What is a Rentcharge?
A rentcharge is a type of charge affecting a property. While it is common to see ground rent in leasehold property, a rentcharge is more likely to be found in new build freehold property where the developer is transferring the interest in the land but wants to retain the ability to levy charges on any owner, usually for the maintenance of any remaining common parts.
A rentcharge can also be used to bind a buyer to positive covenants such as maintenance of a boundary wall.
Rentcharges can be registered at HM Land Registry and, as such, any lender taking an interest in the property is subject to the rentcharge.
How could this affect me or my lender?
A rentcharge could be problematic when it comes to selling your property or detrimental to the security of your lender. As such, lenders have tightened their lending criteria when it comes to rentcharges in recent years.
It is worth noting that a rentcharge is often for a nominal/minimal amount. However, unlike ground rent or service charges, there is no statutory way to challenge the amount of the rentcharge imposed.
Also, certain automatic remedies relating to failure to pay the rent apply, which could have drastic consequences for the rent payer and the lender and which they may not have considered.
The remedies include the usual remedies for defaulting in payment, namely:
- Action for recovery of the debt
- Option to grant a lease over the property
- Right to take possession of the property
- Potentially an express right of entry or re-entry into the property for breach of covenant
One of the main concerns for lenders is that the person with the benefit of the rentcharge has, as mentioned above, a statutory right to grant a lease over the property to clear any arrears of unpaid rent over 40 days. There is no obligation for this person to notify any lender of this lease. This can severely impact the security of any lender.
Even if the arrears are paid, there is no obligation for the person with the benefit of the rentcharge to terminate any lease that has been granted in the meantime. This means that your freehold interest in your property, and your lender’s security over it, could continue to be subject to a lease to a trustee, allowing them also to remove you from your home and arrange for tenants of their own choosing to take occupation instead.
Alternatives and Advice
Whilst the Rentcharges Act 1977 generally abolished the creation of new rent charges, there are still a number of exceptions, such as estate rent charges.
The 1977 Act made a few changes that may assist a homeowner when selling a property with a rentcharge, such as:
- imposing a maximum term of 60 years for rentcharges, meaning that most will expire by 2037; and
- a right to redeem the rentcharge – if you know who owns the charge, you can apply to the Department of Communities and Local Government to redeem and remove the charge.
If you are concerned your property could be subject to a rentcharge that may cause problems when you sell, you should:
- firstly check the deeds to see whether the property is subject to a rentcharge or not and whether this has been registered;
- make prompt payment of any demands so as not to fall within the debt categories set out above;
- if no demands are made and you have not been paying, the alternative is that an allowance can be agreed on any sale for 6 times the amount due under the rent charge deed.
If you are purchasing a property subject to a new rentcharge allowed within the exemptions under the 1977 Act, you should ensure that your lender is happy with the terms as well. The simplest solutions here are:
- ensure there is an obligation to notify any lender before enforcement action is taken;
- ensure that no premium can be demanded when trying to release a lease created for enforcement; or
- negotiate and remove the right to create a lease at all.
You can also contact another member of our New Build team here.