Livy Twiss explains what rentcharges are and how they work, along with key cases and legislation.
Are you buying or selling a property that is subject to a rentcharge? Have you been asked to enter into a new rentcharge?
There are a number of issues, risks and, thankfully, solutions for parties interested in land that is subject to (or about to be subject to) a rentcharge. These include concerns following recent case law and the government’s plans to lessen the risks associated with the disproportionate remedies available when rentcharges are breached.
What are rentcharges?
According to section 1 of the Rentcharges Act 1977, a rentcharge is any annual or other periodic sum charged on or issuing out of land, except from rent reserved by a lease or tenancy or any sum payable by way of interest.
Most rentcharges are imposed on freehold interests and created for an indefinite period (a perpetual rentcharge). They create a legal interest in land — even though the rent owner may not hold any land. Unlike a lease, the rent owner does not hold any reversionary interest in the charged land. The rentcharge is capable of being transferred and binds the original rent payer and any successors in title.
Estate rentcharges
An estate rentcharge (under section 2(4) of the 1977 Act) is created either for making covenants which are to be performed by the owner of the charged land and enforceable by the rent owner (section 2(4)(a)) or meeting (or contributing towards) the cost of the performance (by the rent owner) of covenants for the provision of services, the carrying out of maintenance or repairs, the effecting of insurance or the making of any other payment which benefits the charged land (this may also benefit other land) (section 2(4)(b)).
How do rentcharges work?
A rentcharge runs with the (relevant) land, not the covenant.
As a result, the successor owner of the charged land will not be bound by the covenant to pay the rent unless a direct covenant has been entered into. However, the land will be burdened by the rentcharge — and the risk of enforcement action is the reason for payment. Rentcharges can be used to enable positive covenants (such as covenants to repair) to be imposed on the charged land.
The deed creating the rentcharge may include an express right of entry or re-entry which is exercisable on breach of covenant and not just for non-payment of rent. New housing developments often use estate rentcharges to ensure the payment of service charges for freehold estates for maintenance of shared areas or facilities.
How are rentcharges enforced?
Where non-payment of rent occurs, a rent owner can recover the service charge by an action of debt (section 2(4)(b)).
Statutory remedies are also available (under section 121 of the Law of Property Act 1925) if rent (or any part of it) is unpaid for 40 days after it is due. The rent owner has the right to enter into possession and take the income until the rent and all arrears — together with all costs and expenses caused by non-payment of the rent — are fully paid. There is no requirement for a legal demand to have been made (section 121(3) of the 1925 Act). The rent owner may also 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 rentcharge (known as a rentcharge lease). There is no requirement for a legal demand to have been made (section 121(4) of the 1925 Act).
A rent owner may have an express right of re-entry and can claim for breach of covenant to pay rent. Where there is a breach of covenant (other than non-payment of rent), a rent owner may have an express right of entry.
How are rentcharges registered?
If the charged land is unregistered, a right of entry annexed to a legal rentcharge will bind a purchaser automatically — whether or not they have been given notice. An equitable rentcharge cannot be registered, but may have an agreed notice or a unilateral notice entered in the registered title of the charged land, since a rentcharge is not an overriding interest. Equitable rentcharges in unregistered land that are created after 1925 are registrable as Class C (iii) land charges.
The key case
Roberts and others v Lawton and others [2016] UKUT 395 (TCC); [2016] PLSCS 245 raised concern regarding rentcharge arrears in relation to statutory remedies available under section 121 of the 1925 Act. This resulted in a number of lenders refusing to lend on properties subject to rentcharges on the basis that they deemed rentcharged properties as unsuitable security.
In this case, the rent owner bought and managed rentcharges. It was entitled to a nominal income from the properties in addition to the price of the redemption of the rentcharges (where property owners wanted to end the rentcharge).
The rent payers were in arrears (approximately £6-£15). The rent owner became entitled to grant to the directors of the rent owner, as trustees, rentcharge leases of the properties due to non-payment of the rentcharge. The rentcharge leases were granted for a term of 99 years and reserved no rent (any rent would go to the rent payers).
