Author: Jacy Donoghue, Trainee Solicitor
JB Leitch Real Estate
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. In this article, Jacy Donoghue of JB Leitch Real Estate, reviews both the purpose of estate rent charges and the remedies available for management companies, developers and owners under the provisions of Section 121 of the Law of Property Act 1925.
Estate rent charges impose enforceable charges on land to secure and create obligations that are directly enforceable against any successors in title to the original purchaser, without the need for the successor to enter into any direct agreement with the management company (or other owner of the rent charge). There is no scope or method to challenge the amount of rent charge, other than bringing court proceedings.
Mortgage lenders do not deem rent charges acceptable where they are not demanded or collected meaning a clear payment receipt cannot be obtained. Where this is the case, lenders require the issue to be resolved before they will agree to lend, requiring the rent charge owner to be obligated to give the owner and any lender written notice of the arrears with at least two months’ written notice to remedy the breach before any action can be taken. This results in the purchasers being unable to proceed with the purchase of a property until the rent charge has been redeemed, removed or paid up to date. The reason for this is the potential for the provisions under Section 121 of the Law of Property Act 1925 to be used by the rent charge owner to recoup outstanding rent charges. Section 121 of the Law of Property Act 1925 provides two remedies which allow the rent charge owner to take possession of a freehold property and lawfully exclude the owner from their property should the rent charge monies remain unpaid for 40 days. This causes great concern to lenders as this could make a property unsaleable. This means that a lender’s security, and ability to sell the property should the owner default on their mortgage, could be at risk.
Remedies available under s121 of the Law Property Act 1925:
Section 121(3) Law of Property Act 1925 – A right to enter into possession of and hold the property or any part thereof, and to take the income from the property.
Section 121(4) Law of Property Act 1925 – A right to lease the property or any part thereof to a trustee.
Unlike forfeiture proceedings against a leaseholder following a breach of a lease, there would be 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. The right of re-entry and the granting of a lease would be binding on any future purchasers and any lenders in possession. This could significantly affect the value of the property and limit the number of lenders willing to offer mortgages on properties which have these provisions included.
Consequently, when acquiring a property on a development that is subject to estate rent charges the purchaser may seek to limit or remove the remedies available to rent charge owners pursuant to Section 121 of the Law of Property Act 1925 by way of a Deed of Variation.
The compromise to limiting or removing the available remedies to the rent charge owner would be to include a clause similar to the one below, that notice would be required to be given to a lender, and also the property owner, prior to any of the remedies under Section 121 being exercised. An example of such clause to vary the provisions contained in the original deed granting the estate rent charges, could be:
| “In the event of default by the Transferee in paying the Fixed Rent charge and/or the Variable Rent charge the Manager hereby covenants with the Transferee and their successors in title: (a) that in the event of a lease being created pursuant to the powers in section 121 of the Law of Property Act 1925 such lease shall contain an agreement on the part of the tenant to surrender such lease immediately upon payment of all arrears and the reasonable costs of collecting such arrears (all reasonable legal costs including court costs) and the reasonable costs of creating and surrendering the lease; and (b) to procure the surrender of such lease in such circumstances. It is further agreed and declared that no premium can be charged by the Manager for the time being in consideration of the surrender of such lease. PROVIDED THAT before any powers under section 121 of the Law of Property Act 1925 are exercised by the person entitled to the Fixed Rent charge and/or Variable Rent charge (including any right to enter the Property is exercised) such person shall give no less than 2 months’ prior written notice of its intention to do so to the Transferee and to any mortgagee of the Property whose interest is registered against the title to the Property and such breach shall not have been remedied within 2 months of notice being served on the Transferee and such mortgagee. Additionally, if further action is taken regarding non-payment the Manager must notify the Transferee and any mortgagee of such action.” |
It is clearly necessary that obligations to pay for the maintenance of shared facilities are binding and enforceable on all property owners on an estate. Without such obligations there is no guarantee that all property owners would pay their respective contributions. This could lead to insufficient funds to carry out necessary work and upkeep of shared facilities, which would result in common parts being neglected, to the detriment of the overall amenity and value of the properties that are part of that development. The example clause above offers both property owners and mortgage lenders the opportunity to remedy any arrears, before further action can be taken by the rent charge owner, thereby representing a balance of rights.
In conclusion, schemes including the use of rent charges have become increasingly common in recent years, established to cover the cost of maintaining communal areas and spaces. It is noteworthy that although rent charges are still in existence, they have a finite life, and are collectively due to be automatically extinguished in July 2037. However, estate rent charges are an exception to this. The government published its consultation paper “Tackling unfair practices in the leasehold market” in July 2017 which recommended giving freeholders an equivalent right to leaseholders so they can challenge the reasonableness of service charges levied through a deed of covenant or an estate rent charge. This aspect of potential reform is yet to be progressed and as such the instruments discussed above provide an established means by which estate rent charge owners can preserve the quality, standards and value of developments.
Should you wish to discuss this article further, or if we can help with matters relating to estate rent charges, please contact us:
