Rentcharges – historic but current


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For further information, please contact Gideon Dabby-Joory, Partner, Fladgate LLP (gdabby-joory@fladgate.com)


 

What are they?

Rentcharges are any annual or other periodic sums charged on land, except rent reserved by a lease or any sum payable by way of interest.  If they remain unpaid, there could be disastrous consequences even if payment has not been demanded.

They were common in the 19th century in Manchester, Bristol and Bath where freehold owners sold properties to developers for less than market value in return for the developers paying an annual rentcharge. They were also used as part of imposing covenants on land.

They are historic because under the Rentcharges Act 1977, subject to limited exceptions no new rentcharges can be created on or after 22 August 1977.

They can be transferred by the beneficiary of the rentcharge, and they bind the original rentcharge payer and its successors in title by virtue of the charge over the charged land and the methods of enforcing that charge if they remain unpaid.

They are usually registered on freehold interests but they can affect tenants if a lease contains a covenant obliging the tenant to pay a contribution towards the rentcharge if it is demanded by its beneficiary. Even if there is not an express covenant in the lease, most leases contain an obligation that tenants take subject to any encumbrance on the freehold title.

Rentcharges were granted for either an indefinite or a fixed period.

They are still current because, subject to limited exceptions, every rentcharge, if it has not previously been terminated, will be extinguished on the later of 22 July 2037 or the expiry of 60 years from the date when the rentcharge first became payable. They may also be expressly released by the beneficiary of the rent charge by deed although a beneficiary will, more often than not, demand that arrears are paid before the rentcharge is terminated.

Why should purchasers and tenants be wary?

Rentcharges should not be ignored! Often the sums reserved by a rentcharge are small and in historic currency. Many beneficiaries have stopped demanding payment of them and often a freehold owner has never received demands to pay rentcharges during its ownership of the property. Despite this, the risk still remains and this has been emphasised in Roberts and others v Lawton and others [2016] UKUT 395 (TCC).

If a freehold owner fails to pay a rentcharge for a period of 40 days after it is due, whether or not demanded, the beneficiary can grant a lease out of the freehold title to trustees, thereby holding the freehold owner to ransom until the payment of the rentcharge and all costs and expenses incurred due to non-payment. Statute does not state how long the term or what the rent should be in such a lease but in Roberts v Lawton the lease was granted for 99 years and at a peppercorn rent because any rent would be payable to the freehold owner and the purpose of the lease was to recover unpaid rentcharges from the freehold owner.

The grant of such a lease would devalue the freehold interest and make it worthless and unmortgageable whilst the lease is in place. This leaves the freeholder in a precarious position because it was upheld in Roberts v Lawton that there is no obligation on the beneficiary to surrender the lease even if the arrears and all other sums are paid. In Roberts v Lawton, the beneficiary agreed to surrender the lease once the arrears and other sums had been paid but this is subject to the discretion of the beneficiary.

As mentioned above, tenants of leases registered against freehold titles which are subject to a rentcharge may also be required to make payments they otherwise were not expecting to make.

Next steps?

Often no evidence is available as to whether the rentcharge is still payable, so often it is ignored or alternatively an insurance policy is taken out.

It is vital that purchasers or tenants make comprehensive enquiries on the details of the rentcharge and if no further information is forthcoming, indemnity insurance should be put in place.  Care must be taken to ensure that the policy covers not only the non-payment of the rentcharge and any costs and expenses incurred by its beneficiary but also any costs incurred to ensure that the lease is surrendered.

Even with indemnity insurance in place, as was made clear in Roberts v Lawton, there is no guarantee that a lease will be surrendered; but having insurance in place to help deal with the issue should provide some comfort to purchasers in the unlikely event that the worst case scenario arises.

Tenants should also ensure that any lease which they enter into does not contain an obligation on the tenant to contribute towards paying a rentcharge.

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