Rentcharge Hell - Advice needed

Robyn182

princeofpounds said:

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.

Hi again,

I’ve gone over the TP1 again, specifically the Rentcharge section. Just a note and I don’t know whether it is relevant but they refer to it as ‘rentcharge’ not ‘estate rentcharge’.

it goes on to state the following:-

“Such rentcharges to be forever charged upon and issuing out of the land hereby transferred provided that the management company shall have the remedies for non-payment of rentcharge specified in Section 121(2) and (3) of the Law of Property Act (1925).”

what does section 121 mean in relation to this?

i also found why Coventry Building society say it’s not a problem is because we will become members of the management company.

“ESTATE RENT CHARGES
If an estate rent charge is payable on a property, we confirm this will be acceptable on the basis that one of the following conditions can be satisfied:
1. The provisions under section 121 of the Law of Property Act have been excluded under the estate rent charge clause.
2. The estate rent charge clause includes a mortgagee protection clause, which states that notice of at least 28 days is to be given to the mortgagee prior to any enforcement action being taken by the owner of the estate rent charge.
3. The owner of the estate rent charge is a management company comprising of the residents, who are the shareholders of a private freehold development . 

If condition 2 (above) is satisfied, you should also consider whether a suitable indemnity policy should be taken out to further protect our interest (and the onus shall be on yourselves to approve the policy in accordance with the provisions of the Handbook).

Flugelhorn

Robyn182 said:

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? 

Our vendors arranged the DoV's solicitor  for us in similar situation, it was done in our name and overseen by our Solicitor and tested against requirements of major lenders - it was signed by us, the management company sols and the developers sols - it is noted at the LR, lots of people have done them locally 

Robyn182

Flugelhorn said:

Robyn182 said:

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? 

Our vendors arranged the DoV's solicitor  for us in similar situation, it was done in our name and overseen by our Solicitor and tested against requirements of major lenders - it was signed by us, the management company sols and the developers sols - it is noted at the LR, lots of people have done them locally 

Thank you. How long did all all take and the cost of getting it done? 

Assuming this was done before exchange and completion? 

Thanks 

princeofpounds

Thanks Robyn182 for the further reply. I'm sorry it has taken me a few days to get back to you.

It may well be referred to as 'rentcharge' in the title - it is a rentcharge in basic terms. What makes it an estate rentcharge is the purpose and most importantly the variability of the charge. It's based on the same legal mechanism, but the legal situation you end up in is very different so that's why the distinction is so useful.

The reason is that fixed rentcharges can be redeemed (paid off to remove them) under law, and indeed all of them will expire by (IIRC - I could be off as I haven't bothered to check) 2037 under legislation introduced a few years back. So they are very easy to deal with. This legislation doesn't apply to estate rentcharges. 

It sounds like the title explicitly does include the Section 121 provisions, at least on my reading. That means that if the estate rentcharge is not paid, they can enter your property for the purpose of taking possession and create a lease on it that they can then sell to another party for the purpose of recovering the money. This is the problem that a DoV is intended to correct. The link below is the relevant legislation. 

https://www.legislation.gov.uk/ukpga/Geo5/15-16/20/section/121

As for the lender - ok that's very interesting. You're right, Coventry do permit lending when you will be a member of the management company. I hadn't spotted that they require only one of the three conditions to be fulfilled. A small handful of other lenders do too, looking at the UK Finance Handbook link provided, although most of them are just different brands of Coventry as far as I can tell. 

So your solicitor is right - they can let you proceed as the lender is satisfied. Given what you said about how the communicated with you on the issue it seems they are a little bit surprised too!

However, you have a slightly difficult choice here, because it's still the case that most lenders will not lend. And you can't be entirely sure what the prevailing standards will be in the mortgage market when you come to sell. Perhaps some of them will loosen up and follow Coventry's standard, or perhaps those following Coventry's standards will tighten up further. Or you could take a view that you could get the DoV organised after purchase, although there's no guarantee on that you would hope a residents' association would be helpful in that respect.

This probably explains why you see conflicting advice from solicitors (as I have) in recent times. Some solicitors might say that it's not a problem for you personally, so go ahead. Others think one step ahead and say 'it may be a problem for others' and caution you. I would tend to sit in the caution camp, partly because these things have a tendency to tighten up over time. The other part is that whilst the Coventry approach is very sensible from a practical point of view, it's not really watertight in the legal sense - it relies on your being a shareholder of the management company and their goodwill towards you as a shareholder, when in reality they have no such obligation.

Personally I would either want the DoV or at the least a written assurance from the management company that they would provide one after the transaction. 

Flugelhorn

Robyn182 said:

Flugelhorn said:

Robyn182 said:

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? 

Our vendors arranged the DoV's solicitor  for us in similar situation, it was done in our name and overseen by our Solicitor and tested against requirements of major lenders - it was signed by us, the management company sols and the developers sols - it is noted at the LR, lots of people have done them locally 

Thank you. How long did all all take and the cost of getting it done? 

Assuming this was done before exchange and completion? 

Thanks 

It was all done before exchange (early March) and registered after completion  along with the all the other registration - The issue was raised in the December and various bits of paper were circulated including to us to sign, the feeling was it was no more than a few weeks. Our solicitor commented that it seemed the management company / developers were quite used to this and there was a fairly standard DoV produced

The vendor covered the cost so I don't know what it was

GDB2222

DOVs seem to be becoming commonplace, so hopefully it won’t hold things up too much. 

Flugelhorn

GDB2222 said:

DOVs seem to be becoming commonplace, so hopefully it won’t hold things up too much. 

that was very much the view of our solicitor - they were needed by so many of the large mortgage lenders that there were bound to be many being done 

Robyn182

This has all been really useful so I appreciate everyone’s feedback! We are proceeding with a DOV, no idea of timescales at the moment! 

deltrotter

I had to do the same last July when buying a property on a two year old estate Robyn. Halifax would not mortgage without it and my solicitor also said she would not deal with me without it (scared of being sued later?).

It took days rather than weeks but I guess it all depends on how fast parties respond.

Robyn182

deltrotter said:

I had to do the same last July when buying a property on a two year old estate Robyn. Halifax would not mortgage without it and my solicitor also said she would not deal with me without it (scared of being sued later?).

It took days rather than weeks but I guess it all depends on how fast parties respond.

That’s good to know and fills me with some hope. Unfortunately we don’t seem to be moving very fast in this transaction, our solicitors actually asked for this back in November and it’s only been acknowledged by the sellers solicitors this week so I don’t feel like we will have as much luck, but one can hope