Dear Occupier

For reasons that will become clear in this post, rentcharges are a bit of a legal oddity. It has been a new realm for me, but I was intrigued by this case, and wiser members of the NL collective have held my hand as I headed down this particular rabbit hole. As a result, this is nothing if not a collective post (apart from the errors. Those are all mine.)

The decision by the First-Tier Tribunal (Property Chamber) in the case of Roberts v Keegan (REF/2012/1006, REC/2013/0041) [Not available online yet], about the enforcement of a rentcharge, may seem a little obscure, but I think it is of interest. Since it is a first tier decision it creates no precedent.

Rentcharges are a form of real property (an incorporeal hereditament) which give someone (the “rentowner”) the right to receive income from land. Rentcharges may be registered by the land registry although registration is voluntary.

Rent charges were apparently, at one time, a popular way of selling property. Rather than selling for the property’s full price, it might be sold at a reduced, or even nil, price but subject to a rentcharge in favour of the vendor. The vendor would then be guaranteed an income out of the land they had sold.

The Rentcharges Act 1977 made a number of drastic reforms to rentcharges. section 2 prevents the creation of most new rentcharges. There are some exceptions and one of these, “estate rentcharges”. What is more existing rentcharges, except for ones that are “variable”, will all cease to exist on 22nd July 2037 by section 3. While it is tempting to think their imminent demise means that they can be safely ignored by property lawyers, there are still 22 years to go – plenty of time.

Estate Rentcharges

Section 1 of the Rentcharges Act defined a “rentcharge” as:

any annual or other periodic sum charged on or issuing out of land, except—

(a) rent reserved by a lease or tenancy, or

(b) any sum payable by way of interest.

Now lots of sums that come up in practice fall into that definition. I wonder (and this would be interesting to test) whether service charges not reserved as rent are really “rentcharges”. Certainly any charges for upkeep of common property imposed on freehold owners must be rentcharges.

Section 2 introduces the idea of an “estate rentcharge”:

(4)For the purposes of this section “estate rentcharge” means (subject to subsection (5) below) a rentcharge created for the purpose— (a)of making covenants to be performed by the owner of the land affected by the rentcharge enforceable by the rent owner against the owner for the time being of the land; or (b)of meeting, or contributing towards, the cost of the performance by the rent owner of covenants for the provision of services, the carrying out of maintenance or repairs, the effecting of insurance or the making of any payment by him for the benefit of the land affected by the rentcharge or for the benefit of that and other land. (5)A rentcharge of more than a nominal amount shall not be treated as an estate rentcharge for the purposes of this section unless it represents a payment for the performance by the rent owner of any such covenant as is mentioned in subsection (4)(b) above which is reasonable in relation to that covenant.

Again, many charges (even service charges?) we meet in practice would be estate rentcharges. If they are “variable”, they won’t be abolished by the Rentcharges Act 1977 and new ones may be created. They also appear (by section (5)) to be confined to charges that are reasonable, (doing in 1977 what section 19 of the Landlord and Tenant Act 1985 did in a more partial and less satisfactory way nearly a decade later).

Do estate rentcharges work that way? Yes, says Smith Brothers Farms v Canwell Estate  [2012] EWCA Civ 237.  Section 2(5) prevents enforcement of an estate rentcharge for any amount that is not reasonably incurred.

For some unforgivable reason, NL failed to look at Smith Brothers Farms v Canwell Estate  at the time, despite its wider importance.

Enforcement of Rentcharges

Section 121, Law of Property Act 1925 gave the owners of rentcharges three methods of enforcing their right. One of these, the right of distress, was abolished along with other forms of distress for rent by the Tribunals, Courts and Enforcement Act 2007 on 6th April 2014.

The other two are: a right to take possession and a right to create a trust of a lease of the land to pay off the arrears. Mysteriously the decision mentions “four remedies” (see paragraph 30) but, well, the fourth escapes me.

There are two key points about the rights of enforcement. The first is that the trust of a lease is:

to raise and pay the annual sum and all arrears thereof due or to become due, and all costs and expenses occasioned by nonpayment of the annual sum, or incurred in compelling or obtaining payment thereof, or otherwise relating thereto, including the costs of the preparation and execution of the deed of demise

Which means that a rentowner may recover their costs of enforcement by this route in addition to the arrears.

The second point is that the remedies do not require there to have been a prior legal demand for the sums due. If you owe a rentcharge it is up to you to pay it. If you fail to do so, the rentowner may enforce without warning.

Lest someone subject to a rentcharge fear these powers of enforcement, Rentcharges may also be forcibly redeemed by the rent payer under sections 8-10.

