A rent charge is an annual sum paid by a freehold owner to a third party who normally has no other interest in the property. The Rentcharges Act 1977 provides that no new rentcharges can be created, other than estate rentcharges. It is this type of rentcharge that developers are using increasingly to secure the positive obligation to pay for the shared expenses for communal areas in freehold developments. The rentcharge will impose a charge on the land and can be protected by registration at HM Land Registry.
The remedies if there is default in payment of the rentcharge should be of concern to buyers of properties affected and their lenders.
The case of Roberts and others V Lawton [2016] highlighted one of the little known or understood remedies; namely that if the rent remains unpaid for 40 days, the rent receiver can grant a lease of the property to a trustee as a means of raising money to clear the arrears, interest and costs. Other Draconian remedies include a statutory right of entry into possession of the property until arrears, costs and interest are paid. There is no mechanism in the Rentcharges Act 1977 to challenge the amount of a rentcharge.
The nature of the remedies means that those advising buyers and their lenders must properly consider the effect of any rentcharge being imposed and must fully advise the buyer and the lender of the consequences.
There are alternatives to an estate rentcharge but the problem is that if a developer sets up an estate using an estate rentcharge to secure the means of payment, they are unlikely to be persuaded to shelve this approach once the documentation is drafted and some of the units sold off.
If you are buying a property that is affected by a rentcharge, you must ensure that you obtain specialist advice early on in the transaction to establish if it is affected by a rent charge. You will need advice about the risks and so will your lender if you are getting a mortgage.
To discuss this or any other property related issue, contact us.