Estate Rentcharges – what do you mean?

Last year all the interest was on Leasehold Houses. Developers were selling new houses as 999-year leaseholds rather than freeholds in the normal way. This meant that the buyer would pay a lump sum, or ‘premium’ as if they were buying a freehold, but also pay a small ground rent to the freeholder (initially the developer) for the duration of the lease, and a service charge to cover the cost of the provision of services.

Leasehold Houses

Most buyers thought nothing of it. They had been tenants of flats for years and this is the way that all flats operate. Besides, it would be explained that the service charge only operated until the local council adopted the roads and the verges, and they could always buy the freehold at an indicative price of a few thousand pounds. The developers might even have gone on to explain that unless they sold the houses leasehold they wouldn’t be able to recover the service charge from all the residents, as once the first buyers sold to a new owner the new owner would not be liable to pay it, because in freeholds:

the burden of a positive covenant (like paying for repairing the roads) doesn’t run with the land and bind the owner for the time being,

whereas in leaseholds it does. This sounds sensible, even if the reason for it sounds rather esoteric – a Maxim of Equitythat lawyers learn about in the first year of their law degree.

Now if the developers had been fair and reasonable (not their natural inclination) this wouldn’t have been a problem. And if local councils hadn’t been subject to enormous financial pressures, so they didn’t want to take over housing estates in the way that they had always done, the problems would have been reasonably short-lived. But developers worked out pretty quickly that as well as sorting out the problem of recovering the cost of maintenance they could make extra money by selling on the freeholds after they had finished the development. As the prices depended on a multiple of the ground rent the developers weren’t content with ground rents of £10 a year, but built in rapidly increasing rents, say £250, perhaps doubling every 5 or 10 years.

The new owners of the freeholds then noticed that they could make even more money by increasing the maintenance charges, getting associates to cut the grass, or manage the estate, and that they could levy charges for alterations to the properties, like changing the colour of the doors or windows, altering the kitchen, or even keeping a pet. Service charges ran to hundreds of pounds a year. And the cost of buying the freehold went through the roof – people were quoted £50,000 or more.

Clearly this couldn’t last, and the first reaction was from mortgagees, who refused to provide mortgages on these properties – so nobody would buy them, and the first buyers were stuck with properties that were essentially worthless.

It was a scandal, and the government had to act. After a lot of huffing and puffing in 2017 and 2018 the Housing Secretary eventually announced on 27th June 2019 that the sale of leasehold new-built houses was to be banned, and that help-to-buy monies were not to be made available for them. There has been no legislation yet (November 2019), but the writing is clearly on the wall, and developers have had to think again.

Estate Rentcharges

So, they went back to their lawyers, who dug out an old device, beloved of the Victorians – rentcharges.

These used to be pretty common. Most Victorian houses in Manchester and the North-West were originally sold this way. The original developers would pay a sum cash-down of a bit less than the market value and would then pay a small annual sum for ever – a perpetual rentcharge. This way the landowner would get both a price for the land and a continuing income, as if he had rented it. The payment was secured in much the same way as rent would be – if payment wasn’t made then the land could be repossessed. In Victorian times this was not a real issue, as all the houses would actually be occupied by tenants anyway, so the payments were made by the landlords, who weren’t too worried if payments were occasionally missed and somebody lost their home.

Times have changed, and they are all owner-occupiers now. Rentcharges were felt to be out of date, as well as giving rise to the sorts of problems set out below, and so the Rentcharges Act 1977 prohibited the creation of most new ones, allowed existing rentcharges to be redeemed (usually for 16 times the annual payment, which was generally less than £12.50 a year), and brought all such rentcharges to an end after 60 years, ie in 2037.

However, some rentcharges survived. The sort that we are interested in is the estate rentcharge. This is defined in s2(4) and s2(5) of the Act.

In plain language, this means that you can have:

  • a nominal payment, which allows the charge-owner to enforce positive covenants against the land-owner; or
  • a payment for the cost of providing services, maintenance etc for the benefit of the land or of the land and other land.

In other words, you can use an estate rentcharge to recover the cost of maintaining private roads, common areas for car parking, cutting the grass and repairing the swings – just what the developers needed.

