There’s life in the old dog – the pitfalls of rentcharges

A rentcharge is an interest in land dating back to the 19th and early 20th century. Freehold land would be sold for a capital sum lower than its full value, with the new owner paying annual sums, usually a few pounds – effectively to make up the shortfall over time – to the rentcharge holder. These sums would be secured by a rentcharge over the land.

It is not uncommon these days for landowners to ignore rentcharges on the basis they appear historical and the sums are often insignificant, or because the identity of the rentcharge holder is not known.

However, the case of Roberts v Lawton, which involved a company whose business is to buy and manage rentcharges, demonstrates the perils attached to the non-payment of rentcharge sums.

The rentcharge arrears here ranged from about £6 to £15.

Section 121 of the Law of Property Act 1925 allows the rentcharge holder to grant a long lease of a property to a nominee for the purposes of raising income to recover rentcharges in arrears for 40 days, whether formally demanded or not, as well as administrative costs.

The company exercised its statutory right to grant a lease of each property, for a term of 99 years, to its directors as trustees before seeking to register it at the Land Registry. The question for the tribunal was whether the trustees were entitled to register the leases. It decided they were.

The implications of the decision are far reaching. The existence of such a lease not only entitles the tenant to possession of the land but is likely to have a significant adverse impact on the value of the freehold. At worst, the rentcharge holder could hold the freehold owner to ransom by demanding the payment of a premium in exchange for surrender of the lease, as there is no requirement for the lease to end once arrears have been paid.

From a lender’s perspective, a property will not have good and marketable title in the presence of rentcharge arrears or, in the case of estate rentcharges, if the rentcharge deed contains a right of re-entry exercisable on the breach of any covenant without a provision allowing the lender an opportunity to remedy the breach. In these circumstances, a borrower is likely to have difficulty securing a loan.

Whilst the Rentcharge Act 1977 prevents the creation of new rentcharges, those already in existence will subsist until 2037 when they will be extinguished, subject to limited exceptions such as an estate rentcharge.

There are a number of steps owners of freehold land which is subject to a rentcharge can take to mitigate the associated risks. These include:

• ensuring rentcharge sums are paid up to date so there are no arrears;
• employing a statutory mechanism for redemption of the rentcharge by applying to the Secretary of State who will calculate the price and issue a redemption certificate; and
• considering indemnity insurance, particularly in the event rentcharge sums are in arrears because the identity of the rentcharge holder is unknown.