Winter '16 England & Wales

WINTER 2016 ISSUE

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FIRST COMMENT IN THIS ISSUE: • THE GOOD, THE BAD AND THE UGLY - RENTCHARGES • THE CONSEQUENCES WHEN A BENEFITTING PARTY STICKS THEIR OAR IN • UNDERWRITING CASE STUDY – BREACH OF PLANNING PERMISSION • LEGAL & CLAIMS: CASE STUDY

Leading Title Insurance

Welcome to the winter edition of our newsletter.

In this issue, our resident contributor Paul Butt discusses rentcharges and we also have a submission from one of our senior underwriters Kathryn Graham who discusses a recent case involving restrictive covenants.

In other news, we are delighted to announce the launch of First Title Residential. As you will know, First Title have offered residential title insurance for over 20 years. However, as a market leader we continuously strive to improve our product and service offerings and, as such, have conducted a comprehensive review of our customer proposition including our policy coverage, our assumptions and, most importantly, our pricing. Find out more by visiting www.firsttitleresidential.eu Finally, we would like to take this opportunity to thank you for your continued support of First Title throughout 2016 and we wish you a Merry Christmas and a happy, healthy and prosperous 2017.

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FIRST COMMENT

The good, the bad and the ugly rentcharges Roberts v Lawton [2016] UKUT 395 (TCC)

By Paul Butt Consultant Solicitor Rowlinsons

Introduction

Nature of a rentcharge

It is perhaps not that often that conveyancers come across rentcharges – indeed it is often amusing when dealing with a transaction when the other side have never even heard of them – why is there a rent – when it is freehold land? etc.

To understand how a rentcharge operates it is necessary to appreciate that conceptually there is no fundamental difference between charging rent for possession of freehold land and charging it in the case of leasehold. Historically, there was no legal requirement, for example, for rent to be payable under a lease and no bar on it being payable for a freehold – but see the RA 1977 below, for the current position. This is because a freehold is a type of tenancy albeit one in fee simple that will last forever.

However, over the years rent has become almost universal in leasehold land and almost unknown in freehold.

However, conveyancers should know that Estate rentcharges can be a very useful method of making the burden of positive covenants binding on successors in title to freehold land – for example, the obligation to pay the costs of upkeep of an environmental strip or a sewage treatment plant. That is the good side; but the recent case of Roberts v Lawton illustrates the bad and ugly side of the traditional form of rentcharge – what can only be described as the draconian – indeed outrageous - powers granted to rentcharge owners to enforce payment, the risks to a landowner non-payment of the rentcharge, no matter how small the amount – and to conveyancers in not properly advising on them.

However, until relatively modern times it was common in many areas of the country for the development of land for housing to take place by a seller of a fee simple charging a premium for the purchase of the land (usually at less than the full market value) and then making up the deficit by taking an annual payment – or rent. The word

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“rentcharge” was coined to distinguish the payment from a “rent service” which is the technical term that should be used where the payment is made between landlord and tenant. This was a very similar situation to the one which was common in other parts of the country whereby land was sold for development on 999-year leases at a ground rent. Rentcharges are particularly prevalent in areas of Bristol and around the Manchester area but are found elsewhere as well.

In nature, a rentcharge is a legal interest in land and can have other property rights (e.g. a right of entry) attached to it. It should be registered at Land Registry with its own title and noted against the title affected (Land Registration Act (LRA) 2002, s.3).

Once registered it is binding on all future owners of the land.

Although the Rentcharges Act (RA) 1977 prohibited the creation of new rentcharges of this type, there are many thousands of historic rentcharges still in existence. These will continue to exist until 2037 after which they will cease to be enforceable. It is also possible under the Act for the owners of land subject to a rentcharge to compulsorily require the rent owner to ‘redeem’ the rentcharge, i.e. end it, on payment of a sum calculated according to a statutory formula. Unfortunately, redeeming a rentcharge does not discharge any liability already incurred for arrears, etc.

A typical rentcharge payment may be only two or three pounds a year. Although a valuable sum when the rentcharge was imposed, the effect of inflation

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has been to erode the value of these payments to a nominal amount. It is quite usual for landowners whose land is subject to a rentcharge to think that they can safely ignore such a small amount and leave it unpaid. However, as the judge in this case said: ‘How wrong they were.’

