There are two types of rentcharges, estate rentcharges and historical rentcharges. Here, we aim to assist you in understanding the differences between the two and how they will effect you if your property is subject to one.
What are rentcharges?
A historical rentcharge is an obligation of an owner of freehold land to pay someone, the rentcharge owner, a sum of money, forever, with no time limit. These were frequently imposed on freehold land in the early 1900s to give the original seller of the property which was usually the developer, an income forever.
An estate rentcharge is a charge which is usually set up by the builder of a housing estate which pays towards common areas of the estate such as services, walls, lighting, car parks, private roads and landscaping to name a few. The owners that buy a plot on the development will be required to pay a service charge and when they come to sell their property, the charges will follow through to any new owner.
Why are rentcharges a problem?
In the event that you do not pay the charge when it becomes due, Section 121 of the Law of Property Act 1925 advises that the rentcharge owner can take action such as possession of the property without notice and without an owner being able to apply to a Court for relief. In addition, if the charge becomes unpaid for 40 days the owner of the rentcharge can create a statutory lease over the property and register this with the Land Registry. Of course, the charges owed can be cleared after this time, however, the rentcharge owner is not obliged to remove the lease over the property even when those charges have been cleared.
It has been known that investors have bought old rentcharges and use these newly acquired powers to ransom the owner of the property by registering a lease over the property which would make the property worthless. The Court is powerless to order the removal of such a lease. It is good to know that since the Rentcharges Act 1977 came into force, no new historic rentcharges can be entered into and this Act also provides that all rentcharges will end on 22nd July 2037.
Solutions to rentcharges
You are able to apply on the Gov.uk website to redeem a historical rentcharge and the cost is around 20 times the amount of the charge. These charges are almost always low given that they were implemented so long ago. For example, if the amount of the charge was £4.00 per annum, it would cost approximately £80.00 to remove it but this is not a simple process and can take months for this to be completed. If this option was taken, it would delay any sale considerably.
Estate rentcharges cannot be redeemed under the Rentcharges Act 1977. You can only negotiate the release of this charge with the estate rentcharge owner and this is almost always refused due to the fact that many properties contribute towards the charges for the common areas used by all properties within the estate.
In many cases, historical rentcharges have an unknown rentcharge owner and they have never been called upon to contribute towards such a charge so will offer incoming buyers an indemnity policy to cover any risk that may arise. This is the most practicable solution to the risk. You must always make sure you are aware of the terms of such a policy so that you can ensure that you comply with them.
Historical rentcharge insurance can usually be obtained for any charge created prior to 1977 and will cover a home owner as well as their lender. If any rentcharge owner did create a lease over the property you would be able to make a claim under the policy to recover the sum for any reduction in market value and associated legal expenses.
For estate rentcharges, most indemnity insurance providers will only cover the owners mortgage lender in the event of them not being able to recover the loan over the property. No cover for the homeowner is provided and it is therefore very important to pay any estate rentcharges immediately when they become due whether or not formally demanded.
Why are rentcharges an issue for a mortgage lender?
Such extreme powers are granted to the rentcharge owner and due to risks as noted above, lenders are concerned with lending monies on a property subject to a rentcharge. Actions that are taken by any rentcharge owner could make the property harder to sell or even completely worthless so it would be more difficult for a lender to recover their loan.
Every lender has different rules and requirements on what types of properties they are prepared to lend on and it is therefore important that you are made aware of all of the risks when selling or buying a property with a rentcharge, whether historical or an estate rentcharges. Even if you are not selling, are you looking to sell soon? Are you worried that the rentcharges on title may affect the sale? Is Section 121 of the Law of Property Act 1925 excluded in your deeds? Are there sufficient mortgage protection clauses in place?
Speak to a member of our team today to discuss any concerns you have further: 01727 858807