What're the impacts of Estate Rentcharges on conveyancing transactions?

What are estate rentcharges?

An estate rentcharge is essentially a mechanism for a third party, i.e. management company or developers, to secure contributions to the costs of maintaining communal areas by the rent payer. The estate rentcharge imposes a charge on the land which can be enforced to secure the homeowner’s obligation to pay for services provided.

Some examples of maintaining/repairing communal areas for services include:

• Street lighting in residential areas;

• Upkeep in maintaining private roads;

• Maintaining landscaped gardens; and

• Repair of private drainage systems.

Usually, when private developers build homes, the council will ‘adopt’ the estate and the local authority have the responsibility for maintaining the services such as those listed above. This is not the case with estate rentcharges because the local authority will not ‘adopt’ the estate and the councils won’t pay for the maintenance/repair of the communal areas.

The Land Registry estimate there are around 100,000 registered titles that are subject to an estate rentcharge and this figure is likely to increase.

Conveyancing problems

The remedies available to the estate rentcharge owners create problems in conveyancing due to the unforeseen consequence if obligations to pay the rentcharge is not met. The remedies include a cause of action for debt which is innocuous and there are certain draconian rights available to rentcharge owners which are causing consternation to many mortgage lenders. These rights are contained in sections 121(3) (right to enter into possession of and hold the property thereof, and take the income from it) & (4) (if the rentcharge goes unpaid for 40 days, the rencharge owner may grant a lease of the property to a trustee) of the Law of Property Act 1925 (LPA). It is these rights that have mortgage lenders running scared and many mortgage lenders will not lend against properties subject to an estate rentcharge unless these statutory rights have been excluded from or suitably modified in the title of the property or there are provisions requiring the estate rentcharge owner to give a minimum period of 40 days’ notice to the mortgage lender to have the opportunity to pay the arrears of estate rentcharge.

What should conveyancers do to make buyers aware?

• Potential buyers should be informed of how a rentcharge operates and the vulnerability of the consequences if these are unpaid;

• Estate rentcharges will be with us for the foreseeable future and buyers must be advised how there may be issues/delays on resale if potential buyers’ mortgagees have stringent requirements to meet requiring amendment of existing rentcharge provisions;

• A detrimental impact on the security means that lenders should factor this in when assessing risk during the underwriting process;

• Unlike financial obligations arising under a lease (such as service charges or ground rent), there is currently no statutory mechanism to challenge the level of charges imposed by an estate rentcharge.

Conclusion

On any conveyancing transaction where an estate rentcharge applies, appropriate steps need to be taken to rectify provisions so they meet mortgage lender’s requirements.  

Another approach might be to negotiate with the developers and lenders to create a standard form of drafting for estate rentcharge provisions with an accompanying Code of Conduct. This Code of Conduct should contain contractually agreed enforcement methods for Rent Receivers (for example, excluding the above statutory remedies) whilst also providing for notice periods which could be given to lenders prior to any enforcement action being taken for arrears to be discharged.

The Government’s plan for reform on the current law regarding estate rentcharges and for rentcharges to be dispensed is an on-going matter. In light of recent history (Brexit and CV19) these plans have been given less priority then would normally have been the case. For the foreseeable future therefore wherever estate rentcharges burden a property care needs to be taken to ensure that the draconian nature of the rights available to the rentcharge owner are tempered so as to remove the risk to mortgage lenders of their security being rendered valueless.

For further information regarding estate rentcharges when purchasing property, please contact Syed Hoque on 01489 864100 or by e-mail to syed.hoque@lawcomm.co.uk.

This article is for guidance only and does not constitute advice.