Is My Long Residential Lease an Assured Shorthold Tenancy (“AST”)?
There is a possibility of a long residential lease falling within the scope of the Housing Act 1988. This means that there is a real risk of leaseholders losing their homes and the lenders losing their security.
Although there is no maximum term for AST’s, they are often regarded as short-term arrangements. An AST is mostly used by buy-to- let landlords when granting a tenancy of a residential property usually for a term of six to twelve months. However, a long residential lease is potentially an AST if it satisfies all the following conditions:
- The tenant is one or more individuals
- The tenant (or at least one of them) occupies the dwelling as their only or principal home.
- (Assuming the lease was granted on or after 1 April 1990), the annual ground rent is between £251 and £100,000 inclusive (or between £1,001 and £100,000 inclusive in Greater London).
- The tenancy does not fall within any of the exceptions in Schedule 1to the Housing Act 1988
If a long residential lease satisfies the above criteria and as a result falls within the definition of an AST, it will have serious consequences for long leaseholders and their lenders.
Under the Housing Act 1988 the Landlord has the right to terminate the lease during the fixed term and take possession of the property if it satisfies the conditions set out in section 7(6) of the Housing Act 1988 without compensating the leaseholder or its lender.
From all the grounds stated in section 7(6) of the Housing Act 1988, the one of greatest concern to leaseholders of long residential leases is ground 8. Ground 8 permits the Landlord under an AST to terminate the tenancy and seek recovery from the leaseholder where the annual rent is in arrears for three months. Ground 8 is a mandatory ground which means that the court has no choice but to order possession if the landlord can prove it.
Most residential long leases reserve a fixed annual ground rent which the leaseholders have to pay, in addition to the premium paid at the time of purchase. However, some leases (in particular, the new build leaseholds) contain escalating ground rents within them. Some of these ground rent escalation clauses can be unfair and onerous to the leaseholders, for instance a lease with a starting yearly rent of £300 may provide that the rent will double every 10 years over a term of 999 years. The ground rent after 90 years will therefore be £153,600. This extremely high ground rent will make the lease unmarketable within a few decades.
The best way to prevent a long residential lease falling within the definition of an AST is to keep the ground rent under the lease from escalating into the parameters of an AST.
If a long residential lease is an AST it may have other consequences for the leaseholders. The leaseholder will lose its right of first refusal on the sale of a freehold by the landlord under the Landlord and Tenant Act 1987. Where a freeholder of a block of flats is proposing to sell his interest, he must offer first refusal to “qualifying tenants”. However, an AST is not a “qualifying tenancy” and a leaseholder is therefore exempt from being a qualifying tenant.
If a leaseholder wishes to obtain a lease extension under the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993), the premium payable for the lease extension will take in account the loss of ground rent under the existing lease, as the new lease will be at a peppercorn rent. A higher ground rent under the existing lease will therefore increase the premium payable for the lease extension.
In December 2017, the Government announced that it will tackle unfair practices in the leasehold market. The Ministry of Housing, Communities and Local Government has issued a consultation on “implementing reforms to the leasehold system in England”. The Government is specifically looking to impose a statutory cap on ground rents for new leases granted for terms in excess of 21 years and imposing a ban on the sale of leasehold houses.
If you require further information, please contact Kiran Walia on k.walia@connaughtlaw.com.
Note: The information contained in this article is intended to provide general guidance only and shall not be deemed to be or constitute legal advice. Connaughts accept no responsibility for any loss as a result of acts or omissions taken in respect of this article.
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