Three topics to consider with rentcharges: freehold, estate and ground rent

Rentcharges have been in existence since the 1290 Statute of Quia Emtores, which was payable to the lord of the manor in perpetuity.

They became popular in the Victorian and Edwardian eras as a mechanism to release land from its manorial owners and get the land into use. Once the land was developed, the subsequent owners would then be liable for a yearly charge, normally ranging between £2 and £10.

Rentcharges – they may be archaic but they should not be overlooked

While the Rentcharges Act 1977 sought to prohibit new rentcharges, except in a few instances, such as estate rentcharges, there are many thousands of historic rentcharges still in existence. These will continue until 2037, when they will end. However, it is possible under the Act for owners of land subject to a rentcharge to compel the rentowner to ‘redeem’ the rentcharge. That is, end it on payment of a sum calculated according to a statutory formula.

Rentcharges can often go unrequested for some time. Indeed, there have been cases where the rentowner has requested the payment of a backlog of rentcharges with harsh penalties for non-payment. In some instances, management companies have used the unpaid rentcharge as an opportunity to grant a new lease and even potential re-entry. The professional footballer, Zeli Ismail has been one such victim of this practice.

Roberts v Lawton [2016] UKUT 395

This case involved a company in the business of buying and managing rentcharges. The company owned about 15,000 rentcharges and used its statutory enforcement rights under section 121 LPA 1925 to compel property owners to make payment of arrears and significant costs.

The case involved a number of property owners who were in arrears with their rentcharges for various small amounts; the lowest was £6 and the highest £15. The company granted its directors, as trustees, rentcharge leases for a term of 99 years that reserved no rent and applied to register the leases at the Land Registry.

Once registered, these leases would stymie the sale of these properties because a sale would not be viable even if the tenant-directors did not seek to take possession. The landowners were compelled to pay significant sums in return for surrender of the leases. One owner had been asked to pay £650. Even where the rent charge is paid, the lease continues.

The Land Registry initially refused to register the leases and the case came before the Upper Tribunal to decide whether the rentcharge leases were registrable. The tribunal judge reluctantly found that the practise was lawful despite being a disproportionate and unfair remedy. Judge Elizabeth Cook said, “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.”

Estate rentcharges typically go towards shared amenities such as shared accessways, communal garden areas or governing the operation of estates, such as large residential developments and business parks. While many of these ‘positive covenants’ are uninsurable, as they relate to ongoing maintenance provisions, there are situations where the management company is long gone, or the document has been superseded and not removed from the title. These may still be insured to give comfort to lenders.

With regard to Leasehold rentcharges, namely ground rent, the assumption is often made that if a property has a long lease (e.g., 125 years plus), it would not be classed as an Assured Shorthold Tenancy (AST). However, according to the 1988 Housing Act Section 3A, the property is classed as an AST if the ground rent exceeds £1,000 per annum in Greater London and £250 elsewhere. This is particularly prevalent for owners with an escalating ground rent where it may not have been classed as an AST when they began or took over the lease. Nevertheless, it could become one over time when the ground rent increases.

So, what does this mean for a property owner and what is the concern for lenders?

According to Section 8 Ground 8 of the 1988 Housing Act, if the property is classed as an AST and at least three months’ rent is overdue by more than three months, the landlord can ‘forfeit’ the lease. In these cases, the court has no right to grant relief and must terminate the lease so the freeholder can regain possession of the property, resulting in the lender losing their security over the property.

Many of our insurers now offer protection for the lender should the landlord issue proceedings for possession against a tenant under Section 8 Ground 8 of the Housing Act 1988.

It is worth noting that leaseholders are to be given a new statutory right to extend their leases to a maximum term of 990 years, an increase from the current entitlement of 90 years, with any annual ground rent payments being reduced to zero. This will mean the need for this indemnity will reduce over time.