Is your Service Charge not fit for service?
Rentcharges are a dying breed, pushed to the fringes of survival with the enactment of the Rentcharges Act 1977 (“the Act”). The Act ensured that rentcharges will face an extinction event on 22 June 2037, with nearly all rentcharges set to be extinguished, and somewhat more importantly, that no new rent charges can be created. However, as ever in law, there is one rather large exception. Capable of both survival and creation, the estate rentcharge can, if not properly dealt with, cause misery to both homeowners and prospective buyers.
In its most common form, the estate rentcharge is most recogonised as a service charge. In essence, if a sum is paid annually or periodically, and is charged on or issues out of the land (except rent under a lease) then that payment will constitute a rentcharge. It also grants the person entitled to that interest in the land the ability to enforce it.
At first glance, this may not seem unreasonable. As now favoured in many developments, if a management company has been created to maintain common parts, then it would seem reasonable that the management company is able to enforce its interest if a house on the estate decides not to pay its contribution.
However, this is where the underlying danger of estate rentcharges comes to the fore. An estate rentcharge is not a personal interest, it is an interest in the land. By virtue of being an interest in the land, it is enforceable not only against the initial offending homeowner, but against their successors in title. Usually, there would be a form of statutory protection, perhaps a notice provision.
This is not the case with estate rentcharges. Section 121 of the Law of Property Act 1925 (“the LPA 1925”) contains two draconian remedies for recovery to the aggrieved party if payment of the rentcharge remains unpaid after 40 days:
A right to enter into and take possession of the land, and take any income from the land (S121 (3) LPA 1925);
A right to grant a lease of any length to a trustee (S121 (4) LPA 1925).
A charge that is created as an estate rentcharge can mean that a lender’s security is put at risk. As a rentcharge will bind future owners, a prospective lender will therefore be concerned that if a payment has been missed, their security may be compromised.
An estate rentcharge does not, however, have to pose a problem. If drafted correctly at the outset, it is possible to maintain the benefit of paying a service charge to maintain communal areas, without being concerned that missing a payment could leave a property unsaleable.
If you require assistance with an estate rentcharge please contract our residential Property department in Minehead on 01643 707777 or Taunton on 01823 745777