29 November 2017

Rentcharges Re-Charged

The 2016 case of Roberts and others v Lawton and others [2016] UKUT 395 has shown that rentcharges still have a sting in their tail, and highlighted why developers and investors should not ignore rentcharges revealed on title due diligence.

Rentcharges tend to conjure up images of dusty old deeds and payments in shillings, whatever those are… and you could be forgiven for overlooking them. Subject to limited exceptions, no new rentcharges can be created on or after 22 August 1977 and most rentcharges will be extinguished automatically, without further ado, on 22 July 2037.

So why are we still talking about them? The answer lies in the enforcement options available to rentcharge holders, one of which was the subject of the Roberts case. Before we consider that case, let's remind ourselves what a rentcharge actually is. A rentcharge is a type of interest in land. It secures (by way of remedy against the charged land) payment of an annual or periodic sum (other than rents reserved by a lease or any sum payable by way of interest). Most rentcharges are created for an estate in fee simple, which means that the rent is payable forever.

Section 121(4) of the Law of Property Act 1925 creates a particularly quirky enforcement option for a rentcharge holder seeking to recover arrears. It allows a rentcharge holder to grant a lease of the land which is subject to the rentcharge to trustees, to enable the trustees to raise money to pay the rent and arrears. The remedy is exercisable where the rent under the rentcharge or any part of it is unpaid for 40 days after it has become due, whether formally demanded or not. It is thought that the rentcharge lease cannot be used to recover arrears which are more than 6 years old.

In the Roberts case, Judge Elizabeth Cooke had to consider how s121(4) leases, which we will call rentcharge leases, work in practice. She reluctantly held that once a rentcharge lease is granted:

  1. it will continue in existence even where (i) the arrears have been paid, and/or (ii) the charge itself is redeemed, and/or (iii) the underlying rentcharge is extinguished under the Rent Charges Act 1977 in July 2037;
  2. it can be used to recover future payments (with the surplus of the money raised/income received being paid to the owner of the reversionary interest, usually the freeholder of the property which is subject to the rentcharge);
  3. it can only be brought to an end prior to contractual expiry by voluntary surrender.

The judge described the statutory remedy as "draconian" and suggested it ought to be reformed. The case for this is clear; for the sake of a potentially small sum, a land owner could find itself subject to a long rentcharge lease, which it has no power to terminate, and which carries with it the right for the lessee to collect the occupational rents (and keep them so far as necessary to satisfy any arrears and the rent under the charge from time to time).

There are still many operational uncertainties in relation to rentcharge leases. For example, if a rent charge lease taken for a term exceeding 7 years (ie a lease which would normally be registrable) is not registered, will it bind a purchaser for value? We simply don't have any guidance on this, as it is an untested area of law.

Rentcharges may be down, but they are not yet out. If apparent in due diligence, developers and investors should consider with their legal team how the risk associated with a rentcharge can be reduced or eliminated. Options might include a claim for adverse possession or title indemnity insurance. That's a matter for another blog post though…

Elizabeth is a senior associate in our Commercial Real Estate team.

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