Orchard Trading Estate Management Ltd. v Johnson Security Ltd.

Under the Rentcharges Act 1977, a rentcharge may qualify as an estate rentcharge where it funds costs incurred in performing service, maintenance or related covenants for the benefit of the affected land. Payments of rates relating to common service areas may satisfy that requirement where those areas provide amenities to the units. Section 2(5) is an anti-avoidance safeguard. Validity is tested by comparing the charge with the promised covenant performance, rather than by asking whether every individual item was reasonable in amount. A variable rentcharge measured and limited by expenditure incurred in performing the covenants is not invalid merely because the deed contains no express reasonableness cap.

Orchard claimed arrears of nominal and variable estate rentcharges from Johnson under transfers of two industrial units and a 1987 transfer and rentcharge deed. Johnson defended the claim on the basis that the rentcharges were prohibited by section 2 of the Rentcharges Act 1977, particularly because the deed allowed recovery of rates and did not expressly limit service expenditure by reference to reasonableness.

District Judge Roach directed those matters to be tried as preliminary issues. On 18 May 2001, His Honour Judge Weeks Q.C., sitting as a High Court judge, decided both issues for Orchard and struck out the relevant paragraphs of the Defence. On appeal, Johnson pursued the arguments concerning rates and reasonableness. The central questions were whether the variable rentcharge was an estate rentcharge and whether section 2(5) invalidated it.

Appeal dismissed. Peter Gibson LJ delivered the judgment, and Mummery LJ agreed.

1. Rates and the estate-rentcharge exception. The roadways, service area and sewage works had been transferred to Orchard so that it could provide amenities and services for the units. If rates were payable in respect of those areas, they would form part of the costs of holding them for that purpose. Payment of the rates would therefore be for the benefit of the units and fall within section 2(4)(b) of the Rentcharges Act 1977. The High Court judge was correct on this point.
2. Reasonableness under section 2(5). Section 2(5) is an anti-avoidance provision. It prevents the rent owner from requiring a payment unrelated or disproportionate to the performance of qualifying covenants. The relevant comparison is between the price of the rentcharge and the promise to perform those covenants. The appeal concerned the validity of the rentcharge, not whether each individual item of expenditure was reasonable in amount.
3. Variable charge. The variable rentcharge was measured and limited by the expenditure incurred by Orchard in performing its covenants. The absence of an express contractual limitation of reasonableness did not make it void. The court could not regard recovery of no more than the expenditure incurred in performance of the covenants as unreasonable in relation to those covenants.
4. Issues left open and order. The court did not decide whether a term of reasonableness was in any event implied, or whether any invalid part of the rentcharge would be severable under section 2(2), because those issues were hypothetical. Orchard’s alternative argument based on the contractual covenants in the transfers and deed was also unnecessary to decide. The appeal was dismissed. Johnson was ordered to pay Orchard’s costs on the standard basis, subject to detailed assessment, with an interim payment of £25,000.

• Court of Appeal (Civil Division): On 26 March 2002, Peter Gibson LJ dismissed Johnson’s appeal, with Mummery LJ agreeing. Johnson was ordered to pay Orchard’s costs, including an interim payment of £25,000. The judgment is reported at [2002] EWCA Civ 406.
• High Court, Bristol District Registry: On 18 May 2001, His Honour Judge Weeks Q.C. determined the preliminary issues in Orchard’s favour and struck out paragraphs 3, 4 and 5 of Johnson’s Defence.