Rentcharge Hell - Advice needed

Robyn182

We are 4 months into buying a freehold detached property on an estate that is around 6 years old. 

It has now come to light that the property is subject to a Rentcharge which is owned by the management company.  The Rentcharge is minimal at £5 per year and our sellers have told us they knew nothing about it.  Our conveyancers have put the fear of god into us with regards to the risks of buying a property that is subject to a rentcharge and suggested we ask for a Deed of Variation which she said would assist us and any future purchaser - She has also advised us this is a lengthy process and we could be waiting another couple of months for this to be created and signed by all the parties as they seem to only use snailmail to correspond (my mind is still blown by this!!)

We have since had a phone call from our solicitors to advise that our mortgage company has actually said they are happy for us to proceed without a Deed of Variation or Indemnity Policy. 

I guess we have a couple of options: -

• Our mortgage company have advised they are happy for us to proceed WITHOUT a Deed of Variation or Indemnity - We can just proceed as it and run the risk of coming across this issue when we sell!
• Continue to ask the sellers to get a Deed of Variation drawn up for our peace of mind - This may take months. 
• Apparently indemnity insurance isn't an option for us due to the rentcharge being paid to the management company.  I have no idea why not and they couldn't give me any other context.

I wondered whether we could progress with the house purchase without the Deed of Variation and instruct a solicitor after we have bought the property to get a Deed of Variation drawn up whilst we live there for future use? 

Any experience or advice welcome.  We feel stuck to know what to do.  This has already been a painful process and the thought of another 2-3 months is weighing heavy on our shoulders! 

Thanks 

GDB2222

Your solicitor is absolutely right. You will have trouble selling without a deed of variation.

Rentcharges are draconian. Essentially, the management company can take your house away from you if you fail to pay the service on time (even just £5). The deed of variation helps, although it does depend what the deed says. 

daveyjp

Rent charges are draconian (the beneficiary can make you a tenant in your own home with no notice if you fail to pay what is due on time, even if it is not demanded) that's why your conveyancers are raising it as an issue.  

This is quite a good explainer to the background and the remedy, which is a Deed to convert it to a charge.

https://wslaw.co.uk/insight/rentcharges-a-plague-on-your-houses/

GDB2222

Two people think "Rentcharges are draconian."

GDB2222

Oh, and it may be £5 now, but what will it be in the future?

princeofpounds

Hi Robyn.

First, some background on estate rentcharges (bit of copy and pasting from a previous post of mine for ease, in case anything seems familiar to people).

These are basically covenants on a freehold house that allows someone to collect money to pay for management of the communal parts of the estate.

It is analogous, but not the same as, service charges on a leasehold property. Confusingly it is NOT the same as a 'regular' rentcharge, which is just a fixed sum of money payable to a rentcharge owner and the legal implications are very different. 

Estate rentcharges have been used for many years as a mechanism to pay for this kind of communal management. In practice they mostly worked ok, although they had one problem in that there was no effective regulatory/judicial oversight of how they functioned. In the case of a service charge for leasehold properties, you can always appeal to a Tribunal if you think you are being charged inappropriately. Many estate rentcharges are actually owned by a Residents Association, so there was little incentive to mismanage in those cases, but some were owned by third party corporations, not all of whom were above-board.

However a bigger problem then arose as a result of a legal case - Roberts v Lawton (2016) aka 'the Morgoed case'. Morgoed bought a bunch of estate rentcharges and looked for instances of non-payment. They then took someone who had not paid and then attempted to take legal possession of a title to their home on the basis of some clauses in the Law of Property Act 1925 (Section 121 specifically). For decades no-one really thought the courts would allow this, but it turns out they decided it was the law, even though they described this as 'draconian'.

So, over the following years, mortgage lenders started to realise this issue and increasingly they now refuse to lend on properties unless those Section 121 powers are modified/removed. The specific problem is that the mortgage lender has no opportunity to be notified of any non-payment. In a leasehold property, they must be told - to protect their security, they would then pay the service charge or ground rent themselves, add it to the mortgage, and hit the borrower with penalties or even take possession themselves. They don't get to do that with an estate rentcharge, so they could end up with a mortgage that isn't being paid and no opportunity to repossess the property.

