What is a rentcharge?
A rentcharge is essentially an annual or other periodic sum paid by the owner of land or property to another person who has no other legal interest in the land or property. Historically, they were popular as a way for builders to develop land without paying a premium as the landowners would instead be compensated by receiving the income from the owners of the new properties pursuant to the rentcharges.
How do rentcharges affect land?
A rentcharge means the original rent payer (and its successors in title) are essentially bound to pay a charge over the affected land indefinitely.
Rentcharges are generally small, nominal sums. However, despite this, there can be serious implications should they not be paid in full as the various remedies available to a rentcharge owner pursuant to Section 121 of the Law of Property Act 1925 (LPA 1925) to recover arrears of rentcharges are quite significant.
The implications if rentcharges are not be paid in full include:
- A right of entry onto the land to hold the land and take income from it until the arrears have been discharged; and
- The grant of a lease of the property to compel payment of the rentcharge and the cost of recovery.
To trigger enforcement of the above remedies, the rentcharge payments must have been in arrears for over 40 days. There is no requirement for the rentcharge owner to raise a demand for payment.
The case of Roberts & others v Lawton & others [2016] is an example of where a rentcharge owner has taken advantage of the remedies available against property owners in respect of arrears of rentcharges. In this case, the rentcharge owner was in the business of buying and managing rentcharges and had the benefit of around 15,000 of them. Some of the properties subject to the rentcharges were in arrears and to recover these the rentcharge owner granted to its directors (as trustees) leases of the properties for terms of 99 years. This meant that the property owners had to make payment of the arrears together with very high administration costs which resulted in the freehold in the properties becoming virtually unsaleable and unmortgageable. To make matters worse for the property owners, section 121(4) of the LPA 1925 provides that once a rentcharge lease is in place, the rentcharge owner can continue to make use of it to recover future payments. In addition, the rentcharge leases would continue notwithstanding any statutory redemption of the rentcharge itself, and even beyond the extinguishment of rentcharges in 2037 (see below). It was held that whilst the remedy effected was draconian and out of all proportion, the Rentcharges Act of 1977 (RA 1977) had not dealt with the reform of the remedies available and therefore the leases were valid and capable of registration at the Land Registry.
Dealing with rentcharges
Statutory Redemption
Under section 8 of the RA 1977, the owner of any land affected by a rentcharge may, subject to payment of a redemption figure, apply for a redemption certificate to certify that the rentcharge has been redeemed. Redemption under section 8 does not apply to the rentcharges still permitted to be created by section 2(3) of the RA 1977 (e.g. estate rentcharges – see below) or to rentcharges charged on or otherwise payable in relation to land wholly or partly in lieu of tithes.
Indemnity Insurance
Indemnity insurance is often available to cover the risk of any claim for arrears of rentcharges being made in the future.
Automatic Extinguishment
The RA 1977 provides for existing rentcharges to extinguish automatically on 21st July 2037 or 60 years from the date on which the rentcharge first became payable, whichever is later.
RA 1977 - Estate Rentcharges
Whilst the traditional rentcharges referred to previously can no longer be created, ‘estate rentcharges’ are permitted by the RA 1977 and are now being used on new developments to deal with the cost of recovering the costs of maintaining any privately shared areas, roads and services from the owners of freehold properties that have the right to use such shared areas.
The obligation on the owner of a freehold property to make any contributions towards the cost of maintaining any shared areas is a positive obligation and does not run with the land. This means that when a property is sold by the original owner such obligation does not automatically pass to the new owner.
Developers generally deal with this issue in one of two ways:
- By way of a ‘deed of covenant’ scheme where each new owner enters into a deed of covenant with the owner of any shared areas where they agree to pay a contribution towards the cost of maintaining the same. However, such a scheme can sometimes fail meaning the property owner has no obligation to make such a contribution.
- By way of an estate rentcharge scheme. Estate rentcharges are being used by developers as an alternative to deeds of covenant for enforcing positive obligations and/or obtaining contributions towards the cost of managing shared areas.
Whilst more beneficial to developers, the use of an estate rentcharge scheme is not always welcomed by property purchasers as the powers of enforcement for non-payment are the same as those under the LPA 1925 which are hugely onerous.
Property owners should therefore be aware that whilst historical rentcharges will eventually become obsolete, the use of estate rentcharges can still be problematic when trying to sell/charge their properties. Therefore if negotiating the purchase of a new property, at the very least they should ensure that the rentcharge owner is obliged to serve notice on a charge holder of the property before taking any enforcement action in the event of there being any arrears of sums due.
Would you like further guidance on rentcharges?
If you find yourself in a dispute or would like any guidance on rentcharges, please get in touch with our expert listed below and visit our real estate service page for any other inquiries.