17th March 2022
17th March 2022
It is becoming more common to find, on managed modern mixed tenure residential estates, that the properties sold thereon are subject to Estate Rentcharges. So what are Estate Rentcharges and how can they be enforced if they are not paid?
Estate Rentcharges come in two forms:-
A fixed Estate Rentcharge. This is normally something nominal like a peppercorn or £1.00 or similar; and
A variable Estate Rentcharge. This is a cost that will vary from one year to the next and will be used to cover the costs of the management and maintenance of the communal facilities serving the estate. This might include matters such as roads, parking areas, paths, lighting, green areas and insurances on the same etc., where those facilities have not been, and will not be, adopted by the local authority following completion of the development. They are, in essence, a form of service charge and can be payable in respect of both leasehold and freehold property.
The Estate Rentcharge arises out of the title of each property on the estate and are payable by the property owner. They will appear both on the title of the property as a “registered charge” and the terms and matters falling within them will be detailed in the lease or transfer of the relevant property. This will include what management costs are recoverable as an Estate Rentcharge, when it is payable and what proportion of the total estate costs the individual owner is liable to pay.
Estate Rentcharges are permitted by the Rentcharges Act 1977 (“the Act”). Whilst the Act provides that all existing Rentcharges are to be extinguished on 22 June 2037 and that no new Rentcharges can be created. Fixed and variable Estate Rentcharges are an exception to that rule though and therefore will remain beyond that date - Sections 2(3)(c) and 4 to the Act.
Estate Rentcharges are payable to the “Rent Owner”. This is usually the developer of the estate or, more commonly, a company set up to manage the estate or common parts to which the Estate Rentcharges apply. It is quite common for the latter company to be one in which each property owner on the estate holds a share and thus is ultimately run by the residents of the estate.
How do Estate Rentcharges compare to service charges?
Unlike service charges collected in relation to leasehold property, Estate Rentcharges are not subject to many statutory rules or regulations. For instance, there is no requirement for the Rent Owner to follow any formal consultation process in relation to major expenditure. There is also no facility for the property owners to exercise a right to manage that would allow them to take over responsibility for the management of the estate.
Unlike the rights provided to tenants of leasehold property, there is also currently no statutory mechanism to challenge the level of charges imposed by an Estate Rentcharge.
Estate Rentcharge Legislative Reform
Reforms have been proposed but very little progress has been made to date.
In October 2018 the Government announced an intention to “create a regime for freeholders which provides that maintenance charges must be reasonably incurred and that services provided are of a reasonable standard”. It further stated “we will provide freeholders with the ability to challenge the reasonableness of the charges they are required to pay towards the maintenance of communal areas and facilities at the First-tier Tribunal”, neither of which exist presently.
In June 2019 the Government committed to “equal rights for freeholders: we will legislate to give freeholders on private and mixed tenure estates equivalent rights to leaseholders to challenge the reasonableness of Estate Rentcharges as well as a right to apply to the First-tier Tribunal to appoint a new manager to manage the provision of services covered by Estate Rentcharges”. It further committed to “consider introducing a Right to Manage for residential freeholders….as part of creating greater parity between leaseholders and residential freeholders”.
So, whilst reforms are in the pipeline, there is little prospect of any changes being made in the very near future.
How are Estate Rentcharges enforced?
In default of payment of an Estate Rentcharge, the Rent Owner can bring a debt claim in the County Court for recovery of the outstanding sums, as it would for service charges, and then enforce as a debt in one of the various ways provided under the Court rules. Whilst often effective as a means of enforcement, the above is only one of the options available to the Rent Owner. Other, and arguably stronger, options are provided for by s.121 Law of Property Act 1925.
The automatic statutory remedies available at s.121 LPA1925 for Rent Owners, which some might consider severe and which often have not been contemplated by the defaulting property owner, are strong and thus provide an effective threat, and if necessary remedy, against any defaulting property owner.
The two remedies as set out in the Law of Property Act 1925 are:
Section 121(3) provides to a Rent Owner the right to take possession of, and hold, the property, and take income from it until the debt is paid.
In short, where the property owner is indebted to the Rent Owner, the Rent Owner can obtain an Order for possession of the property in the County Court, evict the property owner and then rent the property out, or otherwise raise income from the property to cover the debt. The “debt” here will include the Rentcharges owing and set out in the possession claim plus all additional Estate Rentcharges accruing whilst the Rent Owner is in possession, as well as any costs incurred in the recovery process.
Section 121(4) allows the Rent Owner to grant a lease of the property to a trustee for the purpose of raising monies to clear the arrears, interest and costs. Any lease granted will continue for its full term of years, even if the Rentcharge arrears are paid or the Rentcharge redeemed in full.
There is no requirement for the Rent Owner to serve any notice on the property owner or any lender giving them a reasonable time to remedy the breach, nor is there a right for the property owner to apply to the Court for relief. This combination means that the property owner could be excluded from their home without any remedy. In all practicality, and prior to the issue of proceedings for possession or the debt, the Rent Owner will usually have served a formal letter before action and so the property owner will have had ample opportunity to clear the debt. Proceedings are therefore always the last resort and they will, in any event, take weeks or several months to result in an Order of the Court. Accordingly, the defaulting property owner will have ample opportunity to obtain competent advice such as will enable them to address any breach and prevent the matter reaching Court.
Estate Rentcharges are often misunderstood by the Rent Owner and their agents and are often relatively low in monetary value per property. However, they are enforceable and with relative ease too, and they are an effective way of enabling management of communal areas on estates.
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