Buying on an estate? Beware of rentcharges

Recently, the government said it intends to ban the sale of houses on a leasehold basis; to put an end to the practice of developers imposing escalating ground rents and high estate charges.

While not without its problems – some of which will be addressed when the Leasehold Reform (Ground Rent) Act comes into force – there are often good reasons why properties are sold on a leasehold basis, and the alternatives aren’t necessarily straightforward.

Leasehold provides a mechanism to ensure that owners who share parts of a building or external areas, such as a private road or shared accessway, are subject to mutually enforceable obligations, intended to ensure that facilities or areas are maintained and paid for by those who use them. If a property is sold on a freehold basis (as opposed to by the grant of a lease), it’s not as simple to incorporate enforceable provisions relating to the maintenance of facilities.

One of the most common methods of achieving this is by selling freehold properties subject to an estate rentcharge. Shared areas are increasingly common in new developments and estate rentcharges are being used to ensure that successive owners are obliged to contribute towards their maintenance.

However, a 2016 decision in the Upper Tribunal (Tax and Chancery Chamber) brought some troublesome clarification to the law regarding rentcharges, potentially blighting many freehold properties subject to an estate rentcharge. According to the Law Of Property Act 1925 (LPA1925), if a property owner falls into arrears with their rentcharge, the person entitled to receive it can lease (and take possession of) the property, enabling them to receive income and clear the arrears. In the 2016 decision, the judge said­ that if such a lease is granted, it stays in place until voluntarily surrendered by the person entitled to the rentcharge; it would not otherwise come to an end when the arrears have been cleared.

The implications of this have filtered down to conveyancers and mortgage lenders, many of whom insist that if the property is subject to a rentcharge, a deed of variation must be entered into to amend the provisions of the original deed and exclude the relevant part of the LPA1925. However, due to its wording, there’s an argument that its operation can’t be excluded by a later deed (although it probably could be when the estate rentcharge is created). So, while a deed of variation may make the property acceptable for, and meet the requirements of, a mortgage lender, there’s no guarantee that it will solve the problem and homeowners may still be at risk.

Clearly, the situation is murky. Although the government says it intends to revoke the problematic section of the LPA1925, in the meantime, if you own a property subject to an estate rentcharge, it’s crucial to protect your position by making sure you’re never in arrears. If you’re purchasing a new-build property that’s subject to an estate rentcharge, careful drafting can ensure that you’re protected from these potentially catastrophic consequences.

Our team of expert advisors can help you with the sale or purchase of properties subject to estate rentcharges, as well as any disputes. Please get in touch; we’d be happy to help.

Do you need our help?

Our highly rated residential property team has a reputation for excellence, thoroughly and efficiently helping clients through a range of challenges that may arise.