The Rentcharge at 1 Arlington Road – Roberts v Keegan

The popularity of rentcharges as a device for creating incomes occurred at a time when clearly few thought it would be necessary to build-in anti-inflationary devices. As a result Victorian rentcharges tend to be for teeny-weeny sums of money. In Roberts v Keegan it was £2.75 a year.

The rentcharge was noted in the property’s Charges Register, so that when Mr Keegan bought it in December 2000, he would have known there was a rentcharge, though its small size meant that he probably did not give it much thought.

Mr Keegan paid an instalment in 2000 and two instalments in 2002. In the latter case, he made the payment in response to a demand in an envelope (and yes, this matters) addressed to “The Occupier”. It is unclear whether that last payment actually reached the then rentowner. She did not note a payment in her accounts and the judge thought that the postal order sent by Mr Keegan might never have reached her.

Where there are large numbers of even tween-weeny sums of money, there will be someone with a business plan. Morgoed Estates Limited was that someone and, by September 2003, it had become the rentowner.

Morgoed did not, at that stage, know Mr Keegan’s name and so addressed demands to “The Occupier” as had their predecessor in title. The judge found that Mr Keegan had almost certainly destroyed them because he usually ignored such letters.

The result of these confusions is that by February 2005, the rent arrears stood at £5.50 (if Mr Keegan’s 2002 payment had made it through the post) or, as Morgoed thought, £11. Enough is enough, they appear to have thought, and they served a possession notice: this time addressed to Mr Keegan because Morgoed had discovered from the land registry the identity of the registered proprietor, the cost of doing so (£60) being added to the arrears.

The Dispute

A telephone call, described as “somewhat contentious”, took place between Mr Keegan and Mr Roberts (acting for Morgoed). One issue in the telephone call was a demand, by Mr Keegan, that Morgoed supply proof of ownership of the rentcharge. Mr Keegan came away thinking that if he paid the arrears of the rentcharge (but not the £60) he would be sent a copy of the title deed. Mr Roberts was equally quite sure he made no such promise.

In March 2005, Mr Keegan paid £5.50 but was not sent any documents in return. Mr Keegan did not pay the £5.50 which may or may not have been outstanding from 2002, nor the £60 claimed in costs, nor did he pay the rentcharge due in 2005, which was now outstanding.

Morgoed then (in 2005) demanded £68.75, consisting of the next year’s ground rent and offered to sell the rentcharge for an additional £49.50. They continued to send demands until 2012. As far as I can tell from the judgment, Mr Keegan made no further payment.

Eventually Morgoed exercised their s121(4) power and granted a lease for a term of 99 years of the property to trustees and applied to register it. Perhaps unfortunately (as we shall see) the backsheet of the lease said “Demise to secure payment of rentcharge”.

It’s not a lease, it’s a mortgage

What, you might imagine, could be wrong with applying to register a lease that Morgoed had the undoubted power to create? Nonetheless, Mr Keegan resisted and, surprisingly, the tribunal agreed with him.

The judge reasoned as follows. Compulsory registration of title happens, under section 4 Land Registration Act 2002, but section 4(5) excludes mortgages with a subsisting right of redemption. Much the same applies for voluntary registration of title under section 3, which also excludes mortgages of that kind.

What’s a mortgage? The Land Registration Act 2002 defines a “legal mortgage” as having the same meaning as in the Law of Property Act 1925, which in turn defines “mortgage”, “unless the context otherwise requires” as:

(xvi)“Mortgage” includes any charge or lien on any property for securing money or money’s worth; “legal mortgage” means a mortgage by demise or subdemise or a charge by way of legal mortgage and “legal mortgagee” has a corresponding meaning; “mortgage money” means money or money’s worth secured by a mortgage; “mortgagor” includes any person from time to time deriving title under the original mortgagor or entitled to redeem a mortgage according to his estate interest or right in the mortgaged property; “mortgagee” includes a chargee by way of legal mortgage and any person from time to time deriving title under the original mortgagee; and “mortgagee in possession” is, for the purposes of this Act, a mortgagee who, in right of the mortgage, has entered into and is in possession of the mortgaged property; and “right of redemption” includes an option to repurchase only if the option in effect creates a right of redemption

Aha! Said the judge. This lease is made to “secure payment” of the rentcharge. It even says so on the back. Section 205 also talks about “securing money” (almost certainly not in the same sense, but let’s not worry about that) ergo, the lease is a mortgage.

Not only that, the judge found that it had a “subsisting right of redemption”, because Mr Keegan could redeem the rentcharge under sections 8-10 of the Rentcharges Act 1977. Thus the lease could not be registered and the registration would have to be cancelled.

It’s all about costs (as usual)

Well, OK, so it’s a mortgage and not registrable, but the Tribunal could direct the registrar to note the lease on Mr Keegan’s title under rule 40(3) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013.