Estate rentcharges The ‘good’ type of rentcharge known as an ‘estate rentcharge,’ is designed to make positive covenants in freehold land binding on successors and in particular to allow the costs of services provided to the home owners to be recovered. These are permitted and will remain enforceable after 2037.

The estate rentcharge is defined in RA 1977, s. 2(4) as: …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.

FIRST COMMENT

The “rent owner” is the person who has the benefit of the rentcharge.

Note that the rentcharge must be of a “nominal amount” unless it represents a reasonable amount for payment of a service charge, as defined (RA 1977 s.2(5)).

So the idea is that then payments under the rentcharge are binding on all future owners – and if a right of re-entry is attached, then obligations will be binding almost as if it was a leasehold property.

Note also that a ‘nominal’ rentcharge can be used to enforce positive covenants not involving the payment of money, e.g., to repair a fence, wall, building, etc.

The effectiveness of Estate rentcharges was confirmed by the Court of Appeal in Smith Brothers Farms Ltd v Canwell Estate Co Ltd [2012] EWCA Civ 237.

Enforcing rentcharges The ugly side of rentcharges is that that the person entitled to receive the rent has powerful legal rights to recover the sums due. These are given by section 121 of the LPA 1925. The owner of the rentcharge can take possession of the property and use the income from it to clear the arrears. Alternatively, there is a right for the rent owner to grant a lease of the property to trustees to raise and pay the arrears and associated costs. These leases give the trustees to whom they are granted the right to take possession

of the land to the exclusion of the freehold owners.

These rights arise if the rentcharge remains unpaid for more than 40 days, even if the rentcharge has not been demanded. Note how different this is to leasehold property where rent is not payable unless demanded and prescribed information provided.

Even more worryingly, there is no provision in the RA 1977 for a lease granted pursuant to section 121 to come to an end when the arrears are cleared. The rentcharge lease, once granted, is a permanent arrangement for the payment of the rentcharge. The lease, once granted, could be sold to raise money for that purpose and, once sold, it would continue in the hands of the purchaser lessees. There is further no provision for a rentcharge lease to come to an end once the rentcharge has been redeemed. Draconian remedies, indeed!

The Case In Roberts v Lawton, the owners of several properties had not paid their rentcharges. The arrears ranged from £6 to £15. The owner of the rentcharges, Morgoed Estates Ltd, then granted leases of the properties to trustees for terms of 99 years and tried to register the leases at Land Registry. According to the case, Morgoed own about 15,000 rentcharges and a similar number of ground rents. The judge (Elizabeth Cooke) set out Morgoed’s policy as follows: 13. In the case of the properties belonging to each of the Respondents to this appeal, the rentcharge was, according to the Appellants, [in] arrears early in 2013

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in sums that now range from about £6 to about £15.

Morgoed Estates Ltd, therefore, granted a rentcharge lease of each property to its directors, the First and Second Appellants, as its trustees, and they sought to register the leases. The leases are granted for a term of 99 years. No rent is reserved, of course, because any rent would go to the landowner (one of the Respondents, in each case). Once registered, the existence of the leases will make each property unsaleable even if the tenant chooses not to take possession. The practice of the First and Second Appellants is to surrender the lease once the arrears and its costs are paid off, and they say that they have never sold a rentcharge lease. It will readily be understood that the costs far exceed, in each case, the value of the arrears – for example, Mr. Hanley told me at the hearing of this appeal that he was asked to pay £650 in respect of the grant and registration of the lease. Once the lease is in existence, therefore, it amounts to a stranglehold on the property owner whose freehold is worthless in the presence of the lease. Mr. Roberts told me that he and the Second Appellant hold a large number of registered rentcharge leases and that other rentcharge holders have taken the same course so that many hundreds of rentcharge leases are currently registered.

The case concerned whether the leases were capable of being registered at Land Registry. The Upper Tribunal held that they were. The land owners had claimed that the leases could not be registered as they were in effect a mortgage on the property and the First Tier Judge had agreed with that approach. However, on appeal, the Upper Tribunal had ‘no difficulty’ in disagreeing with that view. They were not mortgages. They were leases in their own right, giving the tenants the right to exclude the property owners and were thus registrable at Land Registry in the usual way.

