This week’s Legal Update focuses upon the much-publicised Leasehold and Freehold Reform Act 2024 (“the Act”) that received Royal Assent on 24 May 2024. The Act is understandably being heralded as the biggest shake up to leasehold (and freehold ownership) reform in over 20-years. The intention of the Act, amongst other things, seeks to give homeowners greater protection and powers in respect of a number of issues, one of which is, the often misunderstood, rentcharges.

Whilst the Act has not fully come into force, a number of provisions did so on 24 July 2024. One of those was Part 7 of the Act which has brought about change in respect of how rentcharges are dealt with and how the Rent Owners can recover them. 

What is a rentcharge

Rentcharges come in two forms and are generally seen in relation to freehold properties forming part of a wider managed estate but they can apply to leasehold properties too. The two forms are:-

1. Fixed rentcharge; and

2. Variable estate rentcharges.

Our Legal Update here deals with the detail of each type but in summary, the Act has changed the position in terms of the collection and enforcement of fixed rentcharges only.  It has not changed the position insofar as variable estate rentcharges are concerned - more on this later.  

Variable estate rentcharges are often paid like a leaseholder pays a service charge.  The are becoming very common place and arise where parts of an estate are managed, perhaps where the local authority has not adopted roads or the estate contains green or recreational areas that give rise to maintenance and insurance costs.  The properties on that estate will be subject to a variable rentcharge to cover those costs.  The manager of the estate will often be the beneficiary of the rent charge and is referred to as the “Rent Owner”.

The Act

Prior to 24 July 2024, the Rent Owner, could enforce non-payment of such sums by way of the remedies set out at Section 121 of the Law of Property Act 1925 (“S121”) that provides:

Possession Remedy

A Rent Owner the right to take possession of, and hold, the property, and take income from it until the debt is paid;

In short, where the property owner is indebted to the Rent Owner, the Rent Owner can obtain an Order for possession of the property in the County Court, evict the property owner and then rent the property out, or otherwise raise income from the property to cover the debt.  The “debt” here will include the rent charges owing and set out in the possession claim plus all additional accruing sums whilst the Rent Owner is in possession, as well as any costs incurred in the recovery process; or

Granting an underlease remedy

The ability of the Rent Owner to grant a lease over the property to a trustee for the purpose of raising monies to clear the arrears, interest and costs. Any lease granted will continue for its full term of years, even if the rent charge arrears are paid or the rent charge has been redeemed in full.

As is clear, the remedies available to Rent Owners under S121 are powerful and draconian, especially in circumstances where such sums of rentcharge are nominal, as is quite common.  However, the Act has now changed this statutory right of enforcement and brought about set procedures that a Rent Owner must comply with in order to collect sums due under the rentcharge.

What has changed under the Act

The Act has introduced a new definition of “regulated rentcharge” which, in broad terms, are all rentcharges save for estate rentcharges, statutory rentcharges or those made by a Court order or relating to certain family trust arrangements.

The Act has completely removed the Rent Owner’s enforcement remedies under S121 referred to above in respect of those rentcharges that fall within the new “regulated rentcharges”.  The Rent Owner may still proceed to demand and collect the rentcharges but only once it has followed a detailed procedure.

The procedure referred to at Part 7 of the Act, which can be seen here, introduces new Sections 120A - D to the Law of Property Act 1925, that requires the Rent Owner to demand the rentcharge in a statutory format and which must be accompanied with the instrument that created the rentcharge.

Given the onerous requirements of Part 7 of the Act, the fact that S121 remedies are no longer available and that most such rentcharges are often fairly nominal sums, it is suspected that there will be little motivation for Rent Owners to actually demand or pursue them.

The changes here are clearly welcome news to property owners and lenders alike who have often been deterred to lend against properties that are burdened with such rentcharges.

So, what about variable estate rentcharges?

Many Transfer Deeds that govern the use of large estates of freehold houses, will contain an obligation on the property owner to pay a Rent Owner or usually, a Management Company, a variable estate rentcharge for the maintenance and repair of common parts. These can be sometimes be substantial sums in comparison to fixed rentcharges and they operate on a similar basis to service charges payable under a residential long lease.

Variable estate rentcharges are NOT caught by the definition of “regulated rentcharges” as set out in the Act. Accordingly, the Rent Owner or Management Company, can still utilise the remedies available to it under S121 where the payee of such a charge has failed to pay what is due.    

Conclusion

Since the implementation of the Act, certain sections of the property management industry have understandably been confused as to the rights of their clients to collect rentcharges - both fixed and variable.

Whilst the remedies for what are now regulated rentcharges are no longer available to Rent Owners under S121, the position is unchanged in respect of variable estate rentcharges.  Variable estate rentcharges can continue to be enforced using the remedies available under S121 notwithstanding the implementation of the Act.     

Many will say that the Act has not gone far enough to protect property owners against the draconian remedies available under S121 given how commonplace variable estate rentcharges are but it is expected once further provisions of the Act come into force, property owners will be given powers similar to long leaseholders so that they can at least challenge the reasonableness of sums being demanded of them by the Rent Owner.

KDL Law have a well-established process in place in order to assist Rent Owners and Management Companies to swiftly recover outstanding variable estate rentcharges that remain unaffected by the Act. If any assistance is required, then please contact us to discuss.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

If you have received this update in error or wish to unsubscribe from future updates then please email us at info@kdllaw.com.