Rent charges and estate rent charges have been in existence for years; however, defaulting on payment can be a burden with disastrous consequences for both the payer and the lender.
What are the charges?
Estate rent charges are common among new-build freeholds and are employed by developers to finance work on communal facilities and areas. Rent charges, on the other hand, are listed on the property title deeds as an annual payment to a third party, many of which have been in place for centuries.
Rent charges add another layer of complexity and cost to homebuyers after conveyancing costs and purchasing fees have been paid. Some banks are refusing mortgages on new-build freehold properties where developers are including uncapped management charges.
The 1977 Rentcharges Act states that existing rent charges will be written off on 22 June 2037, after which no new rent charges can be created; however, many historic charges prevail. After conveyancing costs and purchase, a buyer may currently be faced with historic rent charges by a third party, such as a former developer or landowner. If not paid, these charges could result in the buyer being required to forfeit their freehold.
In some instances, it may be possible for the payer to terminate or negotiate the agreement of rent charges with the rent receiver. This is likely to be in return for an agreed lump sum; however, there is no statutory system for challenging charges.
When calculating your conveyancing costs, it is therefore important to factor in any associated rent charges.
Any default on such charges by the payer could also jeopardise the lender’s security. This should be a key consideration when undertaking risk assessment during underwriting.
Lenders can seek resolution in a few ways. One of the options is to seek a right to grant the lease of the burdened property to trustees to raise the funds to clear the costs owed. Another method is via statutory right of entry, prohibiting the payer access until all charges are paid; however, the only mechanism of enforcement is court proceedings.
Either approach could impinge on the lender’s future security; as such, some lenders now require a minimum of two months’ notice when it comes to rent charge arrears in an attempt to protect their interests.