KEY POINT: You will occasionally come across estate rentcharges in connection with maintenance costs on an estate, but new rentcharges are rarely created nowadays.

Q: I am buying a freehold property which is subject to an estate rentcharge. I thought rentcharges had been abolished. What is the position?

A: You are partly correct. The Rentcharges Act 1977 prohibited the creation of any new rentcharges. However one important exception to this general rule is the preserved ability to create "estate" rentcharges.

Q: Sorry - could you just go back a step - what is a "rentcharge"?

A: A rentcharge is a periodic sum charged on land, but not rent payable under a lease or any sum payable by way of interest. It is paid by a "rent payer" to a "rent owner". Note that this is not a landlord/tenant relationship - in a typical case the rent payer will itself be a freehold owner.

Q: So what is an "estate" rentcharge? How does it differ from an ordinary rentcharge?

A: Well, an estate rentcharge is a rentcharge created either:

(i) to make a rent payer's personal covenants enforceable by a rent owner; or

(ii) to secure payment for the provision of services, repairs, insurance or other benefits to the land affected by the rentcharge. Services could include the maintenance and repair of estate roads and providing landscaping.

Estate rentcharges can either be for a fixed amount or for a variable amount, but a rentcharge for more than a nominal sum must be reasonable in relation to the services provided by the rent owner. This is to protect rent payers against rentcharges where the amount charged bears no relation to the actual expenditure as rentcharges are not intended to be sources of profit for the rent owner.

Q: Why have I never come across an estate rentcharge before?

A: Estate rentcharges are now rarely created. When developing a business park or industrial estate, it is much more common for a management company structure to be used instead.

Q: How does a management company structure work? Why is this better than an estate rentcharge?

The management company provides estate services, the cost of which is recovered through a service charge levied on plot owners in proportion to plot size. When the development is completed, legal title to the common parts and estate roads is transferred to the management company. Control passes to the plot owners within the estate, who take shares in the management company and run it for their mutual benefit. Compare this to a rentcharge arrangement, where the plot owners have no direct control over the rentcharge owner.

A further disadvantage of an estate rentcharge is that there is no one obvious to whom ownership of the estate roads and common parts can be transferred. Either these will have to remain in the ownership of the original estate owner/developer, or the purchaser of the final plot on the estate may also find itself being asked to acquire the estate roads and common parts and even become the provider of the services. Rentcharges have also become less common due to the draconian remedies available to the rent owner for non-payment of the estate rentcharge. The rent owner has a statutory right to enter the property to distrain and take possession until arrears and costs have been paid.

Additionally the deed creating the rentcharge may include a right of re-entry if the rent payer is in breach of covenant. This effectively gives the rent owner the right to forfeit the land (even if the rent payer is a freehold owner). For most institutional lenders, a right of re-entry is a non-starter and a prospective purchaser of land affected by such a right of re-entry is likely to have difficulty in securing funding. This problem does not arise if the plot owners on an estate take shares in an estate management company.

Q: What about commonhold?

Yes, in the long run commonhold may prove to be the best structure for managing services and common parts on an estate. Although designed principally with residential property in mind, commonhold should work equally well on commercial estates. The commonhold system is enshrined in the Commonhold and Leasehold Reform Act 2002, and is expected to be brought into force during the summer of 2004. We plan to include a detailed article on commonhold in our June issue. (Antonia Coltman)

 © Lovells