This is where all those “addressed to Occupier” envelopes come into the story. Although the Property Chamber does not normally have a rule that costs follow the event, it does when hearing land registration cases. Mr Keegan, having won, would be entitled to his costs. The judge thought that if those costs wiped out the sums owed to Morgoed then there would be nothing to enforce, given a set off, and the lease should not be noted on the title.

But what about Morgoed’s costs? Here is where the ire of the judge, which has clearly been present throughout the judgment, finally bites on Morgoed. The judge thought that Morgoed’s refusal to supply Mr Keegan title documents, or to mediate the dispute when asked, made their incurring costs unreasonable and, relying on Gomba Holdings, therefore not recoverable. Mr Keegan could not be blamed for routinely destroying letters addressed to “The Occupier” since that was fairly normal practice as a way to avoid junk mail.

So, Morgoed get nothing, at least in these proceedings.

Comment

I may be a neophyte in the world of rent charges, but much of this seems to me to be wrong – or at least I can’t see how the Tribunal’s findings add up.

The judge appears to have lost sight of the fact that Mr Keegan had been refusing to pay any of the sums he owed for a period of 7 years, after having been made well aware of the identity of the rent charge owner. The sums might have been piffling, but were undoubtedly due. The law puts the onus on the payer to pay. Mr Keegan was quite capable of doing his own researches into title but he did not do this. The judge thought that Morgoed ought to have factored the price of supplying such documentation into the purchase price they paid for the rentcharges, but why should they? They have no obligation to do so.

Since Morgoed were entitled to enforce, why should they not incur at least some reasonable costs in doing so. Sums like £60 are not really very large by the standards of legal costs in many other cases, albeit large by comparison with the small size of the rentcharge.

Refusing mediation may well be unreasonable, but Mr Keegan seems only to have offered to mediate the dispute about registration of the lease, not about owing the rentcharge. What is more there are times when it will usually not be reasonable to mediate. Mr Keegan’s refusal to pay a sum he owed might well be one of those times.

Nor is applying to register a long lease really an unreasonable thing to incur costs trying to do. It was the wrong procedure, but a reasonable lawyer might well have thought it was the right one.

On that point the judge seems to have gone wrong in two different ways. The most serious being the right of redemption. The Rentcharges Act 1977 allows Mr Keegan to redeem the rentcharge but not the lease. Most specifically, by section 9(3)(b) of the Act, redemption does not affect the right of the rentowner to enforce any rent due before the rentcharge was redeemed.

Nothing in section 121 allows the lease to be redeemed or ended once created. Of course if the lease persists after the arrears are paid off, any additional monies are held on trust for the rent payer, but the lease persists. The rent payer may then have the lease conveyed into their hands under the principle of Saunders v Vautier and it would then be extinguished, but I think it is a stretch to call that a right of redemption. Even if it is, it wasn’t the one the judge thought it was..

It is the finding that the lease is really a mortgage that is so surprising. The drafters of the Law of Property Act 1925 were pretty clear what a mortgage was. They were more used to mortgages by demise then we are today and if that is what they intended that such a lease was a mortgage they would surely have said so. Leases as enforcement mechanisms turn up in many places – even in the law of mortgages – but are not usually treated as mortgages themselves. If the judge were right, there would be other wider consequences.

Fortunately this is a first-tier decision, so we may simply look on in wonder, possibly with a tinge of bewilderment. I wonder if it will be appealed, so that my education in rent charges may continue.

About Giles Peaker

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts, and still is Nearly Legal on Google +.
Posted in Housing law - All, Leasehold and shared ownership and tagged .

17 Comments

  1. I must admit that I read this with a mix of horror and bewilderment as people flirt with the idea of Community Land Trusts. The concept of taking public land for social housing and then paying the council a regular income is popular, but if there is the least doubt as to whether such arrangements are allowed (they would probably be variable and might be for a fixed period, so might escape the ban, but the uncertainty might be the death knell) then another way of addressing the housing crisis in London might fail. (I accept his is a minority interest)