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Conclusion The case confirms that a lease, once granted, is a permanent arrangement for the payment of a rentcharge. The lease could be sold to raise money for that purpose, and once sold it would continue in the hands of the purchaser. There is no provision for a rentcharge lease to come to an end once the rentcharge has been redeemed or the arrears paid. The tenant of the rentcharge lease is, theoretically, entitled to possession of the property.

The grant of the lease effectively sterilises the property in the hands of the freehold owner. They could not sell with the lease in place. The owner has no choice but to negotiate with the rent owner to surrender the lease. In the Roberts case, the implication was that the rent owner would be prepared to do so only if its costs amounting to more than £650 were paid.

The judge in the Roberts case, herself a former Law Commissioner, described the effect of the provisions as ‘toxic’ and a ‘wholly disproportionate remedy.’ However, that is the law as it stands. Even though historic rentcharges will no longer be enforceable after 2037, the remedies that the rent owner has are clearly draconian and ripe for reform. This is an area of law that the Law Commission might wish to review.

However, the immediate impact of the case is that conveyancers must advise clients buying properties subject to a rentcharge of the importance of paying it on time and the risks of ignoring any correspondence from the rent owner. But the best advice must be to redeem it ASAP!

FIRST COMMENT

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The consequences when a benefitting party sticks their oar in...

By Kathryn Graham Senior Underwriter First Title Insurance

Background

Covenants

The University of Chester obtained planning permission in November 2014 to construct a new community rowing facility. The proposal was to replace an old single storey boathouse with a new two storey facility.

The University’s land forms part of a stretch of riverside land which runs along the bank of the river Dee. In 1891 the whole of this land was acquired by local residents on behalf of themselves and a group of their neighbours. By an 1896 deed, the land was partitioned into separate lots, each of which was allocated to the owner of a house on Dee Banks who had contributed to the purchase price. The purchasers entered into a scheme of mutual covenants. The effects of which were to:

The existing single storey boathouse at the water’s edge had been used to provide regular sailing instruction to the University students until it became too dilapidated and fell out of use in around 2002.

The intended facility would provide a community rowing and fitness centre for use by the University of Chester’s students and students at other local academies.

1 Fry J in Richards v Revitt (1877) 7 Ch 224, 226

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a) prohibit any trade or business; b) restrict the use of each lot to private occupation only as gardens or pleasure grounds; and c) limit the height of any building at a level 4’6” above the level of the adjoining pavement on Sandy Lane.

FIRST COMMENT

Grounds for objection On 9th March 2015, Dr. Witter, a neighbour, issued proceedings in the High Court seeking an injunction to restrain the proposed development which he claimed would breach the covenants.

The basis of the objection was that the 1896 deed created a scheme of development and the covenants were in principle enforceable against the University by Dr. Witter and the other objectors who own riverside plots.

What next for the University?

The University, in an attempt to progress the development, applied to the Upper Tribunal under grounds (a) and (aa) of Section 84 (1) of the Law of Property Act (LPA) 1925 to modify those covenants.

As a reminder, Section 84 of the 1925 Act gives the Upper Tribunal power to discharge or modify restrictive covenants affecting land where certain grounds in section 84(1) are made out.

The first ground relied on by the University was ground (a) which applies where the Upper Tribunal is satisfied that by reason of changes in the character of the property or the neighbourhood or other circumstances of the case which the Upper Tribunal may deem material, the restriction ought to be deemed obsolete.

The University’s alternative ground was (aa) which authorises the discharge or modification of a restriction by reference to

its impeding some reasonable user of land for public or private purposes. It is dependent on the Upper Tribunal being satisfied that the restriction, in impeding that user, either: (a) does not secure to persons entitled to the benefit of it any practical benefits of substantial value or advantage to them; or (b) is contrary to the public interest; and that money will be an adequate compensation for the loss or disadvantage (if any) which any such person will suffer from the discharge or modification.

Acquiescence as a defence?

The University asserted that those with the benefit of the covenants acquiesced for so long in their breach, the covenants themselves become incapable of enforcement, and should be deemed to be obsolete. The Upper Tribunal noted that obsolescence, in that sense, may not arise from a wholesale change in the character of the property or of the neighbourhood, but if circumstances were such that a covenant has become unenforceable, that could justify treating the covenant as obsolete.

