Rentcharges On The Rise – What Conveyancing Firms Should Be Aware Of

You may not be a big movie fan, but I’m guessing you’ve probably seen Jurassic Park at some point – you know the one, scientist ‘resurrects’ dinosaurs, creates theme park, dinosaurs run amok, and repeat.

In the first Steven Spielberg-directed film, Jeff Goldblum plays Dr. Ian Malcolm and on learning about the park, the dinosaurs and how the scientists intend to control the evolution of the dinosaurs, he rails against this, saying that they are trying to control the uncontrollable. ‘Life finds a way’ being his famous quote.

I’m convinced that a very small number of developers (in our property world, are of the same persuasion, because it seems self-evident that having moved to take away their cash cow of leasehold houses, they are now looking for other means by which to maintain their profits. ‘Overtly commercial developers will find a way’, we might believe and that ‘way’ appears to be, at the moment, estate rentcharges and variable rentcharges.

For those that don’t know, these rentcharges are two of the few permissible rentcharges still allowed under the Rentcharges Act 1977.  Very similar to ground rent, they need to be paid annually and they are secured on land. If you’re looking for a good piece on rentcharges, how they have originated and evolved, then I would point you in the direction of the Shoosmiths website which has an excellent piece here.

The point is that, we are now seeing a growing number of instances where developers are creating rentcharges over properties, where they would have created leasehold houses in the past. And, while historically those rentcharges would have been for a very small amount, lo and behold, some of these new ones are very different.

So, we’ve seen some escalating rentcharges introduced by developers, rising from £120 per year at RPI with a further £20 increase every six years. Essentially, what the developers are doing is creating a new financial asset class to replace the one they have lost under the new leasehold house rules.

While they may be advertised as being collected to cover the cost of maintaining communal gardens, the increases bare no relevance to the cost of maintaining them and, more worryingly, the increases could easily catch out the unwary property owner triggering enforcement proceedings which include the granting of a long lease over the land under s.121 of the Law of Property Act 1925.  Nationwide are so concerned about these powers that its UK Finance Handbook Part 2 responses state that any such rentcharge includes a clause to the effect that use of these powers cannot take place without two months’ notice having been served upon them.

Newer rentcharges are also coming with other stings in the tail, notably the inclusion of additional rights of enforcement, plus attaching the notice required by lenders to these additional rights rather than the existing rights under s.121 of the LPA. We are certainly concerned about this because it might trip up an unsuspecting conveyancer who, on missing this, finds themselves in hot water when the client comes to realise what has been put in place and has to pay for a deed of variation or worse.

If you wanted a clear idea of what is at stake here, then look at the latest Land Registry numbers on rentcharges, which we have secured through a Freedom of Information request, and we now have permission to publish:

• The total number of properties subject to a rentcharge as at 2019 is 1,056,592.
• The total number of ‘rentcharge titles’ registered at 10,647.
• 178,769 rentcharges have been registered since 2015.
• 29,968 rentcharges have been registered in this year alone, although more may have been lodged but not completed.

One suspects that more and more developers will look to introduce rentcharges on their newly-built properties as they realise what can be ‘achieved’ – and let’s be in no doubt, as the Shoosmiths article points out, ‘the person entitled to receive a rentcharge has powerful legal rights to recover the sums due’ including the ability to ‘forfeit the owner’s title to the property, take possession of the property and use the income from it to clear the arrears or grant a lease of the property to trustees to raise and pay the arrears and associated costs’.

Those who believe they can somehow bypass the payment of such rentcharges could find themselves, theoretically, losing possession of that property, and (more likely) they’ll have to come to an arrangement with the rentcharge owner before they could move forward with any plans they might have for the property.

We are clearly concerned about the increased use of rentcharges – especially as a substitute for the creation of leasehold houses and the ability to sell on the freehold as developers have been doing to earn income. It appears that some developers have ‘found a way’ to get around the excellent work that has been carried out in the leasehold sector, and there is significant potential for serious customer, and conveyancer firm, detriment if we do not get a handle on this.

Our focus will therefore be on education and understanding in this area, and making our member firms aware of what might be hitting their desks, but it also seems quite obvious that we need further reform in this area, in order to ensure one unfair approach is not simply replaced by another.

 Beth Rudolf is Director of Delivery at the Conveyancing Association