What’s the problem? – Rentcharges
Sarah Loan, Commercial Property Solicitor, explains the issues surrounding rentcharges and why they aren’t as innocuous as most people think.
“Rentcharges” can be archaic and complex, but be careful not to ignore them as they have potentially costly consequences and can be problematic to deal with properly. The amounts involved may be very small, but the extent of the Rentcharge Owner’s rights of enforcement might shock a Buyer.
What are Rentcharges?
Rentcharges don’t usually relate to a Lease (despite referring to payment of “Rent”). They are an obligation on the owner of Property (the “Rentcharge Payer”) to pay money to a third party (a “Rentcharge Owner”), who may or may not have an interest in neighbouring land, and usually apply to the Freehold interest in Property.
Rentcharges were usually imposed on the sale of Property in order to provide a regular income to the Seller, in return for the Buyer being able to develop the land. As the amounts involved did not change with decimalisation nor inflation, they are now relatively small amounts- typically £10 or less per year. Therefore, they have not always been seen as much of a problem.
Since 22 August 1977, the types of Rentcharge that can be imposed have been severely limited. The main type Rentcharges that can still be imposed are on properties within Industrial or Residential Estates, where the Freehold interest in land is sold and the new owner needs to pay to contribute (for example) to the maintenance of common parts of the Estate. These are known as “Estate Rentcharges”.
Why are Rentcharges an issue?
Once imposed, Rentcharges bind the Property until they are terminated (about which please see below). Those imposed in older Deeds, where it may not now be possible to trace the current Rentcharge Owner, can be the most problematic.
Further complications can arise where the land is subsequently split, and the obligation to pay is apportioned between the owners of the resulting parts. There are a number of ways this can happen, and some leave each of the relevant Rentcharge Payers liable to pay the Rentcharge for all of the Property initially charged.
The real concern are the archaic methods of enforcement available to a Rentcharge Owner. These measures are a mixture of common law and Statutory remedies, as well as any powers set out in the Deed which imposes the Rentcharge.
How can Rentcharge Owners enforce their rights?
The most straightforward method of enforcement is for the Rentcharge Owner to treat the money as a debt due from the Rentcharge Payer. However, only up to 6 years’ worth of “Rent” will be payable as a debt. Further, a Rentcharge Owner is less able to recover their costs in doing so, and is free to use the further options below first.
The Statutory remedies are, perhaps, the most concerning, and “bite” if the rent has not been paid for 40 days or more. They include:
- The right to “re-enter” (similar to forfeiture for leases) allows the Rentcharge Owner to receive all of the income relating to the Property (for example, from a Lease), until the Rentcharge Owner and their costs have been paid.
- The right to grant a Lease to Trustees (“the Trustees”), who in turn try to recover the rents and costs on behalf of the Rentcharge Owner by leasing or mortgaging the Property.
As the Rents involved are often relatively low, the initial debt due is likely to be less than £100. To recover the Property in either instance, a Rentcharge Payer must either:
- Pay the Rent then owing and the Rentcharge Owner’s (legal, surveyors, etc) costs in connection with the occupational lease and the subsequent surrender of it, or
- Wait for the income from the Property or the Trustees’ use of their Lease to result in the payment of these amounts.
Given the low amounts involved, the costs can seem grossly disproportionate, and there is no obligation that they are “reasonable”. Further, as the Trustees may struggle to raise funds based on their Lease (as it is unusual and potentially short-lived), their Lease may effectively “ransom” the Property, rather than providing a mechanism to recover their losses (as intended). This has caused consternation both from unsuspecting property owners and legal professionals.
What can a Rentcharge Payer do about it?
Traditional Rentcharges may be brought to an end by:
- Buying the Rentcharge, if the Rentcharge Owner is known and willing to sell it. This must be set out in a Deed and carefully drafted.
- Statutory redemption, which extinguishes a Rentcharge following a one-off payment to the Rentcharges Unit. However, Estate Rentcharges, variable Rentcharges, Rentcharges by way of tithes and Rentcharges where the Rent cannot be confirmed may not be terminated in this way.
- For those willing to wait, the Rentcharges which can be redeemed (see immediately above) will be automatically extinguished in July 2037.
- Adversely possessing the Rentcharge- if it has not been paid for 10 or 12 years respectively depending on whether it has been registered or not. There is some debate about this is now possible, owing to changes to the relevant statute.
If the above options are not available or acceptable, a Rentcharge Payer can consider:
- Taking the risk- as only 6 years’ rent is payable, where the Rentcharge Owner has been inactive for some time, this is the most common route, although this disregards the risk of paying the Rentcharge Owner’s costs in the case of any enforcement.
- Putting indemnity insurance in place. You should speak to a solicitor about obtaining a suitable policy and what that will cover.
Sarah Loan is a Solicitor in our Commercial Property team. If you have any queries about Rentcharges or other commercial property matters contact Sarah at firstname.lastname@example.org.