Leasehold & Freehold Reform Act 2024: How does it affect rentcharges?

The Leasehold and Freehold Reform Act 2024 (LFRA) received royal assent in May 2024 and its provisions are gradually being brought into force.

On 24 July 2024 provisions affecting certain rentcharges came into force. These measures introduce the concept of a ‘regulated rentcharge’. In relation to these regulated rentcharges measures introduced by the LFRA include new notice procedures in relation to collection of rentcharge arrears. In addition, what have been described as ‘draconian��� statutory enforcement provisions for collection of regulated rentcharge arrears have been abolished.

However, not all rentcharges are covered by these measures and in particular, those who pay an ‘estate rentcharge’ do not benefit from the changes.

What is a rentcharge?

In short, a rentcharge requires the owner of land burdened by a rentcharge to pay ‘the rent’ to the person who has the benefit of the rentcharge. Rentcharges usually affect freehold property.

The Rentcharges Act 1977 set out that, subject to limited exceptions, no new rentcharges could be created on or after 22 August 1977, and that existing rentcharges would be extinguished by July 2037 or 60 years from the date on which the rentcharge first became payable, whichever is later.

Many rentcharges are historic, and often the person with the benefit of the rentcharge has no other interest in the property and the rentcharge is for a relatively small sum. There is a statutory redemption process for certain historic rentcharges, and other mechanisms by which they can come to an end.

What are the exceptions?

The Rentcharges Act 1977 set out some limited exceptions, which allow for certain forms of rentcharge to continue to be created. These include estate rentcharges, rentcharges created in relation to certain family trust arrangements, rentcharges created by court order, and rentcharges created under certain statutory provisions in connection with the execution of works on land or the commutation of any obligation to do any such work. These types of rentcharge will also not be extinguished in July 2037 or 60 years from the date on which the rentcharge first became payable.

What’s the problem?

Remedies for failure to pay a rentcharge can include a debt action, a right of re-entry (if expressly reserved in the rentcharge), sale or mortgage of the land charged, appointment of a receiver, or a claim for breach of covenant.

Statutory remedies available under s.121 Law of Property Act 1925 allow the rentcharge owner, if a rent charge is unpaid for forty days (even if no legal demand for payment has been made), to:

• enter into possession of the land which is the subject of the rent charge and hold the land and take any income from it until the arrears have been discharged.

• Grant a lease of the charged land to trustees to recover the rent and arrears and all associated costs and expenses.

There has been criticism that the statutory remedies in particular which are available to rentcharge owners where there has been a failure by the landowner to pay the rentcharge are disproportionate to the sums which are involved and draconian. This was highlighted by the case of Roberts v Lawton [2016] UKUT 395 (TCC).

So, what changes does the Leasehold and Freehold Reform Act 2024 (LFRA) make in relation to rentcharges?

The LFRA introduces the concept of the ‘regulated rentcharge’. A rentcharge will be a ‘regulated rentcharge’ if it is the type of rentcharge which could not be created after 22 August 1977. The definition does not cover rentcharges which are of the type which can still be created under the ‘limited exceptions’ set out above (so it does not for example cover estate rentcharges).

In relation to ‘regulated rentcharges’ the LFRA:

• Introduces a new notice procedure which must be followed before any action can be taken to recover or compel payment of regulated rentcharge arrears.

• Removes the availability of the statutory remedies for enforcement under section 121 Law of Property Act 1925 for regulated rentcharges. This provision of the LFRA came into force on 24 July 2024 but applies retrospectively from 27 November 2023. It applies to all regulated rentcharges arrears whenever they arose.

• Provides for the secretary of state to limit administration charges in relation to collection of regulated rentcharge arrears.

• On and after 27 November 2023 removes the ability for a rentcharge to be charged on a regulated rentcharge (although this is not common).

• Provides that provisions to the contrary in relation to the above in a regulated rentcharge are of no effect.

Comment

Those who find their property is subject to a regulated rentcharge will welcome these changes.

However, those who deal with or are subject to estate rentcharges will have to wait for further measures to come into force before seeing any changes or further regulation. The government also promised a consultation in this area in the King’s speech.