A Guide to the Freehold Rent Charge Legal Indemnity Insurance Policy
Rent charges have received a lot of adverse publicity in recent years and therefore purchasers and lenders are wary of them. In this article we look at the option of taking out specialist freehold rent charge Legal Indemnity Insurance to ease the conveyancing process.
In this guide we look at:
- What is a freehold rent charge?
- What is an estate rent charge?
- How are rent charges evidenced?
- Can ownership of a rent charge be transferred?
- Can a rent owner enforce a rent charge?
- The rent charge problem – the rent owner granting a statutory lease over the land
- The consequences of non-payment of a rent charge and the imposition of a statutory lease
- Can a freehold property owner redeem a rent charge?
- Redeeming a rent charge or taking out rent charge Legal Indemnity Insurance
- Types of rent charge Legal Indemnity Insurance cover
- What does freehold rent charge Legal Indemnity Insurance cover?
- What does estate rent charge Legal Indemnity Insurance cover?
What is a freehold rent charge?
A freehold property can be subject to a rent charge to be paid to a third party (commonly referred to as the “rent owner”). The rent owner usually has no other interest in the property.
A rent charge is defined under section 1 of the Rent charges Act 1977 as “an annual or other periodic sum charge on or issuing out of land except rent reserved by a lease or tenancy or any sum payable by way of interest”. A rent charge can also be referred to as a “chief rent”.
Rent charges have been around for centuries as a historic system where landowners released part of their land for development at a reduced sum in return for a regular income from the purchaser and their successors in title. A rent charge can be for a fixed amount or variable sum. For example, a rent charge can be expressed to rise in line with inflation or other formula.
If a rent charge is imposed it binds all the land in the title, even if the land is subsequently divided and sold off in plots. The rent owner could require any one plot owner to pay the entire rent charge and they may then try to get an apportioned payment from the other homeowners who own property subject to the rent charge and who are not directly responsible for payment. Alternatively, a rent owner can agree to collect the rent charge portions individually from each homeowner through rent charge apportionment.
The Rent charges Act 1977 abolished the creation of new income creating rent charges, subject to a few exceptions:
- Small developments with shared facilities such as a shared accessway.
- Estate rent charges.
If a freehold rent charge was imposed on land many years ago the amount payable may be negligible in today’s money. If the rent charge is a modern-day estate rent charge the payments can be hundreds of pounds per month in some cases.
Existing rent charges registered on property will be extinguished by 22nd July 2037 or sixty years from the date of the rent charge, whichever is the later.
What is an estate rent charge?
There is an exception to the 1977 Rent charges Act ban on new rent charges for the creation of ‘estate rent charges’. These are normally created by property developers to provide ongoing funds for an estate management company. The rent charge payable by the owners of the freehold properties on the estate is then used to pay for the maintenance of communal areas such as playgrounds, private roads and car parks on the estate.
Historically, housing estate communal areas and open spaces were adopted by the local authority who became responsible for maintenance. Nowadays this is uncommon and as most estates need some open space a rent charge is created on each new build property on the estate so ongoing maintenance costs are shared between homeowners.
An estate rent charge can also be used to enforce obligations for the benefit of the estate residents because positive obligations on freehold properties do not run with the land. The use of an estate rent charge with a right of entry annexed to the rent charge, entitling the rent owner to possession, can be a means of enforcement.
How are rent charges evidenced?
A conveyancer will normally be alerted to a rent charge through checking the property Title Register. This should detail the rent charge but may not specify who the rent owner is. With historical freehold rent charges on unregistered land, the property solicitor has the unenviable task of checking the title deeds.
Although the rent charge owner has no legal interest in the freehold land subject to the rent charge the rent charge can be registered at the Land Registry under its own title number.
Can ownership of a rent charge be transferred?
