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24th May, 2018
It sounds like the start of a really bad joke that a property lawyer might bring up at a dinner party. Sadly, it’s no joke and there is a real risk that a long residential lease may fall within the realms of the Housing Act 1988 putting tenants at risk of losing their homes and lenders at risk of losing their security.
Typically long leases of residential property are subject to a minimal ground rent because the value in the property is paid at the start of taking the new lease or on assignment by way of a premium or purchase price. However, there are some cases (particularly in higher value properties) where the ground rent may be higher.
Long residential leases have security of tenure under Section 186 and Schedule 10 of the Local Government and Housing Act 1989. Under that Act, when a long lease comes to an end, the tenant is likely to qualify for an assured tenancy which is afforded further protection under the Housing Act 1988. In order to take advantage of this protection, the lease needs to meet the qualifying criteria:
1. it must be long tenancy (that is a lease of more than 21 years); and
2. it must be a tenancy of a dwelling house, let as a separate dwelling to an individual who occupies the dwelling as their only or principal home (in other words, there must be a lease of an individual property which isn’t let to a company and the tenant must live there); and
3. the lease mustn’t fall within one of the “excluded tenancies” set out under the Housing Act 1988, which include business tenancies, agricultural holdings and licensed premises; and
4. the rent must be a “low rent”.
Most standard residential leases will meet the qualifying criteria above but it is the final criteria that are causing problems. A low rent is deemed to be less than £1,000 per annum for properties in Greater London and £250 per annum for properties elsewhere. If your lease was granted before 1 April 1990 there is a different definition of “low rent” which is based on the rateable value of the property.
When rent exceeds the “low rent” limits, the lease is taken out of the remit of the Local Government and Housing Act 1989 and falls back within the remit of the Housing Act 1988. Provided your lease started after 15 January 1989 and the rent payable doesn’t exceed £100,000 per annum, the lease will sit nicely within the definition of an assured shorthold tenancy agreement.
Under the Housing Act 1988, there are a number of mandatory and discretionary grounds for possession that your landlord can rely on in order to obtain possession of your property. The most important ground to note is Ground 8: defined rent arrears. This ground is mandatory and the court will have no discretion as to whether to grant relief or not to the tenant. Your landlord can rely on this ground if you are late paying your ground rent. The amount of arrears will depend on when ground rent is due:
1. if rent is payable weekly or fortnightly, 8 weeks’ ground rent is unpaid; or
2. if rent is payable monthly or two months’ ground rent is unpaid; or
3. if rent is payable quarterly, at least one quarter is more than three months in arrears; or
4. if rent is payable yearly, at least three months’ rent is more than three months in arrears.
There is one saving grace if you are the tenant, the rent needs to be in arrears at the time the landlord serves notice on you and at the date of the court hearing. This gives you time to cough up the arrears.
But what if you are a mortgage lender? You have limited control over the tenant and whether they pay their rent on time. By the time proceedings are brought, it may be too late. The good news is that certain indemnity insurers are alive to this risk and indemnity policies are available for the benefit of mortgage lenders. The policies cover (amongst other things) the cost of defending legal proceedings and any shortfall in the outstanding debt under the mortgage or charge.
So the punchline to this terrible joke is… beware of high ground rents and if you are a tenant, always pay your rent on time.
If you would like further information, please contact a member of our commercial property team or the author Abi Rudd (firstname.lastname@example.org).