BLOGS

Rent charges – Beware

What is a rent charge and how could it affect you?

A rent charge is an annual sum paid by a freehold homeowner to a third party who normally has no other interest in the property (the rent charge owner). 

A rent charge is defined by Section 1 of the Rent charges Act 1977 (“the 1977 Act”) as “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”. This excludes payments under leases such as ground rent. Section 121 of the Law of Property Act 1925 (“the 1925 Act”) grants a rent charge owner remedies whether or not the rent charge has been demanded.

Rent charges range from approximately £2 - £10 per annum. They are therefore quite insignificant but something that needs to be highlighted if you are buying a property subject to a rent charge.

Rent charges are a historic concept, popular in the Victorian/Edwardian era. They were created as part of an old system whereby owners of land would sell plots for development at a reduced premium or for no money at all so that they could charge a regular payment from the people living on it (through payment of the rent charge). 

The rent charge should be registered at the Land Registry with its own title and noted against the affected title. Once registered, it is binding on all future land owners. For unregistered land, the rent charge will be noted in a conveyance or transfer deed which created the rent charge.

Who has to pay a rent charge?

Many rent charges have become obsolete or have been abolished. However, rent charges are prevalent in Manchester, Bristol, Weston super Mare and other parts of North Somerset.

However, since the 1977 Act, no new income supporting rent charges can be created. The 1977 Act also provides that the historic rent charges which continue to exist until 21 July 2037 or 60 years from the date on which the rent charge first became payable, whichever is later.

How can you redeem your rent charge?

Certain types of rent charge are redeemable under the 1977 Act This essentially means that you pay a single lump sum and after that no longer have to pay the rent charge. 

What if I don’t pay the rent charge?

There are various remedies available to rent charge owners to recover arrears for rent charges created after 1881. These include:

• A right of entry onto the land to take possession of the property and take the income from it until the arrears have been discharged. 

• The rent owner can grant a lease of the property to trustees to raise and pay the arrears and associated costs. There is no provision for such a lease to come to an end if the arrears are cleared or the rent charge has been redeemed.

To trigger enforcement, the rent charge payments must be over 40 days in arrears. There is no requirement for the payment to be demanded however which means a property owner could be subject to enforcement without even having been aware the rent charge payment was due.

Many rent charges have become dormant but the problem arises when companies seek, ruthlessly, to enforce the historic unpaid charges.

Since 2016, rent charges have been brought into focus following the case of Roberts & other v Lawton & Others. In this case, Morgoed Estates bought and managed over 15,000 rent charges. The company enforced its rights under the 1925 Act to compel the property owners to make payment of arrears and significant costs. Morgoed Estate then granted leases and tried to register them at the Land Registry. If the leases were registered it would have essentially made the properties unsaleable as the freehold of the property is worthless given the presence of the lease, unless the freeholder paid a huge premium to redeem the lease. This case highlighted the draconian nature of the powers and the risks of ignoring a rent charge.

Following the above cases, a rent charge can be redeemed in one of two ways:

1. If the rent charge is collected, a conveyancer can apply to the rent charge owner for redemption and the redemption certificate and lodge it with the Land Registry;

2. If not collected for a period of 12 years, a seller/property owner can swear a statutory declaration to this effect and apply to the Land Registry to state that the rent charge is statute barred as evidenced by the non-payments.

What happens in practice when selling/buying a property subject to a rent charge?

Some lenders will not lend on a property that is subject to a rent charge. The first thing your conveyancer should do is find out if the rent charge is claimed or not and if so, how much (as the older charges are often in shillings in property details).

There are however some options:

1. Indemnity insurance. Such a policy is usually inexpensive and provides cover against the powers available to rent charge owner. If this is the preferred option (it is usually the most practical and quickest) then no communication should be made with the rent charge owner or any party associated with them as it would invalidate any insurance. Whilst this option does not remedy the situation, it provides some protection to the property owner (and lender). However, not all lenders accept indemnity insurance.

2. Contact the rent owner to request a variation of the deed creating the rent charge to expressly exclude section 121 of the 1925 Act to remove the rights available to the rent charge owner. The property owner usually has to bear their own costs if going down this route as well as the rent charge owner’s fees. It can be a time-consuming option but it provides complete protection against any potential enforcement. 

3. Redeem the rent charge (as set out above).

4. There is of course also the option of taking a view if the rent charge is very old and has not been claimed but this would not be suitable to buyers obtaining a mortgage and is risky given the above remedies available to a rent charge owner. Your conveyancer could ask the seller for 7 years’ worth of payments (to cover any unpaid demands going back to the limitation period).

New build properties

Whilst historic rent charges will eventually become extinct, the 1977 Act allows for some exceptions – new build freehold properties can come with estate rent charges that apply across the whole estate. 

The “new” rent charges are used to secure payments to privately maintained areas on new developments that on previous developments may have been adopted by the Local Authority for instance, estate roads and open spaces. Management companies are often appointed to collect payments to cover maintenance of the share facilities. To ensure these payments are binding on future owners, an estate rent charge can be created to enforce covenants and continuing contributions towards the costs of the shared areas. These obligations are usually binding on future owners as there will be a requirement in the first transfer document that any future owner has to enter into a Deed of Covenant to observe any positive covenants in the transfer e.g. payment of the maintenance charge.