The rentcharge leases were registered with HM Land Registry. The existence of the rentcharge leases resulted in the property being unsaleable (the tenant being entitled to possession). The intention was to surrender the leases once arrears and costs were paid. The costs generally far exceeded the value of the arrears.
The Upper Tribunal (Tax and Chancery Chamber) held that a rentcharge lease — once granted — continues in existence even when the arrears have been repaid, unless it is surrendered voluntarily. The lease continues despite the redemption of the rentcharge itself. The lease would even continue if the rentcharge was extinguished in 2037 under the automatic extinguishment of rentcharges.
Legislation governing rentcharges
The Rentcharges Act 1977 has three effects:
- Subject to limited exceptions, no new rentcharges can be created on or after 22 August 1977. Rentcharges that can still be created are estate rentcharges (the most common use of rentcharges today is in “service charge” estate rentcharge schemes), rentcharges created by certain statutory provisions and rentcharges created by a court order or in relation to certain family trust arrangements (section 2 of the 1977 Act).
- Subject to limited exceptions (including estate rentcharges and rentcharges for variable amounts), existing rentcharges will extinguish on the later of (a) 22 July 2037 or (b) the expiry of 60 years from when the rentcharge was first payable (section 3 of the 1977 Act).
- Creation of a simplified procedure for the redemption and apportionment of rentcharges.
The Leasehold and Freehold Reform Bill was introduced to parliament on 27 November 2023. This included provisions to reform section 121 of the 1925 Act. The initial draft appears to only reform section 121 for historic rentcharges — those unable to be created since before 22 August 1977. The briefing notes to the bill refer to freehold homeowners on private and mixed-tenure estates as having the same rights of redress as leasehold tenants in relation to estate charges.
Rentcharge checklist
When dealing with buying or selling property subject to a rentcharge:
- Consider the specific terms of the rentcharge — especially the enforcement provisions
- Ensure that rentcharges have been paid when due
- Ensure that any interest which may have accrued has been paid in full
- Consider if the rentcharge has come to an end or (if not) whether it can be terminated
- Consider whether the rentcharge can be varied
- Consider the availability of indemnity insurance to cover the potential risk of enforcement
- Check what (if any) requirements a lender might have
Key takeaways
Rentcharges can be subject to draconian remedies. Always consider alternative options to entering into a rentcharge and/or ensure that amendments are considered to try and protect yourself from the riskiest remedies. When investigating title or preparing title packs, always consider the options available to address any issues created by existing rentcharges and where (if possible) rentcharges can be terminated.
Rentcharges could be terminated in one of the following ways:
Statutory redemption (pursuant to the 1977 Act)
Statutory redemption is not available to all rentcharges — specifically those still permitted to be created from 22 August 1977 (estate rentcharges and variable rentcharges). Following redemption, a certificate should be issued and — in the case of registered land — a copy provided to HMLR to update the registered title.
Voluntary extinguishment
A rent payer may be able to “buy out” the rentcharge by discretionary agreement with the rentcharge owner.
Automatic expiration
Some rentcharges will expire by effluxion of time on the later of 22 July 2037 or the expiry of 60 years from the date at which the rentcharge first became payable (under the 1977 Act). Automatic expiration does not apply to estate rentcharges and variable rentcharges (subject to these remaining variable).
Lapse of time (non-payment of rent)
If rent has not been paid (or has been paid to a party not entitled to it) for a period of time, adverse possession of the rentcharge may have taken place. In the event that a rentcharge has not been paid for 12 years, an application should be made to HMLR for the rentcharge to be removed from the registered title — providing that there has been no communication from the rentcharge owner.
Alternatively, variation or indemnity insurance may be available as remedies — although property owners (as opposed to lenders) may have difficulty in obtaining insurance for estate rentcharges created after 22 August 1977 due to unwillingness to underwrite a failure to pay estate rentcharge.
Livy Twiss is an associate at Brabners
