Rentcharges - What are they, How do they work and Can they be terminated?
What is a rentcharge?
According to Gov.uk:
“A rentcharge is an annual sum paid by the owner of freehold land to another person who has no other legal interest in the land. The person who receives payment from the rentcharge is known as the ‘rentowner’.
Rentcharges have existed for many centuries, but since the Rentcharges Act 1977 no new rentcharges can be created.”
There are however exceptions from the Rentcharges Act 1977, thus enabling new rentcharges to be created. One of these is an ‘estate rentcharge’ created for the purpose of:
- ensuring the performance of positive covenants (‘covenant supporting rentcharges’) (examples of prositive covenants include maintaining fences and buildings)
- meeting or contributing towards the cost of the performance by the chargee (rentowner) of covenants for the:
- provision of services
- carrying out of maintenance or repairs
- effecting insurance, or
- making of any payment for the benefit of the land affected by the rentcharge or for the benefit of that and other land (‘service charge rentcharges’)
The above types of rentcharges can be protected by a right of entry, which can be exercised on non-performance of such covenants. Rentcharges are used in development schemes to support a positive covenant to contribute to the costs of shared elements of the development.
To create a legal rentcharge, the rentcharge must require the payment of an amount issuing out of or charged on property either in perpetuity or for a definite period. All other rentcharges (such as a rentcharge for life) will be equitable interests. This distinction is important in relation to the methods of protection and also in relation to the remedies available for non-payment.
Gov.uk goes on to state:
“Rentcharges provided a regular income for owners of land who were prepared to release land for development. Sometimes the land was released without a capital sum being paid with the rentcharge being the only payment.
A rentcharge is sometimes called a ‘ground rent’. However, a true ground rent is charged on leasehold land. Rentcharges are also often known as ‘chief rents’ in the North West of England.”
In 2012, the Court of Appeal decided in a judgment that a rentcharge was valid even though the entity making the contribution had no benefit from the purpose of the rentcharge, in that case, for the repair and maintenance of roads in another estate. So you don’t have to have a benefit from the rentcharge to still be liable to pay it.
Who has to pay the rentcharge?
“Once it’s imposed, a rentcharge continues to bind all the property even if it’s later divided and sold off in plots.
The rentowner could make any one of the householders on the land pay all of the rentcharge and collect the appropriate portions from the other householders on the land.
This has led to many unfair situations. In some cases, the householder wasn’t able to get money from the others and was left out of pocket.”
Problems with estate rentcharges
Estate rentcharges have priority of protection over subsequently registered charges and interests. Whilst this is effective in protecting the rentowner, this priority of protection may make the property difficult to finance by way of a 1st legal charge mortgage and accordingly rarely created.
Termination of rentcharges
Although rentcharges are usually of very low value, well-advised property owners often try to remove them from their titles because they can cause problems when selling or charging the property. A buyer of a property subject to a rentcharge will ask to see an up to date rentcharge receipt and obtaining this can cause delay and additional expense. Banks may be reluctant to accept property as security where the property is subject to a rentcharge which includes a right of re-entry.
Rentcharges can be extinguished by:
- express release
- statutory redemption
- the automatic extinguishment provisions of Rentcharges Act 1977
A rentowner can release the land from the rent by deed. If only part of the charged land is released the rentowner can recover the whole of the rentcharge from the remaining parcel of land.
A rentcharge can be extinguished when the person or entity that is entitled to the benefit of the rentcharge also owns the property that is burdened by the rentcharge. This however required a clear intention and express notification to the Land Registry.
Section 8 of the Rentcharges Act 1977 sets out a procedure for statutory redemption of rentcharges, whereby a person affected by a rentcharge can apply to the Secretary of State (in relation to land in England) or the National Assembly for Wales (in relation to land in Wales) for redemption. There are of course specific requirements to be satisfied before the application is deemed valid and will be considered.
The result of this application process is that the applicant’s property is released from the rentcharge. This does not however affect the rentowner’s right to recover any rent which may have accrued before issue of the redemption certificate.
Rentcharges extinguish automatically on 21 July 2037 or 60 years from the date on which the rentcharge first became payable, whichever is later. This does not apply to Permitted Rentcharges.
Lapse of time
Following the amendments made by Tribunals, Courts and Enforcement Act 2007, rentcharges are now treated as 'rent'. This means:
- unregistered rentcharges are not extinguished by lapse of time
- the limitation period for recovery of arrears under any rentcharge (ie whether registered or unregistered) is six years
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