An unfortunate and unintended consequence has arisen following the introduction, on 6th April 2013, of new registration requirements at Companies House for companies and LLPs entering into security documents, and those affected are entitled to feel bemused and disappointed as the Government’s stated policy is to reduce red tape, for business in particular, and this is an inadvertent step in the opposite direction.
What has happened and what you need to know about it
From a real estate point of view, the new rules were intended and expected to be all good news. For instance, there had for a long time been legal uncertainty as to whether or not landlords needed to register rent deposit deeds against a corporate tenant’s register of mortgages at Companies House, and this was clarified by a provision in the clearest terms that they do not, at least not from now on.
Estate rentcharges on the other hand, which are only preserved in the modern age to secure collection of payments for communal services on a freehold residential or industrial estate and had benefitted from a similar provision in previous legislation, have had their explicit exemption withdrawn.
For some reason, possibly because legal experts have argued for years that “rentcharges” are not “legal charges” in the true sense of the phrase and so didn’t need an explicit exemption, it has been omitted from the most recent legislation, but this has turned out to have unfortunate consequences in that it has created uncertainty in the minds of some legal practitioners.
The Land Registry and Companies House immediately started a conversation and have now decided between them that, as the exemption for estate rentcharges is no longer explicitly set out in the rules, they might now be capable of registration as legal charges in the register of mortgages of the corporate owner liable to pay them. An announcement to this effect was made by the Land Registry in late July.
Neither body has said that they must be registered but, equally, neither will say that they need not be. Furthermore, if the rentcharge is not registered at Companies House, the Land Registry will make a note on the property register of the rentcharge title to this effect when it is submitted for registration there, so a buyer will immediately know of the lack of registration at Companies House.
From a practical point of view, it is clear that those who have the right to receive the payments secured by an estate rentcharge, developers and estate managers in effect, will almost invariably insist that they are registered so as to avoid any risk that unpaid sums cannot be collected by enforcing the rights under the rentcharge, and no solicitor is going to advise his or her client that it would be safe not to do so.
Why does it matter?
Apart from the administrative cost of completing the registration forms and the registration fee of £13, the property owners will have a security entered on their register of mortgages, which may affect their ability to obtain finance for their own commercial activities. Lenders will only offer their best rates of interest if they can take a first-ranking legal charge over their borrower’s assets, and will be suspicious of an existing entry.
Given their cautious mindset at the moment, they are likely to be oblivious to the argument that an estate rentcharge isn’t really a charge and won’t have priority over their security.
Is there any good news?
Legal practitioners and academics alike are applying pressure on both Companies House and the Land Registry to revisit their analysis of the post-April 2013 situation and revise their stated positions, and they are at least listening to the arguments.
It is the way of these things, however, that progress will be slow, and there might even need to be further legislation to retrieve the legal certainty that existed before, which will depend upon the Government being convinced that it will adversely affect a significant number of people and also the allocation of parliamentary time.
What you need to do in the meantime
The only truly safe course of action for developers and estate managers is to insist on the registration of the estate rentcharges in the register of mortgages of their corporate client owners, primarily housing associations and companies owning space on communally-managed business parks.
The corporates will have to expect their lenders to insist on deeds of priority to ensure that their loan will always take precedence over any sums protected by the rentcharge, and our view is that market practice will develop to allow this to happen for the greater good.
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