When selling freehold plots on an estate, developers may wish to create positive covenants for future owners to perform e.g. payment towards maintaining a private road or drain. It has long been established that such payments are “positive covenants” and will not burden third party purchasers.
A developer may avoid such a covenant being deemed unenforceable against third party purchasers by creating an estate rentcharge.
Estate Rentcharge
One way of securing payment towards maintaining a private road or enforcement of positive covenants is by creating an estate rentcharge. This enables the rent owner (usually a management company who is obliged to maintain the common areas or private road) to enforce positive covenants against an owner of a property. The rent owner does not usually have an interest in the property subject to an estate rentcharge.
A rentcharge is a registrable interest at HM Land Registry similar to profit a prendre in gross.
Whilst there are statutory rights under the Rentcharges Act 1977 (“RA”) to redeem rentcharges which are prohibited by the same RA. An exception applies to estate rentcharges which are currently permitted under the RA.
Problems with Estate Rentcharges
Under Section 121 of the Law of Property Act 1925 (“1925 Act”) if an estate rentcharge remains unpaid for 40 days, a rent owner will be able to create a 99 year lease which is a registerable interest at HM Land Registry (“Trustee Lease”). This lease can continue even if any arrears are paid. Further, akin to the above if the estate rentcharge is unpaid for 40 days, the 1925 Act permits possession of the land by the rent owner until the arrears are paid.
The provisions of the 1925 Act will always apply unless the document creating the estate rentcharge (usually a transfer) expressly provides that the remedies under the 1925 Act are excluded.
Since estate rentcharges are registerable interests under Paragraph 6, Schedule 2 of the Land Registration Act 2002 and a Trustee Lease is also a registerable disposition, any future purchaser or mortgagee in possession will take the property subject to these.
Further, unlike the statutory protection afforded to tenants under residential leases, there are no statutory restrictions on estate rentcharges. This is a huge concern to lenders. Currently, the majority of lenders will require at the very least that the rent owner must be obliged to give both the owner and any lender written notice of the arrears together with at least 2 months’ written notice to remedy the breach before taking any action.
If the estate rentcharge does not meet the lender’s requirements a deed of variation will be required.
The problem for developers is that many buyers will be well advised not to accept any estate rentcharge provisions unless the remedies under the 1925 Act are expressly excluded. It is also important to note that an estate rentcharge does not need to be expressly called an estate rentcharge for it to be deemed the same. Payments expressed as “service charge” or “maintenance charge” carries a risk of being considered an estate rentcharge.
FAQs
Q: I am currently building 4 plots which will contribute to the maintenance of a private road via a maintenance charge and management company in the transfer document. On the sale of the last plot, the management company will be passed to the residents. Is this likely to be considered an estate rentcharge?
A: Yes, subject to the drafting of the transfer this appears to be an estate rentcharge.
Q: My maintenance charge is payable on demand from time to time, does this mean it is not an estate rentcharge?
A: No, “a rentcharge means any annual or other periodic sum charged on or issuing out of land” (emphasis added). The definition of periodic is “Appearing or occurring at intervals”. If the maintenance charge is more than a one-off and payable at intervals, whether set e.g. monthly or not then there is a risk of the same being considered a rentcharge.
Q: the rent owner created a 99 year lease of my property due to arrears. The arrears have now been paid. Is the rent owner obliged to “surrender” the 99 year lease over my property and cancel all reference to it at HM Land Registry?
A: No, subject to the document creating the rentcharge, the case of Roberts & Ors v Lawton & Ors [2016] UKUT 395 (TCC) (01 September 2016) confirmed that any rentcharge lease, once granted, continued in existence even when the arrears had been repaid unless it is surrendered voluntarily.
Q: I am currently purchasing a property subject to an estate rentcharge and the provisions of the rentcharge does not meet my lender’s council of mortgage lenders instructions. What can I do?
A: Mainstream developers are now well informed that previous estates they built may have inadvertently created rentcharges. Most will accept a deed of variation subject to paying their costs. Some accept a deed of variation that they will give notice to any lender before taking action, others may accept that the remedies under the 1925 Act are excluded.
Summary
There are alternatives to estate rentcharges such as restrictions on disposal and the benefit and burden rule.
Many commentators expect reform in the not too distant future. A consultation “Implementing reforms to the leasehold system in England” was carried out in October 2018 where it was proposed to provide freeholders with a regime based on the relevant provisions within the Landlord and Tenant Act 1985. But as the law stands there is no protection. As a developer a lender may scrutinise the use of any estate rentcharges which may be an obstacle for raising finance.
All options should be considered before marketing the plots on your estate. Should you require further advice please do not hesitate to contact Simon Walker or Robert Hurst in our commercial property team.
Simon Walker: simonw@talbotwalker.co.uk 01264 721 705
Robert Hurst: roberth@talbotwalker.co.uk 01264 721 787