Beware of rentcharges
Roberts & Ors v Lawton & Ors  UKUT 395 (TCC) (01 September 2016)
It is perhaps not that often that conveyancers come across rentcharges. But the recent case of Roberts v Lawton illustrates the draconian nature of the powers granted to rentcharge owners, the risks to a landowner of ignoring the rentcharge – and to conveyancers in not properly advising on them.
Nature of a rentcharge
To understand how a rentcharge operates it is necessary to appreciate that conceptually there is no fundamental difference between charging rent for possession of freehold land and charging it in the case of leasehold. But over the years rent has become almost unknown in freehold land.
However, until relatively modern times it was common in many areas of the country for the development of land for housing to take place by a seller of a fee simple to sell it at less than the full market value and then make up the deficit by taking an annual payment – or rent. The word “rentcharge” distinguishs this payment from payments made between landlord and tenant. Rentcharges are particularly prevalent in areas of Bristol and around the Manchester area, but are found elsewhere as well.
A rentcharge is a legal interest in land and should be registered at Land Registry with its own title and noted against the title affected (LRA 2002, s.3). Once registered it is binding on all future owners of the land.
Although the Rentcharges Act 1977 prohibited the creation of new rentcharges, there are many thousands of historic rentcharges still in existence. These will continue until 2037 when they will end. It is also possible under the Act for the owners of land subject to a rentcharge to compulsorily require the rent owner to ‘redeem’ the rentcharge i.e. end it, on payment of a sum calculated according to a statutory formula.
A typical rentcharge payment may be only two or three pounds a year, so it is not unusual for landowners subject to a rentcharge to think that they can reasonably ignore such a small amount and leave it unpaid. As the judge in this case said: ‘How wrong they were’.
There is a second type of rentcharge known as an ‘estate rentcharge’, designed to make positive covenants in freehold land binding on successors. These are permitted and will remain enforceable after 2037.
The snag is that the owner of the rentcharge has extensive rights to recover the sums due. These are given by s 121 of the Law of Property Act 1925. The owner of can take possession of the property and use the income from it to clear the arrears. Alternatively, the rent owner can grant a lease of the property to trustees to raise and pay the arrears and associated costs. These leases give the trustees the right to take possession of the land to the exclusion of the freehold owners. The rights arise if the rentcharge remains unpaid for more than 40 days, even if it has not been demanded. Even more worryingly, there is no provision in the Rentcharges Act 1977 for a lease granted pursuant to section 121 to come to an end when the arrears are cleared or once the rentcharge has been redeemed.
In Roberts v Lawton, several property owners had not paid their rentcharges. The owner of the rentcharges, Morgoed Estates, then granted leases of the properties to trustees for terms of 99 years and tried to register the leases at Land Registry. According to the case, Morgoed own about 15,000 rentcharges. The judge (Elizabeth Cooke) set out Morgoed’s policy as follows:
“13. … the rentcharge was, … [in] arrears … in sums … from about £6 to about £15. Morgoed Estates Ltd therefore granted a rentcharge lease of each property to its directors, the First and Second Appellants, as its trustees, and they sought to register the leases. The leases are granted for a term of 99 years. … Once registered the existence of the leases will make each property unsaleable even if the tenant chooses not to take possession. The practice of the First and Second Appellants is to surrender the lease once the arrears and its costs are paid off…. Once the lease is in existence, therefore, it amounts to a stranglehold on the property owner whose freehold is worthless in the presence of the lease.”
The case concerned whether the leases were capable of being registered at Land Registry. The Upper Tribunal held that they were. The land owners had claimed that the leases could not be registered as they were in effect a mortgage on the property. However, the Upper Tribunal had ‘no difficulty’ in disagreeing with that view. They were not mortgages. They were leases in their own right and were thus registrable at Land Registry in the usual way.
Effect of the case
The case confirms that a lease, once granted, is a permanent arrangement. The grant of the lease effectively freezes the property in the hands of the freehold owner. They have no choice but to negotiate with the rent owner to surrender the lease. In the Roberts case, the rent owner would be prepared to do so only if its costs amounting to more than £650 were paid.
The judge in this case described the effect of the provisions as a ‘wholly disproportionate remedy’. But that is the law as it stands and the immediate impact of the case is that conveyancers must advise clients buying properties subject to a rentcharge of the importance of paying it on time – even if not demanded.
But the best advice must be to redeem it ASAP!