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Writing - s2 of 1989 Act

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Rent charges

This page is concerned with rent charges and their reasonableness.


Definition of rentcharge

Rentcharges Act 1977

A rentcharge is 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 (s1 of the Rentcharges Act 1977). Section 2 provides that no rentcharge may be created whether at law or in equity after coming into force of this section. However, a rentcharge created for the purpose of meeting, or contributing towards, the cost of performance of covenants for the provision of services, the carrying out of maintenance and repairs or the making of any payment .. for the benefit of land affected by the rentcharge is permitted so long as the sum is reasonable (s2(3)(c), 4(b), (5)).


Rates

Orchard Trading Estate Management Ltd v Johnson Security Ltd
[2002] EWCA Civ

In this case the rentcharge related to rates in respect of the common parts and all expenditure incurred in or about the maintenance and proper of convenient management of the estate. The claimant owned and managed the common parts of an industrial estate. The defendant was the freehold owner of one of the units.

The CA held that the payments were valid rentcharges. The payment of rates benefited the land. The covenant did not have to expressly state that it was limited by a requirement of reasonableness.


Reasonableness

Amount payable must be reasonable

Smith Brothers Farms Ltd v The Canwell Estate Company Ltd
[2012] EWCA Civ 237

Summary

This decision is only the second reported case on the interpretation of section 2 of the Rentcharges Act 1977. In the case, the Court of Appeal considered the purpose of estate rentcharges, and what is required for them to be valid. It held that an estate rentcharge is valid if created for the purpose of paying the rent owner for services that it provides for the benefit of the land affected by the rentcharge or for that land and other land. The estate rentcharge would be valid even if it were not specifically or directly for the benefit of the land affected by the rentcharge.

More detail

The amount payable for the services must be reasonable. If an estate rentcharge was validly created, it did not cease to be valid if the rent owner sought to recover an unreasonable payment, but the rent owner could not rely on the rentcharge to recover such payment. Mummery LJ (Para 60):
    “In my judgment, it does not follow that the validity of a rentcharge depends on the reasonableness of the amount calculated from time to time for the service charges. If the rent charge is created for the legitimate purpose of contributing to the cost of the performance of a covenant for the benefit of the defendant's land, it is valid from the outset once and for all and it stays valid as a registered estate rentcharge. However, at the point when the rent owner seeks to recover payment of a contribution to the costs from an owner of the land affected, the rentcharge cannot be relied on ("shall not be treated as a rentcharge") and "will fail" (using the words of the explanatory note of the Law Commission), if the payment sought by the rent owner against the landowner is not reasonable in relation to the performance of the covenant. In those circumstances the registered estate rentcharge does not automatically cease to be an estate rentcharge or cease to be valid: it simply becomes unavailable to the rent owner as a means of recovering a particular contribution to costs that are not reasonable in relation to the performance of the covenant.”


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