In this article Phil Parkinson and Katie Edwards of specialist property solicitors JB Leitch, look at the nature, definitions and parameters of estate rentcharges – a topic that is still subject to much confusion and misunderstanding…
What is an estate rentcharge?
As leaseholders are subject to service charges, freehold property owners can also be subject to charges for the cost of maintaining communal areas and facilities.
Rentcharges are an unusual element of our land law system and despite drawing on similar terminology, it has no relevance to the established leasehold regime for service charges.
Schemes including the use of rentcharges have become increasingly common in recent years and are typically established to cover the cost of maintaining communal areas and spaces.
A rentcharge essentially creates a legal interest in land, usually allowing an annual or other regular sum to be charged to the occupier. Confusion can often arise when the term rentcharge is used interchangeably to refer to both the sum of money – and the interest itself.
Rentcharges were historically used to provide income for landowners in exchange for the release of freehold land for development. Their creation has now mostly been abolished by virtue of the Rentcharges Act 1977, which aimed to reform the law, in order to prevent rentcharges being used for profit by a rent charge owner. Although thousands of rentcharges are still in existence, they have a finite life, and are collectively due to be automatically extinguished in 2037. However, estate rentcharges are an exception to this.
Service Charge or Estate Rentcharge?
An estate rentcharge effectively provides the mechanism by which developers (or management companies) can enforce positive obligations and covenants on the owners of freehold property, typically to secure contribution to the maintenance and upkeep of shared spaces. In this regard, the estate rentcharge broadly serves as an equivalent to leasehold service charge covenants in intent.
Rentcharge Schemes:
A rentcharge scheme may be set up to provide services in relation to the estate, such as maintenance of the common parts and effecting insurance. They would usually be established by the estate developer who, upon completion of the development, would transfer ownership of the common parts to a management company. The primary aim of this type of scheme is to ensure the payment of the rentcharge (i.e. the maintenance charges) so that the estate services can be carried out and to secure an ongoing obligation to contribute towards these costs.
Rentcharges do not benefit from the statutory protection provided to service charges under ss18-30 Landlord and Tenant Act 1985 meaning no application can be made to the First-tier Tribunal (Property Chamber) for a determination. In terms of reasonableness, the subject of rentcharges seldom comes before the courts. It is noteworthy that the Rentcharges Act 1977 provides limited clarity on the issue of reasonableness, although the common law requirement of reasonableness in relation to rentcharges has been considered in the Court of Appeal case of Smith Brothers Farms Ltd v The Canwell Estate Company Ltd [2012] EWCA Civ 237.
Means of Enforcement:
The area of enforcement also warrants careful attention. There are extensive remedies available to a rentcharge owner where arrears accrue. These may be statutory, given by s.121 of the Law of Property Act 1925, or based on the deed containing the rentcharge.
Valid remedies for the owners of rentcharges include:
- A right of re-entry, but only where expressly conferred by the rentcharge deed and would be subject to the conditions therein.
- A statutory right to enter onto the land to take the income from it and hold the land until arrears have been discharged, where any sum remains unpaid for 40 days or more.
- A grant of a lease of the land charged on trust to raise arrears.
- A right of action in debt for arrears of rent.
5. A sale or mortgage of the land charged although this is at the discretion of the Court. 6. The right to appoint a receiver. This would usually be contained in the rentcharge deed, but may be ordered by the High Court where there are long-standing arrears. 7. Service of a statutory demand for arrears exceeding £5,000.00 where the landowner is an individual, or £750 where the landowner is a company.
A Topic for Reform?
The subject of rentcharges has been subject to ongoing debate further to the government intention to introduce legislation to provide more protection for freehold estate rent charge payers.
Specifically, (and prior to the pandemic) the government stated it was committed to the repeal of Section 121 of the Law of Property Act 1925 to ensure homeowners are not subjected to unfair possession orders, adding they also intend “to legislate to ensure that freehold homeowners who pay estate rentcharges have the right to challenge their reasonableness and to go to the tribunal to appoint a new management company if necessary”. In short summary this would essentially provide the freehold owner the rights which would be equivalent of those of leaseholders to challenge the reasonableness of estate rent charges, and limit the potential enforcement actions that could be taken by the rent charge owner which are absent at present.
Given the announcement that “this will be pursued when Parliamentary time allows”, reform may still be some distance away, although, given the urgency to implement leasehold reform, coming months may possibly see timelines brought forward. We will continue to watch with interest. Should you wish to discuss the article and subject further, please contact us.
