Do you own a long lease of a residential property? Is your ground rent more than £250 per year (£1,000 in Greater London)? Was your long lease granted on or after 1st April 1990? If you can answer yes to these questions, please keep reading.
Back in 1988 the Housing Act was introduced and with it the Assured Tenancy with the Assured Shorthold Tenancy (‘AST’) being introduced in 1997. You have probably heard of ASTs. If you have rented a property or let out your own property since 1997, any tenancy would automatically have been an AST.
A lease must meet certain criteria to be an AST under the Housing Act. The criterion which can bring a long lease under the AST legislation is that the annual ground rent must be greater than £1,000 in Greater London and greater than £250 outside Greater London. If the criteria are met, a lease is automatically an AST, whether or not the parties want it to be. There is no way to prevent a lease from becoming an AST.
However, there is a saving grace for investors because another of the criteria is that a property must be occupied by the leaseholder as their principal home. So, if your property is let the lease cannot be an AST. However, this may only be a temporary reprieve because, although the AST may not be an issue now, when you come to sell the property to somebody who is not an investor it could become a problem and your buyer may want the issue to be addressed.
These ground rent figures are relatively low so leases with rents higher than this are very common. To bring more leases within this undesirable category, these ground rent figures not only refer to the initial rent payable under a lease, but also the rent payable at any time under a lease. So, a lease granted for 99 years in 1990 could have an initial rent of £150, which then doubles every 33 years, meaning that in 2023 the lease would be an AST.
Before 1st April 1990, the rent criterion is calculated on the rateable value of a property, so these leases are not immune from becoming ASTs. Just trickier to calculate!
If you know anything about ASTs then you can probably see where this is going. An AST is (usually) a short-term lease and the Landlord can bring it to an end during the term if there is a breach, in this article we will concentrate on rent arrears. If rents are in arrears for three months, a landlord can take back possession. Where rents are paid annually, you can see why this is a concern. A landlord’s ability to take back possession under the Housing Act is different to a right to forfeit which may be set out in the lease, so a landlord can bypass all of the red tape that following the forfeiture route entails.
This is not a satisfactory situation for leaseholders, who have paid hundreds of thousands of pounds for their leases, or for their lenders. The long lease can be terminated and the landlord can take back possession of the property. If this happens the landlord will not have to pay compensation, so the leaseholder and lender are left with no property/security.
Obviously paying rent or not paying rent is within the control of a leaseholder, but a lender is not usually satisfied by a promise from the leaseholder that they will pay the rent.
Another consequence of a long lease being an AST is that a leaseholder will not be a ‘qualifying tenant’ under the rights of first refusal. If all the leases in a block are granted on the same terms, a Landlord may be free to sell a freehold without first offering it to the leaseholders.
There are potential solutions if your ground rent does mean that your long lease is an AST, including indemnity insurance (if your lender will accept it), a variation of the lease (which will require your landlord’s cooperation) or exercising your right to extend your lease (which will reduce your rent to a peppercorn, i.e. nothing).
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