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The Toxic Rentcharges Review

Before the case of Roberts v Lawton [2016] UKUT 395, rentcharges were less of a concern as the amounts were often small and were to be paid to rentcharge owners that were missing or unknown, however attitudes have now changed.

What is a rentcharge?

A rentcharge is a historic property device and dates back to the 1800s and is an annual payment secured on land. Rentcharges affect freehold properties and are not the same as ground rent payable on leasehold properties. Rentcharges have been used previously if a property has been sold below its open market value and the new owner agreed to pay an annual rentcharge to the seller to make up the difference over time. Although the Rentcharges Act 1977 prohibited the creation of new rentcharges of this type, there are many thousands of historic rentcharges still in existence and these will continue to exist until 2037 when they will no longer be enforceable. However, estate rentcharges can be created to secure the payment of maintenance costs or the cost of providing services and will be enforceable after 2037.

Section 121 of the Law of Property Act 1925 (the "LPA") grants the rentcharge owner remedies for unpaid rentcharges (whether demanded or not) if the arrears remain unpaid for more than 40 days, these include:

• Right of entry: This permits the rentcharge owner to enter into possession of the land and take the income from it until the amount due is paid;
• Lease to a trustee: The rentcharge owner is entitled to grant a long lease of the property to trustees for the purpose of raising income to recover arrears, plus enforcement costs and the cost of granting the lease.

The Case

In the case of Robert v Lawton, Morgoed Estates Ltd ("Morgoed") bought and managed around 15,000 rentcharges. Some of the properties were in arrears, however these arrears were trivial and ranged from £6 to £15 per property. To recover these arrears Morgoed granted to its directors (as trustees) leases of the properties for terms of 99 years at no rent (as any rent would go to the land owners) as allowed by s121 of the LPA and compelled property owners to make payment of arrears and significant administration costs and resulted in the properties becoming virtually unsaleable and unmortgageable.

The reasons for the arrears included:

• Evidence was not provided that confirmed Morgoed owned the rentcharge, as Morgoed refused to provide a copy of the historic deed that created the rentcharge without the payment of an administration fee of £60;
• Morgoed sent rent demands to the incorrect address, as one of the property owner in question was not living at the property and then on discovering the property owner's address, Morgoed decided not to send a demand to the correct address but to grant a rentcharge lease straight away;
• One property owner offered to pay for the arrears demanded however, Morgoed would not accept the payment because it required not only the arrears of rent but also its administration charge for the granting and registration of the rentcharge lease, being £650.

The property owners felt they were being 'held to ransom' for amounts far in excess of the arrears owed and decided to involve the court.

The Decision

The Upper Tribunal Judge called Morgoed's behaviour both draconian and troubling, and acknowledged that the granting of the rentcharge lease was a wholly disproportionate remedy given the level of the arrears and that inflation had made it 'toxic'. However, it also ruled that Morgoed were within their rights to register leases against the property titles, meaning that the property owners had no choice but to bow to Morgoed's demands. The Judge stated that "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."

Land Registry initially refused to register such leases, however under the Land Registration Act 2002, the rentcharge leases were not mortgages by demise and so were capable of registration. A mortgage by demise must contain a provision for redemption i.e. for the lease to come to an end when the loan is repaid. Additionally, a mortgage is a security right, which protects lenders, whereas a rentcharge lease functioned as a remedy, not as a security right. As there is no statutory mechanism to force a surrender of a rentcharge lease this did not satisfy this requirement. Once a rentcharge lease is granted it continues in existence even once the arrears have been repaid, unless the lease is surrendered voluntarily, which may result in further additional administrative costs.

In the time since this case, companies have been buying up rentcharges, in particularly in Manchester and Bristol, to exploit this ruling. However, the Government have thankfully taken notice and at the end of 2017 revealed it would look at the legislation to prevent rentcharge owners granting leases in the same manner as Morgoed. Unfortunately, this will take some time. In the meantime, there is the option of obtaining a freehold rentcharge indemnity insurance policy if there has been no prior contact with the rentcharge owner.

We would therefore suggest rentcharges are something considered early on in any transaction (if applicable) and if you would like further advice on this generally or a specific scheme please get in touch with Jennifer Hankinson on 01254 2222417 or Lyndsay Baxter on 01772 220384. Alternatively send any questions through to Forbes Solicitors via our online contact form.

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