Estate Rentcharges are a common feature on housing estates, particularly where there are communal areas and shared accessways. Historically, Estate Rentcharges have not received too much scrutiny. More recently, the market has drawn attention to the powers within the section 121 of the Law of Property Act 1925. Main concerns relate to enforcement powers contained in the available remedies given to Rentcharge owners. Consequently, there has been an increase in Deeds of Variation to exclude the remedies under section 121 to ensure properties remain mortgageable.
Why Section 121 Remedies are considered High Risk
Section 121 gives rentcharge owners significant enforcement powers if arrears remain unpaid for more than 40 days. In particular, they can take possession of the charged property or grant a lease to a trustee with the intent to recover any arrears and costs. The remedies can be exercised without a formal demand or court order, which differs from your usual debt recovery mechanisms and can result in third parties acquiring possession and rights over the property even though the arrears were small. Unlike usual possession and forfeiture proceedings, there is no obligation to provide notice or offer other kinds of relief. As a result, the market increasingly views section 121 as presenting an unacceptable risk to lenders.
Market and Lender Approach
Lender attitudes to estate rentcharges have changed drastically in recent years resulting in a shift of awareness of the severity of the remedies contained in s121 and the impact it could have on mortgage security. Mainstream lenders are unlikely to accept that a small arrear could trigger an action that could override or prejudice a registered charge, even if the risk of possession if very unlikely. This is why lenders have more recently asked for protection of these remedies by seeing the exclusion of them or by way of deed of variation. Where rentcharge owners are unwilling to agree to these changes, transactions can be delayed and, in some cases, may fall away altogether.
Deeds of Variation as the Practical Solution
Where a rentcharge is reserved under a lease or transfer and section 121 is not excluded, the position needs to be dealt with by varying the original granting instrument itself. In practice, this is done by a deed of variation entered into by original parties or their successors in title (and often with any lender’s consent).
A lease variation dealing with section 121 will typically:
- remove the rentcharge owner’s right to grant a lease of the property to recover arrears;
- remove the right to take possession of the property following non-payment;
- make clear that any recovery of arrears must be pursued through the usual court-based debt recovery process; and
- preserve the landlord’s underlying right to collect the rentcharge as a contractual payment due under the lease.
In addition, care should be taken to ensure the variation binds successors in title to both landlord and tenant, so that the exclusion of section 121 remedies is effective for future dispositions and remains acceptable to lenders.
Conclusion
The powers given under section 121 of the Law of Property Act 1925 allows for enforcement remedies that creates too high of a risk for many lenders and purchasers. Accordingly, it is becoming standard practice to exclude these remedies in leases and transfers. This approach consists with modern day practices and reduces the risk of the mortgageability of properties being affected.