The Court of Appeal recently heard a rare case about estate rentcharges, a subject which seldom comes before the courts.

A rentcharge is a periodic payment charged on land other than rent payable under a lease or interest. Nineteenth century developers often imposed rentcharges to provide them with a continuing income after the plots on the development had been sold. The Rentcharges Act 1977 prohibited the creation of any new rentcharges of that type but the Act permits “estate rentcharges”. An estate rentcharge is a rentcharge created to enable the “rent owner” (that is the person to whom the rentcharge is paid) to enforce the performance of covenants by purchasers of the land, or to collect service charges from them.

Positive covenants, such as an obligation to erect a fence or maintain a road or to contribute towards shared maintenance costs, are not normally enforceable against purchasers of freehold property (as opposed to the person who originally entered into the covenant). An estate rentcharge is one way of circumventing that rule. It works by giving the rent owner a right of entry, that is a right to take possession of the property, if the covenant is not complied with. A rentcharge is therefore a very effective mechanism but it is seldom used in practice because the right of entry is seen as disproportionate and likely to be unacceptable to mortgagees.

A rentcharge of more than a nominal amount is only permitted by the Rentcharges Act if it is a reasonable payment for the performance by the rent owner of covenants for the provision of services, carrying out of maintenance or repairs, effecting insurance or making any payment for the benefit of the land affected by the rentcharge or for the benefit of that and other land. The recent case, Smith Brothers Farms Ltd v The Canwell Estate Company Ltd [2012] EWCA Civ 237, concerned the meaning of that provision.

The case concerned a rentcharge used to collect contributions towards the cost of maintaining private estate roads. Smith Brothers owned land on the estate and were required to pay both a fixed contribution towards the cost of maintaining the estate roads and also ninety per cent of the cost of maintaining a road over which they had a right of way. They argued that the rentcharge was void because it was of more than a nominal amount and it was not a reasonable payment because it was unreasonable to have to contribute towards the maintenance of roads over which they had no right of way.

The Court of Appeal upheld the validity of the rentcharge. The court explained that the services were provided for the benefit of the estate as a whole and did not need to benefit the landowner’s land directly. To be valid under the Act, the rentcharge could relate to a covenant for the benefit of both the land affected by the rentcharge and other land. As long as the rentcharge was created for the legitimate purpose of contributing to the cost of the performance of a covenant for the benefit of the landowner’s land, then it would be valid from the outset once and for all. It would not cease to be valid if the amount calculated from time to time was not reasonable, but the rentcharge could not be used to recover a particular payment which was not reasonable.