  2. Pingback: Dear Occupier – Nearly Legal | Current Awareness

  3. Mr Cousins slipped when he referred to four remedies provided by section 121 Law of Property Act 1925. The remdy of action on the covenant to pay against the original covenantor, and the remedy of action on the debt against successors in title of the original covenantor are not provided by the section, though the incidence of dictress was made explicit by section 121 (2) Law of Property Act 1925.
    A well drawn instrument creating an estate rentcharge will have a right of forfeiture or re-entry annexed to the rentcharge, which gives force to the covenants, and is subject to the rules as to relief against forfeiture that make long leases with such rights annexed to the reversion acceptable in practice.
    In the report, http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWLandRA/2014/2012_1006.html&query=morgoed+and+estates&method=boolean, there is no discussion of whether a lease granted under section 121 (4) would generally be a mortgage, or whether this particularly lease was a mortgage – but equity looks to the substance and not to the form. Mortgage by demise was a common way of mortging land before 1926. If appropriately drafted, a lease purportedly granted under section 121 (4) could be a mortgage by demise. But in relation to registered land, it is no longer possible to create a legal mortgage by demise – s 23 Land Registration Act 2002.
    Mr Cousins ordered the service of evidence as to title. A rent authority letter to the terre tenant from the last acknowlwdged rentowner might do, but in its absence it does seem to behove a rentowner to deduce title to the terre tenant. A mere ipse dixit won’t do.

  4. Wonder whether you have come across this sort of situation. Someone buys a small piece of land left over from a development in the 1930’s and finds he has a requirement in his deeds to collect rent charges from the houses in the original development and pass them onto a rent charges owner. He does this for a number of years. Then the ownership of the rent charges changes and the new owner goes direct to houseowners for payment of the rent charges. The owner of the small piece of land finds he still has the requirement to pay the rent charge on his deeds and the rent charge owner wants a small fortune for providing a deed of release.

  5. One strange thing about Morgoed Estates Limited is they file dormant accounts to Companies House, even though the company is trading.

    The accounts say: The company is entitled to file dormant company accounts for the following reason.
    The company holds its real property titles as a bare trustee for Jonathan Howard Roberts and Janet Ann Thain.
    Accordingly, all receipts of the company belong beneficially to Jonathan Howard Roberts and Janet Ann Thain.
    The company does not itself enter into any liabilities.

    I would be interested to learn more about how this, what about tax on profits/admin fees, surely you can’t avoid corporation tax that easily?

  6. Would it be your understanding that even if in the charges in the land registry, there was no reference to specific wording for an estate rentcharge, but rather, just a covenant related to the upkeep of common land for which a variable cost is passed onto the freeholders on that estate – this would still constitute an estate rentcharge?

  7. I am not inclined to think that that a promise by the owner of close A to pay for the provision of services to close B amounts to having charged close A with the payment. I am inclined to think that a mere promise to pay by a landowner will not create a rentcharge issuing out of that land.

  8. I agree that payments for services to close B could be granted (or reserved) out of close A as a rentcharge; but I do not think that a mere promise (covenant) by the owner of close A to pay for such services to close B charges close A the land or makes the payments issue out of the land that is close A. More than a promise would be needed.
    An analogy would be payments under a lease for services that were not granted or reserved as rent: am mere promise to pay for services to close B (perhaps the rest of the building) by a tenant does not make the payments rent. More than a promise (covenant) is needed.
    Lindley LJ distinguished ‘a rent and not merely a sum covenanted to be paid’ in In re LORD GERARD AND BEECHAM’S CONTRACT. [1893 G. 2149.], regarding a rentcharge as a kind of rent.

    • If there is no element of the charge relating to close A, then it doesn’t come under s.2(4)(b). But on the general principle, the 1977 Act appears to say otherwise.

  9. 1. This is really interesting, and reflects the debacle that has result of newly formed estates not adoped by local authorities. On reflection, the fact that the section 2 refers to the creation of a rentcharge seems to imply that there may need to be something more formal in writing which needs to be in place for a rentcharge to be created. However, under the assumptionn that it’s not a valid rentcharge, but rather a promise to pay (through a covenant), then under what law would such a covenant be enforceable?

    2. Another strange situation I’ve now come across in newly formed estates, where the estate rentcharge owner is not the same entity as the owner of ‘communal land’ on which there are covenents in place pertaining to the maintence and general upkeep of that communal land. Neither s.2(4)(a) or s.2(4)(b) seems to prevent the estate rentcharge to be sold to a third party, thereby creating a situation where the communal land owner and the estate rentcharge owner are distinct entities.

    • 1. A covenant is not simply a ‘promise’. A covenant is in writing. A covenant is capable of amounting to a rent charge.

      2. Yes.

    • A rentcharge is a property right, which can be bought and sold and registrable at the land registry. Could a covenant alone be bought and sold? I’m not convinced how this could be done without selling the land associated with the covenant unless expressed as a rentcharge.

    • If a covenant amounts to a rent charge under the 1977 Act it is a rent charge. If a charge for maintaining the estate land is a covenant, it runs with the land (not a ‘promise’) and, it appears from the 1977 Act, it is a rent charge. Whether the benefit of that charge could be sold without the corresponding obligation – to maintain – being assigned with it is another matter. I think not.

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