Good news on rentcharges…
The scenario
You're a property investor. You've found a building that you want to buy and you've agreed a deal. Everything is going smoothly, and your lawyers are working their way through the due diligence. They identify that the property is subject to a rentcharge from the early 1900's under which an annual payment of £15 pounds must be made.
The issue
You couldn't care less about having to pay £15 a year in the context of a multi-million pound purchase. But you remember from a transaction a few years ago that it caused the deal to abort – as your bank refused to lend, because you were unable to obtain insurance to cover the risk caused by the rentcharge. Is the rentcharge that you've just discovered going to scupper your deal?
The good news
No.
The good news is that the law has been changed, so this won't kill the deal.
But what was the old issue and how has the law changed?
The old risk
Until July 24th 2024, the risk was that, if the rentcharge wasn't paid, the rentcharge owner could take possession of the property and/or grant a lease (a "rentcharge lease") of the charged land to trustees to recover outstanding sums. This all stemmed from S.121 of the Law of Property Act 1925.
The issue was highlighted by the now infamous case of Roberts in 2016, which further confirmed that a rentcharge lease will continue even after the outstanding sums have been paid. This created a real headache for buyers, and some banks took the view that this compromised their security and so wouldn't lend without insurance. Unfortunately, insurance was not always available, because a 'sharp' market arose with some profiteers even buying up rentcharges to take advantage of the situation.
The new law
The exploitation of property owners by holders of old rentcharges was dealt with in the Leasehold and Freehold Reform Act 2024 ("LFRA"). How?
The LFRA introduced a new definition of a "regulated rentcharge".
Rentcharges are annual or periodic sums charged on land, except rent reserved by a lease or sums payable by way of interest.
Regulated rentcharges are, in broad terms, all rentcharges save for estate rentcharges, statutory rentcharges and those made by a court order or relating to certain family trust arrangements.
So, the sort of rentcharge that we have in our scenario is a "regulated rentcharge".
For regulated rentcharges only, the LRFA removed the S.121 remedies of taking possession and/or granting a lease. That said, the rent sums can still be demanded – but only by following a detailed and fair procedure, and without any draconian remedies being available.
What about estate rentcharges?
Often you see properties on an estate where there are common parts that need to be maintained and dealt with. In that situation it's not unusual to see an "estate rentcharge" which is effectively just a service charge by another name. Estate rentcharges are perfectly permissible and can still be created.
Estate rentcharges don't fall within the definition of a "regulated rentcharge" so, potentially, the remedies for failure to pay still include the right to take possession or to grant a lease of the property (as explained above). Whilst it will need careful consideration in every case, this is likely to be of a lesser concern where a management company is actively involved and where the charges are being clearly bought to the attention of the rent payer. In addition, in the documentation setting up the rentcharge it is sometimes agreed that the remedies are more limited, which can give additional comfort to buyers and banks.
The key message…
Rentcharges can be a tricky area. Whist it's very good news that the draconian remedies that used to allow the unscrupulous to exploit regulated rentcharges have been removed, you still need to pay them, if demanded, in accordance with new, detailed, rules.
You also need to be clear about whether or not you're dealing with a regulated rentcharge. Even if the rentcharge is not regulated – and the best example of that is an estate rentcharge – you still need to tread carefully.
Our expert team can help you avoid the pitfalls and make sure that you do what you need to do and that your investment is properly protected.
For further information please contact:
or your usual real estate contact at Stephenson Harwood.
