Leasehold Properties – Ground Rents, ASTs and Termination
While there has been a great deal of recent media attention relating to leasehold houses and escalating ground rents, there is another issue relating to ground rents that landlords, flat owners and mortgage lenders need to be aware of.
Assured Shorthold Tenancies (ASTs) are usually short term lets, however, under current leasehold legislation once the ground rent reaches a certain level, long leases can also be classed as ASTs which creates a risk of termination by a landlord and is of particular concern to mortgage lenders.
Any long lease commencing after the Housing Act 1996 came into force, may be an AST if:
- the ground rent in the lease exceeds £250 p.a. (£1,000 p.a. in Greater London); and
- the tenant is an individual (i.e. not a company) and occupies the property as its principal home. (If a tenant rents out the property, then the sub-tenancy is an AST, but the long lease is not).
If there are arrears of ground rent or any other breaches of a long lease, the usual procedure is for the landlord to issue a Section 146 notice (under the Law of Property Act 1925 ) and apply for forfeiture (i.e. termination) of the lease.
The tenant is given a reasonable time to remedy the breach (if it is capable of remedy) and Court proceedings cannot be commenced unless the tenant fails, within a reasonable time, to remedy the breach.
Upon application by the Tenant, the court will usually grant relief and cancel the forfeiture as long as the arrears are paid in full.
However, if the lease is an AST, the court has NO discretion to grant relief from forfeiture.
Therefore in the event that:
- a certain number of rental payments have been missed in a given period (e.g. for yearly rents, 3 months’ rent is outstanding for more than 3 months); and
- the rent is unpaid when the notice seeking possession is served AND at the time of the hearing
- the Landlord serves a notice on the Tenant requiring possession of the property .
the court MUST terminate the lease and give possession of the property to the landlord.
The simple solution for the tenant is, of course, to pay the arrears. However, while a mortgage lender may normally seek to protect its security by paying the arrears, this has become an issue, because the mortgage lender may not know about the arrears until the lease has been terminated.
This has led to banks questioning whether to lend if there are high or escalating ground rents, because if a landlord can forfeit a long lease for non-payment of rent without the possibility of relief, the property may not be regarded as having good and marketable title.
In December 2017, the government issued a consultation paper – ‘Tackling unfair practices in the leasehold market’ and this issue was included in the review. It noted that tenants could be subject to a mandatory possession order if they were in default of payment of ground rent even for small sums and so the government has stated that it will take action to address this “loophole”.
While this ground rent issue may be under review, in the short term, a solution is required to ensure that properties are marketable and mortgage lenders are willing to lend
Another issue of concern is how this affects a group of tenants’ right of first refusal. Under section 5 of the Landlord and Tenant Act 1987, a landlord who wishes to sell the whole or part a block of flats must offer a right of first refusal to the “qualifying tenants” in the block.
However, an AST is not a qualifying tenancy for these purposes, so the tenant would not need to be notified of any intended sale of the block.
Further, depending on the size of the block, the block as a whole may become exempt from a right of first refusal because it only applies if more than 50% of the flats are held by qualifying tenants.
To reduce the risk of the landlord terminating a long lease for arrears of rent, it is arguably within the control of the tenant to pay the ground rent on time and ensure that there are no arrears. However, a mortgage lender is unlikely to obtain sufficient comfort from this and may insist on other protections.
Possible solutions include:
- If eligible, a tenant could apply for a statutory lease extension, so that its rent is reduced to a peppercorn i.e. nil, preventing the lease becoming an AST.
- Varying the lease to the effect that the landlord must give prior notice of its intention to exercise any right to serve any notice under Section 146 LPA or Section 8 HA, on the mortgagee as well as the tenant prior to commencing any proceedings. This gives the mortgagee the opportunity to remedy the breach before the landlord takes any action and so protects the mortgagee’s security over the property.
- To avoid a long lease being classed as an AST (so that the statutory termination provisions for arrears of rent do not apply), the ground rent under a lease could be reduced below the minimum rent required for a tenancy to be an AST (i.e. currently below £250 or £1,000 in Greater London), provided that the landlord is willing to accept a lower ground rent.
- There are specific indemnity insurance policies available on the market which cover the risk that the property is repossessed by the landlord under the Housing Act 1988 for non payment of rent.
- While there may be enforceability issues, the landlord could agree not to rely on section 8 HA to seek to terminate the lease in accordance with its statutory rights. Essentially, the landlord would be agreeing not to rely on its rights of termination given to it by law.
If you would like advice on any of the issues raised here, please contact Joanne Macdonald Jem@slcsolicitors.com on our property team for further information.