PP 2012/29

Rentcharges are annual sums paid out of freehold land to third parties who are not landlords and who have no interest in the land affected by the rentcharge. The remedies available for non-payment place the rentcharge owner in a very strong position. In addition to rights of entry and distress, rentcharge owners are entitled to forfeit the land for non-payment. The Rentcharges Act 1977 made important changes to the law. It enables landowners to redeem historic rentcharges and extinguishes many others in 2037. It also prohibits the creation of new income profit rentcharges – but does authorise the creation of estate rentcharges. Landowners use estate rentcharges to recover service charge costs from freeholders despite the common law rule that the burden of positive covenants does not run with land. This is because the owners of land affected by a rentcharge will usually choose to pay rather than forfeit the land. However, estate rentcharges are relatively uncommon and rarely feature in cases before the courts. Smith Brothers Farms Ltd v The Canwell Estate Co Ltd [2012] EWCA Civ 237 provides important Court of Appeal guidance on the meaning and effect of the legislation. The farming company attacked the validity of the rentcharge reserved out of its land. It relied on s2(5) of the 1977 Act, which provides that rentcharges of more than a nominal amount shall not be treated as estate rentcharges unless the rentcharge represents payment for the performance of service charge covenants which is reasonable in relation to those covenants. The company complained that the rentcharge covered the cost of repairing estate roads that it had no right to use. Consequently, the services provided did not benefit its land. It also complained that the rentcharge transfer obliged the company to pay 90% of the cost of repairing the only road it did use. It claimed that this was unreasonable. The Court of Appeal upheld the rentcharge. S2(4) defines estate rentcharges. It refers to rentcharge covenants for the benefit of the land affected by the rentcharge, or for the benefit of that and other land. Consequently, an estate rentcharge must benefit the estate as a whole. The covenants need not apply specifically for the benefit of individual parcels affected by the rentcharge, so long as the land benefits directly or indirectly. The decision confirms that the validity of an estate rentcharge must be tested by reference to the definition in the legislation. S2(5) is an anti-avoidance provision, and not a definition section. It applies at the point when the rentcharge owner seeks to recover rentcharge payments Ð and prevents rentcharge owners from recovering payments that are unreasonable in relation to the performance of the covenants because the costs in question have not been incurred, or should not have been incurred, or are excessive. The litigation highlights another important point. The farming company attacked the rentcharge because the rentcharge owner had not expressly covenanted to provide estate services. The trial judge sidestepped the point by interpreting the rentcharge transfer to include such a covenant. Nonetheless, draftsmen would be well-advised to cover the point expressly when creating estate rentcharges to avoid having to resort to rules of interpretation or rectification. Allyson Colby is a property law consultant