Blast from the past
Lyndon Campbell looks at how rentcharges came about, whether new rentcharges can be created today and what are the consequences for not paying
At first glance, the subject of rentcharges appears to be a dry and dusty legal phenomenon. However, acquiring freehold land which is subject to a rentcharge can have very real financial consequences. A rentcharge is known by several names. In some parts of the Country, it is incorrectly known as ground rent. In the North West, it is commonly known as chief rent. In spite of all the names, there is one key idea behind the rentcharge. It is a periodic sum charged on or originating out of land, which is not part of the landlord/tenant relationship. Essentially, a rentcharge is an obligation to periodically pay a third party.
Rentcharges actually originate from 1290 when Edward I undertook a radical reform of English land law. A rentcharge was a way for the Lord of the Manor to sell plots of his land yet still collect a regular income from the land.
Fast forward to the 19th century and rentcharges became a popular way for crafty builders to get a regular income from land they had developed; even after the land they developed was completely sold off.
The Victorian fashion for rentcharges helps to explain why they are more common in specific areas of the country. Due to Victorian expansion and development in industrial hubs like Bristol and Manchester, freehold land in these cities is commonly subject to historic rentcharges.
Over time, the Victorian use of rentcharges created gross unfairness. As the freehold land was sold and re-sold, the rentcharge would still be payable. Freehold owners of the land were obliged to pay periodically to a complete stranger who had no other dealings with the land.
The Government took action in the form of the Rentcharges Act 1977. Although many old rentcharges remain in force, the creation of new rentcharges has been severely restricted since 1977. It is possible to apply for redemption of the rentcharge. This is usually achieved by paying 17 times the annual rent as a lump sum. When the rentcharge is redeemed, a certificate is issued as evidence of this. In any case, all rentcharges created before 22 August 1977 will be extinguished on 22 July 2037.
Rentcharges Today: The ‘Estate’ Rentcharge
One of the few rentcharges permitted by the 1977 Act is the “Estate Rentcharge”. In terms of property law it is difficult to make sure that a covenant to do something (eg to contribute towards maintenance of estate roads/communal is binding on plot owners). The usual mechanism for making these covenants stick is via a chain of covenants between each successive householder and the freeholder protected by a restriction in the householder’s title. An Estate Rentcharge is a useful way of avoiding all of this.
There are two different types of Estate Rentcharge. The first type is commonly used to ensure that positive covenants relating to the way in which the property is used going forwards eg for example to make sure boundary fencing is repaired. This type of Estate Rentcharge must be for a nominal amount (eg: one pound) and if breached allows the Rentcharge holder to enter the property to put right the breach and re-charge monies spent to the householder.
The second type of Estate Rentcharge is a rentcharge which meets or contributes to the cost of the performance of a positive covenant. This kind of Estate Rentcharge is used to ensure the payment of service charges following the sale of freehold land. It might be useful to use an example:
A developer owns a sizable piece of freehold develops residential housing on the land and then wishes to sell the individual freehold properties. This is an exclusive development and the developer wishes to create a management company to look after shared areas of the development; the solution – an estate rentcharge requiring each of the freeholders to pay the management company an annual service charge.
Although an estate rentcharge may seem like a convenient way to administer a service charge, care must be taken when considering the creation of such a charge.
From the perspective of a buyer, (taking subject to an estate rentcharge), it must be noted that any future non-payment of the rentcharge can have serious and disproportionate consequences. Unless the rentcharge expressly states otherwise, the owner of the rentcharge would have the right to enter the freehold land until the debt is paid. Also, the owner of the rentcharge would be able to claim distress (entering the freehold land and taking goods to the value of the debt), all of which would make the property difficult to mortgage unless these rights are modified some way in the transfer.
From the perspective of a developer, (wanting to create a rentcharge), there are two key issues to bear in mind. Firstly, the rentcharge must not be too onerous on the defaulting party. If the remedies for non payment go beyond those set out by statute (e.g. forfeiture of the land), then lenders may be unwilling to lend to buyers of the freehold properties. The freehold properties may then become impossible to sell. Secondly, for an estate ‘service’ rentcharge to take legal effect, the sum charged must be reasonable to cover the costs of the services provided. If the sum charged appears to be unreasonable then the rentcharge may fail – there would therefore be no remedy against a defaulting party.
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