What are freehold estate rent charges?
It is becoming more commonplace to see a property, which has obligations to pay a service charge to a management company for the upkeep and repair of common areas on the estate. The obligation to pay the service charges can be secured by way of an Estate Rent Charge. Estate Rent Charges are effectively a charge that is secured on a property which gives the Rent Charge Owner, usually a management company, additional statutory rights to enforce the payment of monies due.
Why can freehold estate rent charges be a concern?
When an Estate Rent Charge is created, Section 121 of the Law of Property Act (LPA 1925) provides two remedies for the Rent Charge Owner for non-payment of the Rent Charge. If payment of the Estate Rent Charge goes unpaid for 40 days or more, the Rent Charge Owner has a statutory right to re-enter the property, meaning the Rent Charge owner could take possession of the property and exclude the homeowner from their house. Any lender would also lose their security. There is also a right to grant a Lease over the Property for the purpose of raising monies to clear the arrears, interest, and costs. This Lease can be registered and will be binding on the property owner and any mortgagees. There is no obligation at law for the Rent Charge Owner to surrender the Lease once arrears are repaid in full. There is no relief available either.
There has been much negative coverage in recent times relating to the ‘draconian’ measures that are available to a Rent Charge Owner in the event of default by the property owner. Some mortgage lenders now take the view that they will not lend on properties that are subject to Estate Rent Charges as the remedies listed above may result in their security in the property being affected. Many homeowners may struggle to sell their property or secure finance in light of this, rendering properties subject to an Estate Rent Charge unmarketable.
What can you do?
The existence of an Estate Rent Charge usually comes up when you are trying to sell or refinance a property, as your proposed buyer and/or their mortgage lender may not be agreeable to the current terms of the estate rent charge. The solution is to remove or relax the remedies available under s.121 LPA 1925 by way of a Deed of Variation, this will require the rent charge owner agreement and a formal Deed will need to be prepared, executed, and registered against the Title at Land Registry.
There are two common ways that rent charges are varied:
1. You could vary the rent charge provisions so that the ability to enforce unpaid monies can only be actioned after notice, for example, 2 months, has been given to the property owner and any interested mortgage lender. This allows for the property owner and/or the mortgage lender to make payment of any outstanding monies before the remedies set out in section 121 LPA 1925 are exercised. This sometimes though may only be a temporary solution and could result in you having a revisit the need to vary the terms in the future, for example, if a future purchaser has different requirements.
2. You could vary the rent charge provisions so that the remedies set out in section 121 LPA 1925 are removed in their entirety. This may resolve the issues noted above and you would unlikely be required to revisit or vary the terms of the estate rent charge in the future. There are still options available to the party with the benefit of the rent charge to recover any unpaid monies.
The deed can be drawn up and completed as part of the conveyancing process when a property is being sold.
A further option to consider, if the Rent Charge owner is not in a position to vary the terms of the deed or to protect your mortgage lender’s interest even further is to consider Indemnity Insurance.
If you have a property that is subject to an estate rent charge or are looking to purchase a property that is subject to an estate rent charge, then you should seek professional advice to ensure that you are fully aware of the terms and implications of the estate rent charge.
How can we help?
If you have any queries in relation to this article, please contact a member of our expert Residential Conveyancing team in Derby, Leicester, or Nottingham to discuss your circumstances.
Please call 0800 024 1976 or contact us via our online form.
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