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Freehold Rentcharges

28-11-2019


If you buy a freehold property on a development where there are communal areas/access ways etc which need repair and maintenance then the possibilty is that you will pay a rentcharge to a management company which is similar to a service charge.

Rentcharges affecting freehold properties have recently become a hot topic for property lawyers following a recent Upper Tribunal case.

Although the Rentcharges Act 1977 prohibited the creation of new rentcharges, there are many thousands of historic rentcharges still in existence. These will continue until 2037 when they will end. It is possible under the Act for the owners of land subject to a rentcharge to compulsorily require the rent owner to ‘redeem’ the rentcharge i.e. end it, on payment of a sum calculated according to a statutory formula.

There is also a second type of rentcharge known as an ‘estate rentcharge’, designed to make positive covenants in freehold land binding on successors. These are permitted and will remain enforceable after 2037.

The snag is that the owner of the rentcharge has extensive rights to recover the sums due. These are given by s 121 of the Law of Property Act 1925. The owner of the rentcharge can take possession of the property and use the income from it to clear the arrears. Alternatively, the rent owner can grant a lease of the property to trustees to raise and pay the arrears and associated costs. These leases give the trustees the right to take possession of the land to the exclusion of the freehold owners. The rights arise if the rentcharge remains unpaid for more than 40 days, even if it has not been demanded. Even more worryingly, there is no provision in the Rentcharges Act 1977 for a lease granted pursuant to section 121 to come to an end when the arrears are cleared or once the rentcharge has been redeemed

In essence the result of enforcement action may mean that the property owner may be lawfully excluded from their own property; the value of the property may drop significantly and the property will be unmarketable and unmortgageable.  As well as causing concern for property owners, mortgage lenders are also becoming concerned about how rentcharges affect their security.

It’s often at the point of the sale of the property that owners find there is an issue. If you would like to talk to someone about whether this issue affects your property please contact the property team at Gardner Leader.


Michelle Challis

Partner
Residential Property

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