Member Article

The Leasehold and Freehold Reform Act 2024 removes the “toxic” rights of rentcharge owners to recover historic rentcharges from landowners and reforms the process for their recovery.

Background

Historic rentcharges require owners of property subject to a rentcharge to pay an annual sum (usually a nominal amount) to the owner of the rentcharge.  There are draconian rights of recovery where they are not paid. These are set out in section 121 of the Law of Property Act 1925.  One of the powers includes the right of a rentcharge owner to grant a lease of the property to trustees allow to recover the sums due, with no provisions for the lease to come to an end when the arrears have been recovered.

An example of the use of these powers was seen in Roberts v Lawton [2016] PLSCS 245 where the rentcharge owner was able to grant a 99-year lease of the land subject to the rentcharge, which was in arrears of around £15 pa. In giving judgment, the judge commented that section 121 was “no doubt an efficient and useful provision when drafted, but inflation has made it toxic.  The remedy - draconian as it is - is out of all proportion to the wrong.”

Provisions in the Leasehold and Freehold Reform Act 2024 remove these draconian powers.  They came into force on 24 July 2024.

Regulated rentcharges

The Act introduces the concept of regulated rentcharges and new rules apply in relation to their recovery.  A regulated rentcharge is a rentcharge of a type that cannot be created under section 2 of the Rentcharges Act 1977.  Historic rentcharges of the type seen in Roberts v Lawton are now regulated rentcharges and subject to the new rules.

Note, however, that section 2 permits the creation of estate rentcharges imposed to secure the recovery of estate service charges or the performance of estate covenants (as well as a few other less frequently encountered types of rentcharge). Accordingly, estate rentcharges are not regulated rentcharges and so, unless an estate rentcharge expressly excludes the rights of the rentcharge owner to use the powers in section 121, those rights can still be exercised if an estate rentcharge is not paid.

Removal of section 121 powers

The powers in section 121 cannot be used to enforce the recovery of regulated rentcharges.  Although the new rule came into force on 24 July 2024, it applies from and including 27 November 2023, regardless of the date on which the rentcharge arrears arose.  Unless a rentcharge owner has exercised section 121 powers before 27 November 2023, the rentcharge owner will now have to begin a debt action in the courts to recover arrears of regulated rentcharges.

Notification of rentcharge arrears

One of the issues with the rules relating to the payment of rentcharges was that the rentcharge owner’s powers to enforce a rentcharge arose automatically if the rentcharge was overdue by 40 days or more.  Landowners did not need to be notified that the sums were due and there was no requirement for the rentcharge owner to prove that they were entitled to the payment.  New rules relating to regulated rentcharges change this position.

Before an action to recover arrears of a regulated rentcharge can be commenced, rentcharge owners will have to serve a formal demand on the landowner and give the landowner at least 30 days to pay the sums due.  The notice must include the name and address of the rentcharge owner, the amount of the regulated rentcharge arrears, details of how the amount has been calculated and details of how to pay that amount.

The notice must be accompanied by a copy of the document creating the regulated rentcharge and proof that the title to the rentcharge is held by the rentcharge owner unless this evidence has previously been provided to the landowner and the details remain unaltered.  The costs of preparing and serving the notice must be met by the rentcharge owner, not the landowner.

If the notice is served at an address that is not the land subject to the rentcharge, the notice must additionally be affixed to or left for the landowner on the land subject to the rentcharge or sent by registered post and addressed to the landowner at the address of the land subject to the rentcharge.

As historic rentcharges are usually a nominal amount, the costs incurred in enforcing their payment will no doubt far exceed the amount recoverable from the landowner and will therefore further deter their recovery by rentcharge owners.

No contracting out

You cannot contract out of the new provisions in relation to regulated rentcharges.  Any agreement or attempt to do so is void.

Conclusion

The new rules are welcome and will prevent the exploitation of landowners subject to historic rentcharges.  

However, section 121 problems may still arise in relation to estate rentcharges and the use of estate rentcharges may increase when the provisions in the Leasehold and Freehold Reform Act 2024 banning the sale of leasehold houses come into force. This is because obligations on a leaseholder to pay an estate charge bind successive owners of the property but obligations on a freeholder to pay an estate charge do not unless there is a mechanism such as an estate rentcharge to secure payment.

It is to be hoped that most property professionals are now alert to the problems that can arise under section 121 and seek to exclude section 121 remedies on creation of an estate rentcharge or change of ownership, particularly as lenders usually impose this as a requirement of lending on residential property subject to a rentcharge. However, further reforms may be required to protect homeowners on residential estates. 

This article was originally published in EG.

 

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