17 April, 2020
Historically a rent charge on land has not been an issue on the sale of land or a property, even where it is not collected or demanded, and sellers have been able to deal with the issue in a few ways including:
The ideal position is that the rent is demanded and paid and a receipt to confirm this is available. Where the rent hasn't been demanded or paid indemnity policies have recently been the main way of dealing with a rent charge to enable a transaction to proceed.
This seems like a perfectly reasonable solution, so what has changed??
Mortgage lenders have now decided they do not deem rent charges to be acceptable where they are not demanded or collected meaning a clear payment receipt cannot be obtained. Where this is the case they require the issue to be resolved before they will agree to lend, resulting in purchasers being unable to proceed with the purchase of a property until such time as the rent charge has been redeemed, removed or paid up to date, which includes trying to locate the rent charge owner.
The reason for this change of view is the potential for the provisions under Section 121 of the Law of Property Act 1925 to be used by the rent charge owner to re-coup outstanding rent charges.
Section 121 of the Law of Property Act 1925 grants a rent charge owner remedies for unpaid rentcharges, even if they have not been demanded, if the arrears are unpaid for 40 days or more. The remedies available include the right of entry where the rentcharge owner can enter into possession of the land and take any income from it until the arrears are paid, or allows the rentcharge owner to grant a long lease of the property to trustees for the purpose of raising income to recover the arrears in addition to any enforcement costs and the cost of granting the lease.
Understandably if you have a mortgage lender with a secured loan on a property they do not want to be a position where a rent charge has been unpaid and the owner of the charge can take possession of the land without notifying the mortgage lender, or create a lease over the land.
If it can be shown the provisions of Section 121 have been excluded or that notice must be served on a mortgagee before any enforcement action can be taken by the owner of a rent charge, this may be acceptable to the lender. If this cannot be shown the rent charge will need to be removed or paid before the lender will deem the property as acceptable security for their mortgage funds.
So what can you do to protect yourself against lengthy delays on a transaction or having abortive transaction costs if you are unable to proceed due to a rent charge? Raise the question early to ask your solicitor to check the title for any possible rent charges, if there is a rent charge ask for enquiries to be made at the outset to establish if the rent charge is paid up to date or not, if it has not been paid, this could be an issue and you can decide if you are able to proceed with the transaction.
Looking at this from the development side, how does the issue of lenders not accepting rent charges affect newbuild properties? You may think that it shouldn't, but many new developments require an estate charge/service charge to be paid by each property towards the maintenance of communal areas. Whilst legislation has changed preventing the creation of the majority of new rent charges, an Estate Charge is a type of rent charge that can still be created, and accordingly careful thought and consideration must be given to the drafting of the clauses creating this rentcharge to ensure it is acceptable to lenders.
Both developers and individual purchasers need to be aware of the potential issues if a new estate rent charge does not adequately offer lender protection to ensure the future saleability of the property. The impact of failure to include mortgage protection provisions could result in in prospective purchasers being unable to obtain a mortgage.
The terms of the transfer need to be carefully checked by a solicitor before being accepted, as a developer, you will need to make sure there are adequate mortgage protection provisions within the clauses of the transfer to prevent difficulties for you in selling the property.
For individual purchasers the terms of the transfer will need to be checked by a solicitor to make sure the mortgagee protection provisions that have been incorporated into the transfer are acceptable to the individual lender. As noted above, you can request that this is looked into at an early stage in your transaction to try and prevent issues later on that could result in higher abortive fees if the terms are not acceptable to the mortgage lender.
For more information contact Francesca James or Claire Smith in our Housing & Regeneration department. Alternatively send any question through to Forbes Solicitors via our online Contact Form.