The Upper Tribunal went on to state that a person entitled to the benefit of a covenant will not be entitled to an injunction to enforce the restriction if it would be inequitable to the covenantor for the court to grant it. This will of course depend on the facts of each case.

The Upper Tribunal referred to an observation 1 which they felt was apt in this case:

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“The fact that the Plaintiff did not interfere to prevent a small and limited breach does not conclude him for all time in respect of a wider and more important breach.”

The Upper Tribunal further concluded that a proposed use of land which would be in the public interest is not enough in itself to satisfy the second limb of section 84(1)A LPA 1925; what is required is that in impeding that use the covenants are contrary to the public interest.

The Upper Tribunal acknowledged that before it can be determined that the restrictive effect of a covenant is contrary to the public interest it is necessary to make a broad assessment not only of the beneficial use which is prevented by the covenant but also of the advantages which it secures to those entitled to the benefit of the covenant.

The Upper Tribunal considered that money would not adequately compensate Dr. Witter for the disadvantage which he would suffer if the covenants were to be modified sufficiently to permit the University to build and use its new boathouse. That assessment was based on an objective appraisal.

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The Upper Tribunal went on to state that they considered that “an award of money would be an inadequate substitute for the unimpeded enjoyment of a beautiful space and for the preservation of a scheme of mutual restraint which has so far succeeded in its object for 120 years. Those benefits, in our view, are invaluable, using that word in both its everyday and its literal sense”.

The application was dismissed as the applicant failed to satisfy the Upper Tribunal that ground (a) or ground (aa) had been satisfied.

Albeit, the successful grant of planning permission for the proposed development and the assertion by the University of the ongoing acquiescence of the restrictive covenant breaches, the facts of the case and application of section 84(1) highlight that there is no absolute guarantee that the Upper Tribunal will modify restrictive covenants.

Case reference: University Of Chester, Re: Land at Sandy Lane [2016] UKUT 457 (LC)

Underwriting Case Study:

FIRST COMMENT

Breach of planning permission Brief Facts & Outcome: Our Insured was a lender providing finance for the remortgage of a large hotel. During due diligence, an issue was discovered in respect of a breach of planning permission consent relating to the number of rooms permitted under the consent which had been obtained when the property had been refurbished a few years previous. The initial conversation was carried out compliant with the consent. However, the mortgagee’s predecessor had in fact created the breach following an internal reconfiguration of the rooms. Due to the time pressures on the transaction, we were required to provide a quick, comprehensive indemnity solution in order to protect the lender’s security against the local planning authority taking enforcement action.

In the event of a successful enforcement action by the local authority, the owner of the hotel would not only be obliged to remedy the breach but they would also be liable for a potentially unlimited fine. The lender was understandably concerned that the loss of the additional rooms would have a material impact on the overall value of the securitised asset.

As a result of the comprehensive coverage provided by our known risk policy, the owner was able to secure their preferential lender to support their business going forward with the minimum of fuss and expense of seeking an alternative means to resolve the issue.

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Legal & Claims Case Study:

Restrictive Covenant in a Lease Background: Our Insured owned and resided in a first floor flat situated directly above a shop (“the Property�).

The Property had wooden flooring throughout which was installed prior to the Insured purchasing the Property. A restrictive covenant existed in their lease which stated that they were not to cause disturbance to other occupiers of the building and that all floors of the premises must be covered with carpet or other effective sound deadening material.

Problem: Shortly after occupation of the Property, the owner of the shop below the flat complained that the noise being generated from the Property was affecting his business and requested that the Insured lay carpet in the flat to rectify this.

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Our Insured subsequently received a letter from the freeholder of the Property informing him that he was in breach of restrictive covenants in his lease and requested that the Insured rectify the breach by carpeting the Property, failing which, further legal action would be taken against him.

Solution: Fortunately for the Insured, he had a title insurance policy with First Title which provided cover in the event of a claim by a third party enforcing the restrictive covenants in his lease.

In order to resolve the claim, First Title paid the Insured the amount required to carpet the entire Property. This remedied the breach of restrictive covenant and removed the threat of enforcement action being taken against the Insured by the freeholder.

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