An estate rentcharge is a historic mechanism of the late 19th century employed by estate owners to make it financially possible to meet the increasing housing need and collect rents for the upkeep of their land.
What is a rentcharge?
Subject to limited exceptions, new rentcharges could not be created after 22 August 1977 and certain types of the draconian rentcharges already existing at that date will automatically be extinguished in July 2037. However, the creation of new estate rentcharges is an exception permitted by the Act and the most common use of estate rentcharges today is to protect the payment of service charges.
In the 1970’s the Local Authority used to adopt the estate roads and open spaces upon the completion of a development leaving no shared facilities for the owners to maintain. More recently however, new planning regimes, designed to limit Council expenditure, have resulted in increasingly elaborate Section 106 Agreements which provide for roadways, sustainable drainage systems, open spaces, recreation areas and car parking to be privately maintained.
The expense and responsibility for organising this rests with the developer, and in order to ensure that the development remains attractive to all future sales the properties on the Estate are usually sold on the premise that a management company will be appointed to organise the maintenance of shared facilities, and the individual property owners on the estate will share the cost of this maintenance.
As a direct result of this the use of estate rentcharges has been a popular trend over the last two decades and this device is employed by imposing a charge on the property requiring the plot owner to pay a service charge to the developer towards the upkeep of the shared facilities. If the plot owner fails to pay the nominal amount, the developer has a right to enforce the payment by using a mixture of common law, statutory and other remedies - such as a right to enter into possession of and hold the Property or any part thereof, and have the income from the Property.
The problems surrounding estate rentcharges
Whilst an estate rentcharge will often only require landowners to make nominal or fairly insignificant payments, the automatic statutory remedies available to the developer on default can be severe. In most cases if the estate rentcharge payment remains unpaid for 40 days, there is a statutory right for the developer to grant a lease to trustees over the Property for the purpose of raising monies to clear the arrears, interest and costs. There is no requirement to tell the lender that a lease is being granted and the lease will continue for its full term of years, even if the rentcharge arrears are paid or the rentcharge is redeemed in full. This threat to the lender’s security of forfeiture and the time, cost and uncertainty of applying for relief is having an adverse impact on the lender’s appetite to take such a property as security.
An alternative available to developers
It is obviously essential that obligations to pay for the maintenance of shared facilities are binding and enforceable on all householders on an estate. Without this, some will pay and some may not. If there are insufficient funds, facilities may fall into disrepair or common areas may become overgrown and neglected. This in turn will spoil the enjoyment and amenity of the properties and may even lead to a fall in value of the houses.
A number of developers and management companies setting up new residential freehold estates are however moving away from estate rentcharges and are creating a contract-based estate service charge regime which is not an estate rentcharge. Under this regime, each homeowner will have a restriction noted on the title to their property at the Land Registry which prevents them from disposing of their property without the consent of the management company. Unlike estate rentcharges the obligation to pay the money due or to perform the positive covenants will not pass with the land automatically upon sale. Instead each seller would have to agree an indemnity covenant with their buyer to enter into the same form of Deed of Covenant.
The management company will in turn, only give the necessary consent to release the property from the restriction when the incoming-purchaser enters into a Deed of Covenant with the management company to contractually commit to pay the estate charge and to observe and perform the positive covenants. In effect, this sets up a chain of covenants that will pass with the Land and is a far more attractive device for buyers and lenders.
Although estate rentcharges are and have been a very effective vehicle for enforcing covenants or obtaining contributions towards the cost of service maintenance and repairs, they are also affecting lending on new build freehold residential properties with increasing frequency and a growing negative presence in the media. With careful drafting and specific obligations within the plot transfer a Deed of Covenant can be as effective as the estate rentcharge without the potential adverse consequences.