A rent charge can be transferred by a rent owner to a third party so the third party becomes the new rent owner with all the rights of the original rent owner. The transfer of rent charge ownership is a cause of complaint by some homeowners where rent charges are bought up by large investment companies or companies where the homeowner has problems in contacting and communicating with the new rent owner. If this occurs, one solution is for the property owner to try to redeem a historical freehold rent charge from the new rent owner.
Can a rent owner enforce a rent charge?
There are a number of options available to a rent owner to recover a rent charge that was created after 1881, including:
- Right of re-entry – a rent owner has the right of re-entry onto the land to hold the land and take income from it until the rent charge arrears have been discharged.
- Granting a lease over the land – the rent owner can grant a new lease of the land charged on trust to raise arrears. This right has been widely publicised because many deeds including a rent charge state the rent will be payable annually whether formally demanded or not. Some rent owners have used non-payment of nominal amounts as a trigger to impose severe penalties on homeowners.
The rent charge problem – the rent owner granting a statutory lease over the land
A rent owner can grant a new lease of a freeholder’s land to a third party. This sounds bizarre to the average purchaser but a rent owner has the ability to impose a statutory lease of the freeholder’s land charged on trust to raise the rent charge arrears. A rent owner is able to do this even if they have not made a formal demand to the homeowner for payment of the rent or started Court proceedings for recovery.
Under Section 121 (4) of the Law and Property Act 1925 if an estate rent charge is unpaid for forty days, the rent charge owner is able to exercise their right to either register a statutory lease on the property to trustees for the purpose of raising monies to clear the arrears, interest and costs or to exercise rights of re-entry to the property. The power to grant a statutory lease was not abolished in the 1977 Act so the rent owner has the legal right to create a lease and:
- Claim fees for creating the lease.
- Claim a payment for the removal of the lease from the freehold property.
There is no limit or reasonable fees test contained in the 1925 Act and a property owner has no statute-based power to challenge the creation of a statutory lease if the rent charge is over forty days in arrears.
The consequences of non-payment of a rent charge and the imposition of a statutory lease
Once a lease is registered against a property the property owner has no statutory mechanism to challenge the registration of a lease against their property. The lease could remain registered on the property, even if the rent charge arrears are paid prior to its end date.
The creation of the lease does not mean that the homeowner has to pay the rent charge owner extra rent over and above that set out in the title deeds or Title Register. It simply means that there is a lease registered against the title and conveyancers will pick up on this on any sale or re-mortgage.
Alternatively, the rent charge owner has the right to take possession of the property and could let the property as a way to recover funds. Either option means the consequences of non-payment of a rent charge, even if unintentional, could make a property unsaleable until the legal issues are resolved. That can be both time-consuming and expensive. It can also make it impossible for a homeowner to re-mortgage their property.
Can a freehold property owner redeem a rent charge?
Many homeowners view historical rent charges as a nuisance and want to clear the title deeds of the obligation so they do not have to make an annual payment and to make it easier when they come to sell their property.
If a rent charge was created before 22 August 1977 a homeowner may be able to redeem it under the provisions of the Rent charges Act 1977. The cost of redemption is, at present, about 16-17 times the annual amount of the rent charge. The Rent charges Act provides a procedure for the redemption of relevant rent charges which involves the property owner paying a redemption fee and then applying for a redemption certificate to confirm the rent charge has been redeemed. This procedure does not apply to estate rent charges.
If a relatively new build freehold property is subject to an estate rent charge it is less likely to be possible to secure the release of the property from the charge as the purpose of the rent charge payment is often very different from a historical rent charge whose purpose is income generation for the rent owner as opposed to raising funds to maintain communal and open spaces on an estate for the benefit of all residents. If an estate rent charge were to be redeemed it would simply mean that the other estate residents would probably need to have their rent charge fees increased to cover the shortfall in the absence of the local authority adopting the communal areas and maintaining them out of their local taxes and government funds.
Redeeming a rent charge or taking out Rent Charge Legal Indemnity Insurance
If a homeowner wants to sell their property and is anxious that the rent charge may delay the sale and is therefore looking at redeeming their rent charge the quicker and cheaper option may be to take out a Rent Charge Legal Indemnity Insurance policy. Online policies and cover can be created in around sixty seconds, far less time than it takes to redeem a rent charge.