The Problems with Estate Rentcharges

Like a lot of things, if you don’t change and adapt with the times, install the upgrades, and fix things that go wrong, you end up with a Victorian quill when what you need is a modern laptop.

Rentcharges had been ignored by everybody for so long that they just hadn’t been updated in the way that leasehold law had. If you have a long lease then before your landlord can bring it to an end because of failure to pay service charges, they have to abide by multiple safeguards, which were brought in during the 20th and 21st century, as the balance of power between landlords and tenants changed. 

In comparison, nothing much has happened with the enforcement of rentcharges. This is set out in s121 Law of Property Act 1925. As you will see if you read sections 3, 4, and 5, this is draconian, and allows the owner of the rentcharge to:

  • take possession or
  • grant a lease

of the land if any payment or part is 40 days in arrears, whether demanded or not.

Furthermore, following the case of Roberts v Lawton [2016] UKUT 395 any lease that is granted can be registered against the title in priority to the landowner’s and will continue even after all arrears and costs (which can be as high as the rentcharge owner likes) have been paid in full. The only way the landowner can get their land back is if they can pay whatever the owner of the rentcharge asks for a surrender of the lease.

In that case, the arrears were between £6 and £15. The rentcharge owner had made no demand and refused to prove that they owned the rentcharge without payment of a £60 administration fee. They granted 99-year leases of the land to their directors, as trustees, and sought to register them at HM Land Registry. This was held to be valid and enforceable.

There are stories of all sorts of charges being made, from grossly excessive maintenance expenses to escalating payments growing at more than RPI. As bad as, indeed worse than, leasehold houses. Especially after the CA held in Smith v Canwell [2012] EWCA Civ 237 that the court has a very limited role under s2(5) of the Rentcharges Act 1977 in assessing the reasonableness of any charges raised.

Not only does this cause considerable heartache to the homeowners, but it is of course wholly unacceptable to mortgagees in the modern context. Any property with a rentcharge is virtually unsaleable, unless the holder agrees to exclude these remedies from the rentcharge, and rely on a simple money claim to recover what ought to be small sums of money, or at the least give the mortgagees say 2 months’ notice of intention to enforce.

But until the community woke up to the danger (and there are numerous articles on many solicitors’ websites) they became very popular. HM Land Registry figures, (quoted by the Conveyancing Association) show that 178,769 rentcharges have been registered since 2015, and 29,968 have been registered in 2019 so far, with no doubt more in the pipeline. This weekend there were reports on the BBC Website of house sales falling through once a rentcharge was discovered by the buyer’s mortgagees, and a piece on Money Box on Radio 4 on 23.11.19.

The Solution?

Well, you could introduce the safeguards found in leases to rentcharges, or go back to leases but with more restrictions. Or even resurrect commonholds, which were introduced by the Commonhold and Leasehold Reform Act 2002 but have been almost entirely ignored by the legal and business community ever since.

Some developers use restrictions on freehold titles, meaning that properties cannot be sold without the new purchaser entering into a direct covenant with the management company to pay for the cost of maintenance etc. This can work but needs rigorous administration by all the conveyancers involves, because one break in the chain releases all the future owners from the liability.

Another possibility is to rely on the doctrine in Halsall v Brizell [1957] Ch 169 that in order to take the benefit of a covenant you have to bear the burden. This has been qualified in Rhone v Stephens [1994] UKHL 3 to emphasise that you have to have a choice in the matter. In Halsall you could decide not to make use of the right of way and so not have to contribute towards its repair. In Rhone the owner of a roof couldn’t decide not to make use of the right of support to the building partly below his house, so was not liable. And it can give rise to a lot of argument about how much of the estate you have to use before you are liable, especially if one house has, say, its own parking and so doesn’t need to use the car-park.

Councils could be given more money and given obligations to take over the common parts of developments. This would reduce the problem but not really solve it. And if developers make money on selling off the rights they might not be prepared to co-operate and offer up the land, or keep a small portion of a site unfinished so as to avoid a compulsory purchase trigger. It will need careful legislation if it is to be effective.

Or a decisive government could take the bull by the horns and abolish the doctrine that the burden of positive covenants don’t run with the land. But this is perhaps asking a bit much.

One way or another however a solution needs to be found.

Alan Lodge
Consultant Solicitor
David Lee Solicitors

23.11.19

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