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Buying a Property? Watch out for Rentcharges

View profile for Ric Mapp dos Anjos
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The Government is planning big reforms in the leasehold sector to ban escalating ground rents and new leasehold houses. But are some money-driven developers simply turning to other ways to boost their profits? Experts suggest that rising rentcharges in the freehold sector could cause yet new problems for homeowners.

Increasing numbers of new freehold homeowners are facing high, escalating annual costs called rentcharges. If they do not pay up when due, the person entitled to the rent has extensive powers to recover the money, including taking the homeowner to court and even preventing them from living in their home.

Rentcharges are supposed to help developers and estate management companies maintain communal areas such as private roads on freehold estates. However, it is suggested that developers are increasingly selling new houses subject to rentcharges to obtain an additional revenue stream; one which will seemingly replace ground rent income once the Government has reformed the leasehold sector.

If you are planning on buying a house, you should always consult a specialist conveyancing solicitor who can make sure you do not become subject to onerous rentcharges, saving you a lot of time, money and stress in the future.

What are rentcharges?

Although the name suggests, rentcharges are not related to renting property under a lease. Rentcharges are annual or regular payments due from a freehold homeowner (the Rent Payer) to a third party (the Rent Owner). If the Rent Payer does not pay the rent, the Rent Owner can take legal action.

Rentcharges can only apply to freehold properties – freehold is when you own a property outright, including the land it stands on (rather than a leasehold where you own a long lease to occupy the property for a certain length of time but do not own the land the property stands on).

In theory, rentcharges can be used by developers and management companies of freehold estates to maintain communal areas such as parks, private roads and car parks. But experts are concerned that many developers charging these costs are purely revenue-driven.

Why are rentcharges becoming a problem?

In the residential property world, it is usually the leasehold sector that is known for being problematic and poor value for consumers. Therefore, in recent years, the Government has committed to largescale reforms to tackle issues such as:

  • New build houses being sold as leasehold so developers can reserve an ongoing revenue stream from homeowner’s ground rent payments
  • Ground rent escalation clauses in long leases causing leaseholders’ payments to rise rapidly, causing financial difficulty and effectively making their home unsaleable

2020 may well be be the year that new leasehold houses are banned and ground rent on existing leasehold are reduced to £10 or possibly even zero.

In anticipation for these reforms, it appears developers are turning to other sources of additional revenue.

Rentcharges are lucrative for developers as they are powerful, mostly unregulated and there is little redress for homeowners. This can be a dangerous combination resulting in a wide variety of problems, such as:

Extensive enforcement rights

New rentcharges increasingly include wide rights of enforcement if the homeowner misses a payment, including:

  • Taking the homeowner to court to recover the money
  • The statutory right to grant a lease to trustees to raise the money to clear the rent arrears
  • The right to take possession of the property

Unattractive to mortgage lenders

The Rent Owners’ powerful enforcement rights might undermine the mortgage lender’s interest; therefore properties subject to rentcharges require careful consideration by the lender’s solicitor as they might jeopardize the good security of the mortgage lenders .

As well as their rights of enforcement, the Rent Owner does not need to notify the homeowner or the mortgage lender if they decide to take action.

It may therefore be difficult for homeowners subject to a rentcharge to access the best deals, get a mortgage at all, or sell the property.

Few rights of redress

There are limited rights of redress to protect homeowners’ own interests. For example, there is very limited  relief from forfeiture (a legal remedy which can protect leaseholders from being evicted).

This means if the Rent Owner tries to repossess the freeholder’s home for falling behind on payments (an extreme reaction) the court cannot step in to prevent it.

If a homeowner is threatened by eviction, their only option will be to try and negotiate with the Rent Owner. However, the Rent Owner is in a much more powerful position, reducing the homeowner’s chances of securing a positive outcome.

Will rentcharges be banned?

At the moment, the Government is focusing on the leasehold sector and has made no statements about its intentions to address rentcharges. However, given the poor quality experiences reported by an increasing number of home owners, it is clear that reform will be needed in this area.

For now, buyers should carefully conduct their due diligence when purchasing their next home to ensure they are not caught out.

Do you need advice about rentcharges?

At Harold Benjamin, our specialist residential property solicitors can help you navigate the complex areas of law surrounding homeownership. Whether you are buying a property, or you need advice about your rights and obligations as a homeowner, we can provide clear, in-depth advice.

For homebuyers, we will ensure your purchase progresses as smoothly as possible, meticulously addressing every possible issue to prevent you from becoming subject to burdensome rentcharges or any other negative outcome.

For expert advice, give our residential property solicitors in London a call at your local Harold Benjamin branch in Harrow or the West End. Alternatively, please fill in our online enquiry form and a member of our team will be in touch shortly.