Types of Rent Charge Legal Indemnity Insurance cover
CLS offers two types of Rent Charge Legal Indemnity Insurance cover:
- A Freehold Rent Charge Legal Indemnity Insurance policy or
- An Estate Rent Charge Legal Indemnity Insurance policy.
Both types of policy can speed up the conveyancing process as they can limit the need for extensive and sometimes protracted rent charge pre-contract enquiries so that a homeowner or lender can proceed to completion without undue delay.
What does freehold rent charge Legal Indemnity Insurance cover?
The CLS Freehold Rent Charge Legal Indemnity Insurance policy provides protection where there is a rent charge registered against a property and the rent charge was created before 1977 and the rent charge has not been paid at the time of taking out the policy.
The Freehold Rent Charge Legal Indemnity Insurance policy can protect:
- The purchaser of the property. (Protection for the purchaser ends if the purchaser does not pay the rent charge but the lender remains covered under the policy).
- The lender. The policy protects the lender for the financial loss they suffer resulting from the property owner borrower defaulting on their mortgage and there being a shortfall on the mortgage due to the rent charge lease being registered to the property.
- Any successors in title if the purchaser sells the property.
This policy is very helpful where the rent charge owner is unknown or absent or in cases where little information can be gathered from pre-contract enquiries. For example, a probate sale or a sale by a mortgagee in possession.
The policy protects against financial implications of the rent charge owner exercising their legal rights of re-entry under Section 121 (4) of the Law and Property Act 1925 to register a rent charge lease against the property in order to recover the unpaid rent charge and administrative fees.
What does Estate Rent Charge Legal Indemnity Insurance cover?
The CLS Estate Rent Charge Legal Indemnity Insurance policy provides protection for lenders on rent charges created after the Rent Charges Act 1977 and therefore rent charges imposed after 1977 on homeowners. These rent charges are normally ones imposed by developers on new build estates for the upkeep and maintenance costs of the common areas.
The policy offers protection for a lender should the homeowner fail to pay the rent charge for a period of forty days or more and the rent owner then exercises their legal right of re-entry under Section 121 (4) of the Law and Property Act 1925 to register a rent charge lease against the property as a means to recover the rent charge arrears, interest and additional fees. As there are currently no statutory mechanisms to challenge the registration of the lease the upshot is that the lease could remain registered against the property, even if the rent charge arrears are paid prior to its end date.
As the rent charge owner has the right to take possession of the property and could let the property as a way to recover funds this could mean that a property that has a rent charge lease registered against them can become unsaleable. This affects the lender’s security and hence why many lenders require Estate Rent Charge Legal Indemnity Insurance cover when lending on a property that is subject to an estate rent charge, whether it is sold as a new build or a later sale.
The Estate Rent Charge policy protects the lender for the financial loss they suffer if the homeowner/ borrower defaults on their mortgage and there is a shortfall on the mortgage due to the rent charge lease being registered against the property.
The policy is available to lenders where:
- The estate rent charge has not been paid or
- The rent charges are paid and up to date but where the lender requires protection in the event the purchaser does not pay the rent charge throughout the term of the mortgage.
CLS here to help
CLS has over 15 years of experience in helping conveyancers with residential and commercial property transactions. Our online portal, PIPA is free to register and you’ll find our range of over 60 legal indemnity Insurance policies and products at your fingertips – including Variable Statements of Fact to let you customise to your client’s needs for the full range of legal indemnity policies. Online indemnity insurance protection can be available within a matter of minutes. If you’d rather speak to someone, we have a team of specialists who can help you out with a bespoke offline policy.
This article was submitted to be published by CLS Property Insight as part of their advertising agreement with Today’s Conveyancer. The views expressed in this article are those of the submitter and not those of Today’s Conveyancer.