Estate rentcharges in commercial property – what a landowner needs to know

Estate rentcharges are one of the few means of ensuring that positive obligations run with land. They are not common but can be problematic for landowners.

This article addresses some of the issues that arise in the context of estate rentcharges affecting commercial property.

Background

A rentcharge is an interest in land which relates to an annual or periodic payment by a landowner. Unlike with other land interests, the holder of a rentcharge does not need to hold any land in order to be the beneficiary of a rentcharge.

A rentcharge imposes a charge on the land which provides the owner with remedies in the event that the rent payment is not made. Rentcharges attach to land, so even though they contain positive obligations, they will bind successors in title without the need for a deed of covenant or chain of indemnities.

The Rentcharges Act 1977 prohibits the creation of most new rentcharges but still permits the creation of ‘estate rentcharges’. Estate rentcharges are typically created as a means to secure the performance of positive obligations affecting land, for example:

• to secure payment towards the cost of the rentcharge owner providing services for the benefit of the burdened land and other land (akin to a service charge); or
• to ensure that positive covenants to be performed by the proprietor of the burdened land continue to bind the land and successors in title to it.

What are the risks associated with rentcharges?

One of the most significant risks for a landowner to be aware of is that posed by the remedies available to a rent charge owner for breach of rentcharge. Section 121 of the Law of Property Act 1925 contains some potentially draconian remedies which would not usually be acceptable to an investor or lender.

These remedies do not necessarily apply to all rentcharges: they need to be specifically incorporated. But when they are, their effect could be significant.

Two remedies under section 121 remain in force. These are:

• the right for the owner of the rentcharge to enter on to the burdened property to take income from the land until any arrears of the rentcharge and the costs and expenses associated with non-payment have been recovered by the rentcharge owner, and
• the right for the owner of the rentcharge to grant a lease of the burdened property to a trustee for a term of years and to take a rent from the land to recover any rentcharge arrears and costs associated with non-payment.

These remedies are discussed below. They are not mutually exclusive and, as such, the owner of a rentcharge which is in arrears may exercise both simultaneously.

Right of entry into possession

The right of entry into possession can be exercised in the event that the rentcharge remains unpaid for 40 days after the date that payment fell due. The owner of the rentcharge does not need to give notice to the proprietor of the burdened land before exercising this remedy and no legal demand for payment needs to have been made.

The remedy allows the owner of the rentcharge to take income from the burdened land to cover any rentcharge arrears together with all costs and expenses incurred by the owner of the rentcharge is pursuing a breach.

Grant of a lease

This statutory remedy allows the owner of the rentcharge to enter on to the burdened land and grant a lease of the land in favour of trustees.

As with the right of entry into possession, the grant of a lease is available if the rentcharge remains unpaid 40 days after it falls due. There is no requirement for a demand for payment to have been made or for the proprietor of the burdened land to be notified prior to exercise of the remedy.

Whilst the surplus of any rent received over and above the amount required to recover any arrears and associated enforcement costs must be paid to the person for the time being entitled to the reversion (this would usually be the proprietor of the burdened land), case law suggests that the lease granted will continue to subsist even once the arrears have been recovered. It is then for the proprietor of the burdened land to agree a surrender with the owner of the rentcharge. Such surrender will be the subject of commercial negotiations and is likely to require the payment of a surrender premium.

Essentially this remedy potentially allows a landowner to be displaced by reason only of there being limited arrears of rentcharge left unpaid.

Other remedies

In addition to the statutory remedies above:

• it is possible for a rentcharge to include other remedies such as an express right of re-entry – essentially forfeiture.
• a breach of covenant claim might be brought against the original covenanting party in the event of non-payment of rent. The rentcharge deed is essentially a contract and so the original contracting party will remain liable on its covenant even after it has parted with its interest in the land.

Practicalities

Whilst the risks posed by rentcharges are well known among practitioners, rentcharges can be a valuable tool to ensure compliance with positive covenants and obligations. Modern rentcharges may avoid some of the biggest problems found within older rent charges, but there are traps for the unwary. Lenders’ requirements in respect of rentchages are changing and they are increasingly nervous about lending upon a property with a rent charge and so additional due diligence is required. There are some actions that you can take to mitigate the risk.

If buying a property that is subject to a rentcharge, a well-adviser purchaser will enquire to ensure that there are no ongoing breaches of the provisions of the rentcharge and, clearly, it is prudent to ensure that any obligations contained within the rentcharge are complied with in the future. This may mean ensuring extra administrative checks are in place to guarantee compliance with the rentcharge.

If possible, the owner of the rentcharge should be encouraged to register the rentcharge at the Land Registry. Rentcharges can be registered with their own separate title. This should ensure that it is easier to monitor who the owner of the rentcharge is (rentcharges can be freely transferred) and so this makes it easier to ascertain that the rentcharge is being paid to the correct person.

Finally, if possible, where the rentcharge incorporates section 121 of the LPA, it is advisable to try to negotiate a variation of the rentcharge to remove these remedies.