So, firstly I am VERY surprised that your lender is happy to proceed without a Deed of Variation. Given that the estate is so new, do you know if the Section 121 powers have already been modified in some way?

Can I ask which lender you are with? Almost all lenders now demand the modification/removal of the Section 121 powers. The link below shows the Lender's Handbook entry for this issue, and you can see how many of them publish this requirement.

(where the entries say something like 'See 1.11a' or give a contact address, that just means contact them for further discussion as not every lender will publish their policy openly, but most now fall in line with the policies you see published in the table).

Lenders' Handbook - UK Finance Mortgage Lenders' Handbook

Having said that, I have seen a handful of practical instances where this was not enforced - amazingly, because some solicitors still seem to not be aware of these issues and/or are not reading the updated conveyancing guidelines of the lenders properly. 

The problem you may have is that even if your solicitor and lender are happy to let this proceed (and I would love to understand the grounds on which they decided that - you must ask them - I can only think that the rentcharge owner has provided an assurance they will agree one or that the Section 121 powers are already modified) then this could be a problem you face on resale later down the line. Whilst most rentcharge owners will now consider providing DoVs on this issue, I don't think there is actually any legal compulsion for them to do so yet. This really should be the current seller's problem, not yours as a buyer.

Drawing up a deed of variation should not take months. It's a very, very simple deed with about two lines of text. But it's conveyancing, so it might take a while.

As for the issue of indemnity, it sounds to me like someone might be confusing indemnity insurance for unpaid rentcharges - something it is possible to get - with estate rentcharges (which as I said at the outset are very, very different). But anyway, the basic thing about indemnity insurance is that you can usually only get it for legal problems when the person who might take legal action against you does not appear to be aware there is a problem. Once you talk to them about it, the indemnity is gone.

princeofpounds

GDB2222 said:

Two people think "Rentcharges are draconian."

That was exactly the adjective used by the judge in the Morgoed case, who then decided that draconian was the law.

By the way, we should stop calling them 'rentcharges' and call them 'estate rentcharges'. They are not the same thing. Regular fixed rentcharges are very easy to deal with. Estate rentcharges without Section 121 provisions modified/removed can be a major problem these days.

Robyn182

Wow thank you Princeofpounds for that really in depth response, I really appreciate it. 

I’m going to go through all the points you have raised and will respond once I know. Where would I find the Section 121 provisions? I have all the TP1 documents and details of the Estate Rentcharge in there too. 

The mortgage company is Coventry Building Society.

I think we have decided that we want to proceed with the purchase but on the basis that the Deed of Variation is drawn up, we have been told this is the sellers obligation to pay for this, but our solicitor draws up the document.  I will be double checking all the details and the points you have raised with my solicitor on Monday. 

GDB2222

princeofpounds said:

GDB2222 said:

Two people think "Rentcharges are draconian."

That was exactly the adjective used by the judge in the Morgoed case, who then decided that draconian was the law.

By the way, we should stop calling them 'rentcharges' and call them 'estate rentcharges'. They are not the same thing. Regular fixed rentcharges are very easy to deal with. Estate rentcharges without Section 121 provisions modified/removed can be a major problem these days.

I totally agree with you. And I agree with what you wrote in your much longer post. 

This is a problem for the seller to sort out. The OP should not go ahead, even if (surprisingly) their particular lender is prepared to go ahead.

GDB2222

Robyn182 said:

Wow thank you Princeofpounds for that really in depth response, I really appreciate it. 

I’m going to go through all the points you have raised and will respond once I know. Where would I find the Section 121 provisions? I have all the TP1 documents and details of the Estate Rentcharge in there too. 

The mortgage company is Coventry Building Society.

I think we have decided that we want to proceed with the purchase but on the basis that the Deed of Variation is drawn up, we have been told this is the sellers obligation to pay for this, but our solicitor draws up the document.  I will be double checking all the details and the points you have raised with my solicitor on Monday. 

I'm pleased you have decided this, as you risk ending up with an unsaleable property if you don't.

Robyn182

Thanks for the comments. Yes we wouldn’t feel comfortable moving without it. I just hope it won’t take long. 

Am I right to assume that the rent charge owner, (the management company) doesn’t have to agree to this Deed of Variation? Assuming they do agree to it, who actually has to sign it? Us, the sellers and management company?