Rent Charges – what are they and why do they pose a problem for freehold houses on a managed estate?

Historically, when developers completed a new site and sold off the individual freehold plots, all that remained of the developer’s freehold title were small patches of common areas. The responsibility of maintaining these common areas often fell to the local Council.  However, for more exclusive estates, such as converted country houses, substantial parts of the title may be used as parkland, resulting in an estate rent charge. 

As time progressed, developers started to use rent charges as a method of requiring the freehold owners to contribute towards upkeep of the development’s common parts.  Failure to pay could result in the rent charge beneficiary (usually a management company) taking action under Section 121 of the Law of Property Act 1925 (“the Act”) to recover the debt. This was either by the freehold property being repossessed and sold, or the property being leased to a third party.

This causes difficulties for mortgage lenders, as there is no requirement to pre-notify a lender of such action taken to recover the debt, nor does the lender have rights after the property has been re-possessed to remedy the breach. Consequently, the lenders security is at potential risk throughout the duration of the term of the mortgage.

Deed of Variation providing mortgage lender protection:

There are many reasons why an owner may not be able to keep up with payments throughout the mortgage term. For example, during COVID-19 many people became too ill to work, were furloughed, or lost their regular income.  It is now common  for the buyer and/or their mortgage lender to require the rent charge beneficiary to enter into a deed of variation confirming they will not exercise their rights under S.121 of  the Act in the event that the rent charge falls into arrears, without:

• giving the registered lender no less than 21 days’ prior notice of such intention, and;
• not to grant a rentcharge lease – or if one is created, to surrender the lease on settlement of all debt and associated costs. 

Without the deed of variation, lenders may not  approve the loan application, and the sale/re-mortgage would likely fail. Even where there is a cash buyer, they will still likely require the deed of variation, as the buyer may wish at some point to mortgage their property, or upon a future sale where a buyer may purchase with a mortgage.

Debt Recovery:

Giving the lender the protections under the deed of variation would not prevent the management company from bringing an action under S.121 of the Act. Instead, it merely places the lender on notice, giving them the opportunity to step in and take appropriate action to secure their interest. 

That said, by far the most appropriate course of action in an arrears situation would be to bring ordinary debt recovery proceedings in the County Court to recover any debt and enforce a Court Judgment as necessary. A debt recovery action would be the usual course of action for recovering arrears in any event, and is quicker and more cost-effective.   

SE-Solicitors advise clients in regards to rent charge deeds, deeds of variation and for debt management and debt recovery matters. For more information about our Property Portfolio Management services, including Debt Recovery, please click here.