A rent-like sum payable out of freehold property may sound like a contradiction, but that is exactly what a rentcharge is. Rachael Allen provides an overview of this frequently misunderstood and potentially dangerous form of property interest.
What is a rentcharge?
A rentcharge is a periodic sum charged on or issuing out of land, that is not rent reserved by a lease and is not payable by way of interest. Usually rentcharges are a legal interest created in perpetuity and imposed on freehold land. Rentcharges bind the original rent payer and bite on the land that has been charged (the ‘charged land’).
The Rentcharges Act 1977 provides that from 22 August 1977, no new rentcharges can be created, except for:
- estate rentcharges (covering the cost of shared things);
- rentcharges created under certain statutory provisions in connection with the execution of works or commutation of such works obligations;
- rentcharges created in relation to certain family trust arrangements; and
- rentcharges created by or in accordance with a court order.
The 1977 Act also provides for all rentcharges to be extinguished on the later of 22 July 2037 or the expiry of 60 years from the date when the rentcharge first became payable, except for rentcharges:
- of the type that can still be created under the 1977 Act;
- payable in lieu of tithes; and
- for variable amounts.
Why do rentcharges matter?
Rentcharges matter because although the rents payable are generally very small, there can be serious implications if they are not paid in full.
Non-payment of a rentcharge can be enforced by a simple monetary claim (on the covenant to pay rent or an action of debt). Such claims are of little concern. Potentially more troubling are remedies expressly set out in the instrument creating the rentcharge and statutory remedies.
Many rentcharges reserve a contractual right of re-entry exercisable on non-payment of rent, effectively enabling the rentholder to forfeit the estate of the owner of the charged land. At first glance, this may seem draconian. But, unless the deed creating the rentcharge provides otherwise, the right of re-entry for non-payment of rent cannot be exercised unless there has been a formal demand for payment. And, if the right of re-entry is exercised solely for non-payment of rent, then the court is normally willing to grant relief on terms that payment is made.
Statutory remedies under section 121 of the Law of Property Act 1925 are available if:
- the rent or any part of it is unpaid for 40 days after it is due;
- the rentcharge was created by an instrument coming into effect on or after 1 January 1882; and
- the instrument creating the rentcharge contains no contrary intention.
There is no need for any legal demand for the rent to have been made before exercising these remedies.
Under section 121(3) of the 1925 Act, the rentholder may take possession of the charged land and the income from it until the rent and all arrears, together with all costs and expenses caused by non-payment of the rent, are fully paid.
Under section 121(4) of the 1925 Act, the rentholder may grant a lease of the charged land to trustees, who must try to raise enough to pay the rent and arrears, together with all costs and expenses caused by non-payment of the rent. Any surplus must be paid to the owner of the charged land. Such leases are known as rentcharge leases.
Roberts -v- Lawton (2016): The application of section 121(4) of the 1925 Act
In Roberts and others -v- Lawton and others [2016] PLSCS 245, Morgoed Estates Ltd (the rentholder) was in the business of buying and managing rentcharges and ground rents. Some rentcharges in its portfolio were in arrears in sums up to around £15. To recover these arrears, Morgoed granted its directors (as trustees) rentcharge leases of the properties for terms of 99 years, each at a peppercorn rent. The rentcharge leases made the properties unsaleable and un-mortgageable.
The practice of Morgoed and the trustees was to surrender the rentcharge leases once the arrears and its costs were paid off. Its costs far exceeded the arrears in every case.
It was held that once a rentcharge lease is in place, the rentholder can continue to make use of it to recover future payments due under the rentcharge. It was also confirmed that a rentcharge lease will continue notwithstanding any statutory redemption or extinguishment of the rentcharge itself.
Judge Elizabeth Cooke commented that the remedy afforded by section 121(4) of the 1925 Act “was no doubt an efficient and useful provision when drafted, but inflation has made it toxic. The remedy – draconian as it is – is out of all proportion to the wrong” but the rentcharge leases were valid.
How to deal with rentcharges in practice
When a conveyancer comes across a rentcharge, they should consider whether the rentcharge has, or can be, ended. A rentcharge may end by effluxion of time (if it was created for a fixed term), by an express release, by statutory redemption, by lapse or, as mentioned above, by automatic extinguishment under the 1977 Act on or after 22 July 2037.
Release – A rentholder may release the charged land in return for payment of a lump sum. If the rentcharge or the charged land is registered at the Land Registry, any negotiated release should be registered at the Land Registry.
Redemption – A statutory redemption procedure is available under the 1977 Act. The procedure is used to extinguish the rentcharge upon payment of a lump sum calculated according to the formula in the 1977 Act.
This procedure is available for all rentcharges except for those:
- of a type that can still be created under the 1977 Act;
- payable in lieu of tithes;
- having variable rentcharges (which remain variable); or
- where the period for which the rent concerned would remain payable cannot be ascertained.
Redeeming a rentcharge removes the risk of enforcement and avoids potential delay and increased costs on any future sale or charge.
If the redemption only relates to part of charged land, a statutory apportionment or legal apportionment of the rentcharge is needed before redemption takes place. The 1977 Act provides a procedure for statutory apportionment which can be used except where:
- the rentcharge was created by or under certain statutory provisions in connection with the execution of works or the commutation of such works obligations;
- the rentcharge is payable in lieu of tithes;
- the charged land has been divided and part of the land has been charged with the whole liability to pay the rent, to the exoneration of the remaining land.
The rentowner must be party to any legal apportionment.
A redemption certificate should be issued once a rentcharge has been redeemed. The redemption certificate should be registered at the Land Registry if title to the rentcharge or the charged land is registered. The owner of the charged land should take care to pay off any arrears on or before redemption, because the redemption certificate will not affect any right or remedy that the rentowner may have for the recovery of rent which has accrued before the date of the certificate.
Lapse – Before 6 April 2014, a rentowner’s title could be extinguished by the rent not being paid for a period of 12 years, provided that the person in possession of the charged land had made no acknowledgement of the rentholder’s title. If a rentcharge has been extinguished in this way, arrangements should be sought for the rentcharge to be deleted from the title. Applying to the Land Registry to delete the rentcharge may clear the title or may flush out any potential problems with the rentholder.
Following the enactment of schedule 14 of the Tribunals, Courts and Enforcement Act 2007, there is some uncertainty as to whether rentcharges can be extinguished by non-payment of rent relating to any period after 5 April 2014. The Land Registry has issued guidance as to how it will deal with applications to extinguish rentcharges where the period of non-payment of rent includes any time on or after 6 April 2014; the procedures are similar to those for acquiring an estate by adverse possession.
What if the rentcharge is to remain live?
If the rentcharge is subsisting and is not to be brought to an end as part of the transaction, then the specific requirements of any relevant funder should be considered.
The requirements are likely to include making sure that payment of the rentcharge is up to date. Requirements may also include seeking a variation of the rentcharge deed and/or procuring indemnity insurance to mitigate any financial loss caused by enforcement of the rentcharge.
If there is no funder, then conveyancers are well advised to review what lenders are requiring in the market at the relevant time, and to consider which if any of those requirements would be appropriate to the charged land in all the circumstances.
An earlier version of this article appeared in Estates Gazette
For further information, please contact:
Rachael Allen, Hill Dickinson
rachael.allen@hilldickinson.com
