A rentcharge is a small amount of rent that a freehold homeowner pays to a third party. It’s usually between £2 and £10 every year, but the rate doesn’t change from year to year.
If you’re thinking that this sounds like an unusual arrangement, you’d be right. Most people would be surprised to learn that they still owe ‘rent’ after they’ve bought a freehold property. It’s even more surprising when you realise that the rent owner has no real interest in the property, and you get no benefit for the rent you pay.
So why do these arrangements exist?
Well, it’s a bit of a quirk of an archaic legal system. The charges were brought in during the late 19th and early 20th centuries, as a means of deferring some of the capital payment on a house.
Thankfully, the Rentcharge Act 1977 put an end to any new rentcharges.
Rentcharges have a longstop date of 60 years, so most of them will be abolished by 2037.
But rentcharges still exist, and while they are fairly rare arrangements, Bristol and Bath has a high proportion of properties subject to rentcharges.
What does it mean for you if your property is subject to a rentcharge?
Problems with rentcharges: the draconian consequences of non-payment
Rentcharges are often shrouded in a level of mystery. Sometimes the property owner is not aware of the rentcharge due on their freehold. They don’t know who to pay or how to pay.
This leads to the property owner defaulting on the rent. If the rent is £3, this seems like a fairly innocuous oversight.
But the consequences can be very serious. Once a payment is 40 days overdue, the rent owner has the right to:
- pursue the homeowner for debt recovery
- re-enter the property themselves, or
- create a statutory lease on the home for security.
A statutory lease can cost thousands to redeem, and the property becomes impossible to sell while the lease remains in place.
You may think that this sounds ridiculous for a debt of £3. And it is! But unfortunately it’s a legal loophole at the moment.
In recent years, unscrupulous investment companies have been taking advantage of these arrangements. They buy up the benefit of the rentcharge and pursue the homeowners for these draconian consequences in order to make a profit.
Lenders may refuse you a mortgage
We’ve mentioned that the rent owner has a right to re-entry if the rent is late or unpaid. This makes lenders nervous. Mortgage lenders tend to want certainty that they have a right to repossess the property if the buyer defaults on the mortgage payments.
For that reason, mortgage lenders will often want to see that the rentcharge has been redeemed by the homeowner before they agree the mortgage. That means that the homeowner needs to buy the benefit of the rentcharge.
Redeeming the rentcharge
In order to redeem the rentcharge, you need to apply to the Department for Levelling Up, Housing and Communities. You download a form, fill it out and send it in by post. You can find the form and all of the relevant information here: https://www.gov.uk/guidance/rentcharges
Once you’ve submitted the form, together with a photocopy of the deed that created the rentcharge, the Department will calculate how much money you have to pay the rent owner to redeem the rentcharge.
Once paid, you lodge a redemption certificate with the Land Registry.
We understand that this sounds laborious. And it is unusual that it is still a postal system, without an option for online submission. The system is certainly clunky. But it’s the best way we have at the moment of getting rid of the rentcharge on your property.
The other way to redeem the rentcharge, is to go to the rent owner directly. Check the last fixed rent demand notice you received. Is there also a “rentcharge redemption offer” attached to the notice? If so, you can follow the steps in the offer to get your Deed of Release. You’ll still have to pay a fee.
The best advice is to start this process early. If you’re already in the process of selling your home, redeeming the rentcharge could cause unnecessary delays to the rest of the process. Try to get the ball rolling before you think about selling.
Reasons to redeem the rentcharge
Is it worth going through all of that paperwork to redeem the rentcharge?
The reasons to bite the bullet and do it are:
- Security: missing a payment could result in the rent owner re-entering your property
- Ease of sale: it can be difficult to sell a house that is subject to a rentcharge
- Speed of sale: applying to redeem the rentcharge could slow up the sales process.
- Increase your house price: the presence of a rentcharge could devalue your property.
How much does it cost to redeem the rentcharge?
This is a good question and it varies from one property to another. As a general rule, it’s around 16 times the yearly payment, but it can be as much as 25 times.
The best thig to do is apply to the Department for Levelling Up, Housing and Communities and ask them to calculate it for you. If you think the cost outweighs the benefit, there’s no obligation to go through with it.
Alternative solutions
Is there anything else you can do if you don’t want to pay the redemption charge?
Well, you could simply wait until 2037, when the rentcharge will lapse.
Or you could add mortgagee protection measures, which dilute the rights of the estate rentcharge owner.
Finally, you could put measures in place by a deed of variation.
The only free option is to wait for the rentcharge to lapse.
How we can help
If you need advice on the rentcharge on your property, please get in touch. We can help you understand the charges, what they mean for you, and how to buy out the rent owner. Don’t leave it to the last minute when you’re thinking of selling your home.