Long leaseholds beware

Within the last decade, ground rents have been steadily rising as residential landlords and developers seek to maximise the value of freehold interests, moving ever further away from traditional “peppercorn rents”. The effect this has had on the price and marketability of leasehold properties has not gone unnoticed and has been subject to both media and governmental criticism.

However, it is often overlooked that this trend has led to many long leasehold properties qualifying as assured tenancies under the Housing Act 1988 (the Act), inadvertently granting landlords the ability to terminate leases in circumstances prescribed by the Act and stripping tenants of their capital assets.

The Act provides that a leasehold property subject to a ground rent in excess of £250 per annum (or £1,000 in Greater London) will automatically be deemed an assured tenancy. Although, properties let to corporate tenants and those not occupied as an individual’s principal residence fall outside the scope of the Act and remain unaffected.

Should a tenancy qualify as an assured tenancy, the landlord will gain the ability to terminate under the quicker process permitted by the Act by virtue of Ground 8 (non-payment of rent). In the case of annual rent arrears, the Act provides that only three months of arrears need be outstanding for a landlord to begin proceedings. Although, the debt must be outstanding at both the date of the landlord’s possession notice and the relevant court hearing in order for the landlord to obtain a possession order.

It may not always be immediately apparent whether a tenancy will be subject to the Act. Qualification under the Act is dependent on the ground rent payable; it is possible, therefore, for a tenancy to fall within the Act throughout the term of the lease. In some instances a lease may initially provide for a relatively modest ground rent, although due to escalator clauses within the agreement, the ground rent rises above the statutory threshold and is subsequently caught.

The major concern is that, whilst it is common for a lease to contain forfeiture provisions in favour of the landlord, the court has some discretion and may grant relief from forfeiture. Under the Act, however, if the landlord can demonstrate that the arrears have been outstanding for the prescribed period, the court has no discretion and must grant an order for possession, thereby terminating the lease.

At present, landlords do not use this ground with any degree of regularity. Nevertheless, lenders have identified this as an issue which represents a threat to their security. As the arrears are required to be outstanding both at the date of the service of the possession notice and the date of the hearing, a tenant will usually have the option of paying off the debt before any court hearing takes place. However, a mortgage lender will often not receive advanced notice of the claim and therefore risks losing its security in the event the tenant defaults on its obligations.

Mortgage lenders are becoming acutely aware of the effects of the Act and in many instances will refuse to lend against properties subject to an unreasonable ground rent. Whilst there is often the option of varying the lease, this will likely include the payment of a substantial premium to the freeholder.

The Government has promised, in its recent White Paper, to tackle what it considers unfair practices in the leasehold market. Although, in the current political climate, leasehold reforms will likely be a low priority and, at this point in time, affirmative action on this issue looks some way away.

If you require further assistance, please contact Joanne McIvor – Partner or any member of the Edwin Coe Property team.

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