Rentcharge

In the United Kingdom, a rentcharge is an annual sum paid by the owner of freehold land (terre-tenant) to the owner of the rentcharge (rentcharger), a person who need have no other legal interest in the land. They are often known as chief rents in the north west of England but the term ground rent is used in many parts of the country to refer to either a rentcharge or a rent payable on leasehold land.[1] This is confusing as a true ground rent is a sum payable in relation to land held under a lease. As a result, it is important to know the status of the land for which, an annual sum is paid.

History

Rentcharge is a legal device which permitted an annual payment to be continually levied on a freehold property. It has been in existence since the 1290 Statute of Quia Emptores and was originally payable to the lord of the manor in perpetuity.

Function

Rentcharges provided a regular income for landowners who were prepared to release land for development, the original builder, or in some cases a third party. The payments due are typically between £2 to £5 per annum, which are no longer a significant burden due to past inflation. Sometimes the land was released without a capital sum being paid with the rentcharge being the only payment. Once imposed, a rentcharge continues to bind all the land even when the land is later divided and sold off in plots. In such cases one terre-tenant can be made responsible for paying the whole rent. That person is then left to collect the appropriate portion from the other terre-tenants whose land is subject to the rentcharge.

Reform

The Rentcharges Act 1977[2] seeks to abolish most forms of rentcharge.[3] Section 2 prohibited the creation of new rentcharges except for 'estate rentcharges' (see below). Such rentcharges may also be redeemed (i.e. ‘bought out’) by the terre-tenant, generally for around sixteen times the annual amount of the rentcharge in accordance with provisions in the Act.[4][5] Although many rentchargers will try to make a private settlement with the terre-tenant,[6] the Act provides a formula which enables Department for Communities and Local Government (DCLG) to calculate the redemption figure that the terre-tenant has to pay the rentcharger in order to redeem their rentcharge.

The sum payable is calculated according to a formula set out in the Rentcharges (Redemption Price) (England) Regulations 2016.the formula is as follows:-

P = R/Y - R/Y(1+Y)^N

P = the redemption price;

R = the annual amount of the rentcharge (or, as the case may be, the rent to which section 20(1) of the Landlord and Tenant Act 1927 applies) to be redeemed (in pounds sterling);

Y = the maturity rate, expressed as a decimal fraction, of the “over 30 not over 30.5 year” National Loans Fund interest rate available from the UK Debt Management Office ; and

n = the period, expressed in years (rounding up any part of a year to a whole year), for which the rentcharge (or, as the case may be, the rent to which section 20(1) of the Landlord and Tenant Act 1927 applies) would remain payable if it were not redeemed.


Rent charges are to extinguished on 22 August 2037 therefore in 2018 the life of rent charges is some 19 years and if input into the formala above and using a yield of 1.78% the rate applicable at 20 July 2018 gives approximately 16 years purchase of the rent


When the transaction has been completed DCLG, on behalf of the Secretary of State, issues a redemption certificate to the terre-tenant.[7] Any existing rentcharges other than estate rentcharges will be extinguished on 22 August 2037.[8]

Estate rentcharges

The 1977 Act retained ‘estate rentcharges’. These are rentcharges that serve one of two purposes. Either the rentcharge is used as a device to impose a duty on the terre-tenant to perform a covenant or it is used to pay for services performed by the rentcharger for the provision of services, maintenance etc. for the benefit of the land burdened by the rentcharge. Rentcharges will therefore continue to exist as a means of paying for the upkeep of freehold estates.

Ground rent is a similar concept but is applicable to leasehold property, not freehold.

References
  1. "Rentcharges". Housing: Home Ownership. Department for Communities and Local Government. Archived from the original on 19 September 2011. Retrieved 15 August 2011.
  2. "Rentcharges Act 1977". statutelaw.gov.uk. Retrieved 18 January 2014.
  3. Income chargeable: rent-charges, ground annuals, feu duties, HMRC. Retrieved 22 December 2011.
  4. "Rentcharges - Detailed guidance - GOV.UK". gov.uk. Retrieved 18 January 2014.
  5. "Chief rent". Mortgage Glossary. Retrieved 21 September 2009.
  6. Gwynne, Andrew. "Beware of Chief Rent scams". Andrew Gwynne MP. Retrieved 30 June 2014.
  7. https://www.gov.uk/rentcharges
  8. Specific deductions: rent & rates: rentcharges, HMRC. Retrieved 22 December 2011.
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