What is a rentcharge?

A rentcharge is an interest in land which secures a periodic sum. The beneficiary of the rentcharge, called the Rentowner, is entitled to enforce their interest in the land if the periodic sum is not paid.

The term rentcharge is interchangeably used to describe both the interest in land, and the periodic sum it secures.

There are a number of different types of rentcharges, but this article focuses on Estate Rentcharges.

What is an Estate Rentcharge, and what is it used for?

Estate Rentcharges are permitted under the Rentcharges Act 1977 and are becoming increasingly more common on new residential developments. Estate Rentcharges enable Rentowners to recover the costs of maintaining any privately shared areas, roads and services from the owners of freehold properties that have the right to use such shared areas.

What defines an Estate Rentcharge is its two primary purposes:

• To enforce positive covenants (a covenant supporting rentcharge) and/or
• To secure payment toward services to be carried out by the Rentowner (a service charge rentcharge)

Covenant Supporting Rentcharge Schemes

The purpose of this type of scheme is not to secure payment (as it must be nominal), but to act as an anchor to secure positive covenants.

Purchasers of a freehold property which is subject to an Estate Rentcharge will often be required to enter into a Deed of Covenant with the Rentowner of any shared or communal areas. The Deed will contain a covenant to pay a contribution towards the cost of maintaining the same.

The Deed will typically provide for an express right of entry or re-entry creating the rentcharge, which is exercisable following breach of other positive covenants and not just the covenant to make payment.

Service Charge Rentcharge Schemes

This type of scheme is typically used in larger developments of freehold houses where there is a more complex system of obligations to secure.

Often, the Rentowner will be a management company which has been deliberately set up to maintain and provide services in relation to the common parts of the development as a whole.

The Estate Rentcharge will be secured against each freehold house so that the owners (and their successors in title) are bound by an obligation to contribute towards the cost of Estate Rentcharge.

Why are Estate Rentcharges being used by residential housing developers?

The most common way of ensuring the ongoing performance of positive covenants by homeowners has been to provide for each to successor in title to enter into a direct covenant with the services provider (usually a management company or the freeholder), which in turn is secured by a restriction on the Land Registry title register of the property.

However, it is possible that the restriction securing this mechanism has not been appropriately registered against the Land Registry title, and in turn a deed of covenant may not have been entered into. This would mean that the proper performance of the positive covenants may not be enforceable against the successor in title.

A rentcharge does not make positive covenants run with the land, but it can circumvent the issue of non-performance through the remedies either contained expressly within the deed creating the charge, or through the statutory remedies attached to it. The rentcharge will continue to bind the land it is charged against unless released by deed, and therefore creates greater security for the ongoing performance of the positive covenants than is traditionally provided for by a deed of covenant and restriction on title alone.

Protection for buyers when there is an existing Estate Rentcharge

For those buying a property which is already subject to an Estate Rentcharge, it is important that any mortgage lender is made aware of its existence. Certain lenders require various protections to be in place when granting a mortgage over a property that is subject to a rentcharge.

The key protections available to a buyer where there is an existing Estate Rentcharge are:

• Ensuring that all Estate Rentcharges are and have been paid when due (without need for demand by the Rentowner)
• Considering whether the deed securing the rentcharge can be varied or
• Considering whether indemnity insurance may be appropriate

If you would like any further guidance on Estate Rentcharges or rentcharges more generally, please contact our Residential Property department for expert advice.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.