the land charged on trust to raise arrears.

To trigger enforcement the Rentcharge payments must be over 40 days in arrears. However - and this is where property owners need to be particularly careful – there is no requirement to raise a demand for payment. This means a property owner could be subject to enforcement without being aware that payment was due.

Rentcharges have been placed firmly back in the spotlight following the landmark Roberts & others v Lawton & others [2016] case. In this case Morgoed Estates Ltd (‘Morgoed’) bought and managed around 15,000 rentcharges. Some of the properties were in arrears and to recover these Morgoed granted to its directors (as trustees)  leases of the properties for terms of 99 years at no rent (any rent would go to the property owners), as allowed under Section 121 of the Law of Property Act 1925. This resulted in the property owners being compelled to make payment of the arrears and significant administration costs which resulted in the properties becoming virtually unsaleable and unmortgageable.

Unlike a mortgage there are no provisions to end a Rentcharge lease once arrears are settled, meaning the property owner may be held to ransom until it pays a fee for surrender of the lease.

While the Upper Tribunal Judge found Morgoed’s behaviour to be both ‘draconian and troubling’, they were well within their rights to register leases against property titles, not matter how unpalatable.

Since this case property owners and legal professionals alike have taken a number of steps to limit potential liabilities arising under a Rentcharge or to extinguish the rights altogether. So what can be done?

Automatic Extinguishment

Rentcharges extinguish automatically on 21^st July 2037 or 60 years from the date of which the Rentcharge first became payable, whichever is later.

Statutory Redemption

For those who can not wait until 2037, by design or choice, the 1977 Rentcharge Act permits existing property owners to buy out (or redeem as it is technically known) the Rentcharges attached to their property.

If you know the rentowner then you can apply to the Ministry of Housing, Communities and Local Government to redeem the Rentcharge. The cost of redeeming the Rentcharge will be about 16 times the yearly payment and the procedure for doing so can be found at: https://www.gov.uk/guidance/rentcharges

If you do not know who the current rentowner or their agent is, simply state so on the form and give the name and address of the person who you (or the previous   occupier) last paid the Rentcharge.

Express Release

You may be approached by the rentowner who is prepared to ‘sell’ the rentcharge to you. This is essentially another way of redeeming the rentcharge but proceed with caution. The rentowner may ask for a sum far in excess of the amount you would   have to pay if you were to go down the ‘Statutory Redemption’ route. Make sure you are not being ripped off; it may save you hundreds of pounds by contacting Ministry of Housing, Communities and Local Government

Indemnity Insurance 

It is very often the case that property owners only become aware that their property is subject to a Rentcharge when they come to sell the property. In the middle of a conveyancing transaction, options 2 and 3 above are often deemed to take ‘too long’ and legal professionals often look to remedy the issue by using indemnity insurance. Whether this is the correct means of addressing the problem is a matter for debate but it is often a quick, hassle-free way of dealing with the issue.

Policies typically cost somewhere in the region £150 - £300 and while more expensive than redeeming the Rentcharge through the official avenues, they are an efficient way of dealing with the problem.

Caution should be exercised however. Your legal representative will need to check the wording of the policy and in particular that your legal expenses and any associated loss are covered should the rentowner enforce their right of re-entry and grant a lease over the property.

This point is particularly pertinent if you are purchasing a property with the aid of a mortgage. Your legal adviser will need to ensure that they are able to comply with your Lender’s Part 2 of the UK Finance Mortgage Lenders’ Handbook for Conveyancers before submitting their Certificate of Title.

In order to avoid being caught out, it is recommended that you firstly check your deeds to see if your property could be subject to a Rentcharge. If you are unsure check with your legal adviser or the Land Registry.

If your property is subject to a Rentcharge then make sure you pay it on time whether demanded or not and always ask for a receipt. Where possible, set up a Standing Order to avoid overlooking payment of the Rentcharge.

If you ever receive a new demand for a Rentcharge ask for documentary proof from the purported new rentowner and ensure that your request is sent by Recorded Delivery. Be prepared to pay a fee for proof (however galling) to avoid having to pay hundred of pounds later if a Statutory Lease is registered against your property.

If your rentowner is Morgoed or another ‘investment company’ make sure you never miss a payment, even when you are not prompted to pay. Companies such as Morgoed exist to make money and prey on the uninformed and unsuspecting.

Finally, and best of all, redeem your Rentcharge through the Ministry of Housing, Communities and Local Government – it will save you plenty of time (and potentially money) when you eventually come to sell and will make your property a far more attractive proposition.

Although the type of rentcharge referred to above will eventually be consigned to history, the use of a new ‘estate rentcharge’ is becoming more and more common on new developments.

In the past facilities such as estate roads and open spaces were frequently adopted by the local authority after construction resulting in there being no shared facilities to be maintained by property owners. This practice is increasingly uncommon and schemes are often now put in place resulting in common and shared areas having to be privately maintained.

This is often put in place on the basis that a Management Company is appointed to organise the maintenance of shared facilities and the individual property owners on the estate share the cost. Where there are shared facilities of this kind selling properties as leasehold would allow the leases to provide for a robust method of collecting service charges.

However, as it is now Government policy to prevent new homes being sold on a leasehold basis, the likelihood is that an increasing number of properties on estates with shared facilities will be sold as freeholds. This could cause difficulties for the management of such housing estates unless robust alternative arrangements are put in place.

Positive obligations imposed on freeholds do not ‘run with the land’ which means that when a property is sold by the original owner an obligation to make a payment does not automatically pass to the new owner. This can be overcome by requiring each new owner to enter into a Deed of Covenant by which they agree to pay for the maintenance of shared facilities. Such schemes can (and do) break down resulting in property owners not being bound by an obligation to contribute toward maintenance costs.

An alternative solution is to use an ‘estate rentcharge’ for enforcing covenants and/or obtaining contributions towards the cost of managing shared areas. The deed creating the estate rentcharge commonly reserves a right of entry annexed to the rentcharge, entitling the rent owner to possession. This is exercisable by the rent owners on the breach of a positive covenant (e.g. non-payment of the charge).

Estate rentcharges can be problematic however and do encounter resistance from homebuyers. For example many of the protections that apply to leaseholders paying service charges do not apply to rentcharges, there is no requirement to consult in relation to major expenditure and there is no right to manage which would allow freeholders to insist on taking over responsibility if they are unhappy with arrangements.

In practice many are opposed to the use of new estate rentcharges for what are effectively service charges. This is in part because the operation on rentcharges is little understood but mainly because there are significant powers of enforcement for non-payment, which may be the cause of reluctance by lenders to take properties subject to a rentcharge as security.

So, on the one hand, while the traditional rentcharge ‘issue’ will extinguish after July 2037 it appears that many more rentcharge-related issues may be in the offing with more and more developers forcing estate rentcharges on the possibly unsuspecting buyers of their properties. Watch this space.