Decision by Upper Tribunal sheds worrying light on the statutory remedies available for non-payment of rentcharges
Morgoed Estates Limited and others v Lawton and others  UKUT 395 (TCC)
A recent case heard in the Upper Tribunal (Tax and Chancery Chamber) has illustrated the grave consequences that can arise out of non-payment of rentcharges. Rentcharges are often revealed on titles to freehold property. Little regard is often paid to them when investigating title, as they generally secure small amounts of money barely worth collecting – that is about to change.
Historically, rentcharges were used in the nineteenth and early twentieth centuries by landowners as a way of earning additional money from the sale of land for housing. As the population was expanding rapidly, land was needed quickly. Consequently, house builders bought land at below market value and sellers imposed rentcharges on the land so that fixed annual payments would be made by the freehold owners in perpetuity to make amends for the reduced up front capital payment they received.
However, The Rentcharges Act 1977 put a stop to creating new rentcharges that have the sole purpose of imposing standalone monetary payments. It provided that all existing rentcharges of this nature would be automatically extinguished by 2037. It also created a mechanism for redeeming such rentcharges.
The passage of time and the effects of inflation have caused the real value of older rentcharges to fall dramatically – typically, they only amount to a few pounds a year.
The only type of rentcharge that can now be created is the 'estate rentcharge', which has been used as a device to make positive covenants run with the land, such as an obligation to pay a service charge contribution. Estate rentcharges are widely used when setting up new residential and commercial estates.
These considerations have led to a view among Solicitors that older rentcharges are of no real concern because the payments, even if demanded, are unlikely to bother the vast majority of buyers.
Enter Morgoed Estates v Lawton
Once a rentcharge has remained unpaid for 40 days, even if the owner of the property has not been served with a written demand, the rent owner has a range of remedies to raise money to pay the arrears and associated costs. One of these remedies is to grant a lease of the property to trustees.
Morgoed Estates Ltd, whose business is to acquire and manage old rentcharges, exercised this statutory right to compel land owners to make payment of arrears and significant costs.
Overall, the case concerned whether the leases it had granted needed to be registered (they do). Additionally, the Judge provided clear authority that a lease granted in this way does not simply end once the arrears have been paid, and, unlike a mortgage, the lease continues for the full term even if the rentcharge itself is redeemed.
The remedy is disproportionate to the breach of obligation giving arguably unjust enrichment to the rent owner.
Implications and Practical Steps
Since a rentcharge lease gives the trustees (ie the tenants of the lease) the right to exclude the freehold owners from the land, this will have a crippling effect on value. In essence, a property subject to a rentcharge lease will be unmarketable and unmortgageable. Therefore, the freeholder can be held to ransom as there is no way to bring the lease to an early termination other than by agreeing with the leaseholder to surrender its lease.
The case will serve as a wake-up call for buyers and their advisors to take rentcharges seriously in their due diligence. Confirmation should be sought that all arrears have been paid so that the title is not at risk of enforcement action. Additionally, if possible, buyers should make use of the procedure under S.8 of the Rentcharges Act 1977 to redeem the rentcharge before any remedies become available. Alternatively, if the rent owner cannot be found, buyers should consider obtaining defective title insurance to protect against the financial losses that may arise in the event of enforcement.