When it is an Assured Tenancy – It sounds like the punchline to a bad joke at a dinner party full of property lawyers, but sadly this is the sad consequence of ever increasing ground rents.
If ground rent in a lease is more than £250pa outside of Greater London or £1000pa within Greater London, and the property is occupied by a tenant as their only or principle home, current legislation determines that these leases are assured tenancies under the Housing Act 1988. Obviously this isn’t new legislation but as ground rents in new leases have snuck higher and higher over recent years and older leases start to reach their rent review dates (allowing for rents to be doubled every 10/15 years over a 125 year term) the question of ground rents has crept into the foreground.
The simple issue is this; if a lease is determined to be an assured tenancy, as soon as the ground rent falls 3 months into arrears, a Landlord has a mandatory ground to apply to Court for an Order for Possession. Mandatory. There is no discretion on the part of the Court. Therefore, if the Landlord were so minded, they could seek possession of a £500,000 asset if a £250.00 ground rent were in arrears for only 3 months. Suddenly the tenant is deprived of a half a million pound asset, and a lender who has a mortgage over it, is stripped of their security.
So needless to say, lenders dislike these arrangements immensely. The first High Street lender to come forward and announce a new approach to ground rents was Nationwide who issued a press release in May 2017 stating that, in the case of new properties “ground rents must be reasonable at all time… with multipliers such as doubling every five, ten or fifteen years not allowed.” Inevitably more and more lenders are following suit and the Council of Mortgage Lender’s Handbook now states that “if the terms of the Lease are unsatisfactory, you must obtain a suitable deed of variation to remedy the defect”. If the lease either is, or could be in the future, an assured tenancy, the terms of the Lease must be considered unsatisfactory.
Developers are slowly picking up on this new lending market and ground rents in new leases are starting to fall to lower levels, capped to avoid the Housing Act application and review clauses linked to RPI or other indexes. However, not all developers are following this approach and buyers are still finding themselves under pressure to accept high ground rents or risk losing their reservation fee.
But what about existing leases? What issues are there? Aside from the ability to proceed with the purchase at the outset, the rent will only increase over time and could affect the future marketability of the property.
You could ask your landlord for a deed of variation to alter the ground rent. It is the only method by which to correct the defect but there are shortcomings; the landlord often wants compensation for the ground rents that they are “giving up” in the future. The landlord is under no obligation to agree to the variation (and the use of the by-product of the statutory lease extension process is too complex for discussion here) and in any event, it can be time consuming and unworkable to procure a deed of variation in the course of a sale (which is often when these issues come to light).
So what other options are there? The indemnity insurance market is no stranger to spotting a defect to cover and policies against the application of the Housing Act have started to become available. However, the majority of these only offer compensation to the lender where the landlord seeks possession from the owner due to rent arrears; arguably the owner shouldn’t need insurance cover as they can avoid the application of the Housing Act by simply paying their ground rent.
As these policies are so new it’s not entirely clear whether lenders will accept them; the writer’s expectation and (limited) experience is that they will where there are not other issues with the rent, such as a particularly high sum or unreasonable review provisions.
So what next? In the December 2017 consultation document, the Government confirmed that “the Government will take action to address this loophole and ensure that leaseholders are not subject to unfair possession orders”, but the Government is somewhat distracted by other Brexit-shaped issues at the moment and so there is no timescale for when this action might be taken.
Speak to our Residential Property solicitors for expert advise on ground rents or any other property matters.
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