19 January 2023 by Alisha Patten

Estate rentcharges – how to deal with them

An estate rentcharge is a sum of money payable by a homeowner towards the maintenance of communal areas making up an estate.  Unlike service charge, which typically applies to leasehold property, an estate rent charge can sit across both leasehold and freehold property.  The person to whom the estate rentcharge is payable is often referred to as the ‘owner’.

Estate rentcharges are relatively common and are not intrinsically problematic.  However, certain issues can arise as a result of the draconian enforcement measures available to the owner of the estate rentcharge when the homeowner fails to pay on time.

Remedies available to the estate rentcharge owner

The enforcement measures available to the owner of the estate rentcharge are set out in section 121 of the Law of Property Act 1925.  They include the following.

Where any amount owed under the estate rentcharge remains outstanding for a period of 40 days, the estate rentcharge owner can take possession of the property and lawfully exclude the homeowner from their home.

Alternatively, the estate rentcharge owner can grant a lease over the property to a trustee and use the income generated from the lease to recover the debt owed.

Problems on sale

Mortgage lenders want certainty that they will be able to exercise all their rights under the mortgage if the buyers of a property fail to keep up with their mortgage payments.  This includes the right to repossess the property.

Because the enforcement rights available to estate rentcharge owners are so severe, lenders are concerned that their own rights may be jeopardised.  As such, mortgage lenders are often reluctant to lend where the property is subject to an estate rentcharge.

The 2016 case of Roberts v Lawton highlighted the problems estate rentcharges can cause for owners of residential property. The case involved several property owners who were in arrears with their estate rentcharges.  The management company managing the properties exercised its rights under section 121 of the Law of Property Act 1925.  It granted its directors, as trustees, leases over the properties for terms of 99 years with no rent reserved.  With these leases in place, it would have been almost impossible for the homeowners to sell their properties.  Therefore, the homeowners were compelled to pay significant sums so that the company directors would surrender the leases. When the case was brought before the Upper Tribunal, the Tribunal Judge reluctantly found that the approach taken by the management company was lawful.

As a result, many lenders now insist on a mortgagee protection clause or the exclusion of the estate rentcharge owner’s ability to create a lease as a remedy for default.

How to address the issue

Recently, we have noticed a trend nationwide to water down the rights of the estate rentcharge owner by adding mortgagee protection measures.

These measures are often implemented by way of a deed of variation.  A deed of variation is a legal document that confirms changes agreed between the relevant parties.  In this instance specifically, lenders are insisting that a ‘sufficient notice’ provision is agreed.  The theory is that, if the estate rentcharge owner cannot exercise its rights without giving the lender sufficient notice, this would allow the lender an opportunity to pay the debt itself and then recover it from the homeowner.  Alternatively, it could give the lender the change to repossess the property itself.

The Government has promised to reform the arguably antiquated legislation in this area.   In 2017, it was announced that new measures would be introduced, meaning that homeowners subject to estate rentcharges would have equivalent rights to leaseholders to challenge unfair charges.   However, at present, the law remains unchanged.

We always encourage dialogue between lenders and solicitors at the point of sale to avoid stagnation and potential barriers to lending, in the hope that estate rentcharges and mortgage lenders might co-exist in an open environment.

For further information on this subject, please contact our Property Management team.

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