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Long lease pitfalls

LONG LEASE PITFALLS

POSTED: 09/07/2019

By Tom Lumsden, Partner

 

There has been a lot of controversy and adverse publicity recently in the legal press surrounding long leases with high ground rents of new build houses and flats. In these situations, there could be quite significant adverse consequences for the buyers of dwellings on such developments. 

 

These problems can also affect sheltered housing accommodation, which might be sold off on long leases, or even some care home accommodation where, rather than the resident occupying the care accommodation under a contract or licence agreement, they have a separate personal care agreement coupled with residence rights under a tenancy or lease.  

 

The problem is as follows: if the annual ground rent payable by the owner of the unit is more than £1000 per annum for a property in Greater London, or more than £250 per annum for a property outside Greater London, then certain sections of the Housing Act 1988 apply. This will deem the lease or tenancy to be an ‘assured tenancy’. The effect of such a document being an assured tenancy is that the landlord’s remedies to obtain possession or forfeit the lease are, in some cases, very harsh against the owner of the accommodation. 

 

For example, one of the grounds on which a landlord could obtain possession is that if the tenant or leaseholder is in two months of arrears of ground rent, the landlord can serve a notice under Section 8 of the Housing Act and issue possession proceedings. In those circumstances, if there is still a ground rent default position before the hearing date of those proceedings, then under the terms of the Housing Act 1988, the Trial Judge at the Court has no discretion, and must make a Possession Order in the landlord’s favour. 

 

The landlord could gain a valuable windfall because he would be able to take back the property in respect of which the resident may well have paid a significant capital sum and, unlike some other forfeiture rights that landlords have in other areas of the law, there appears to be no right of relief available to the leaseholder.  

 

This could pose a real problem for leaseholders who buy sheltered accommodation on a long lease, but where the rent is above the threshold limits. In particular, most lenders are refusing to lend on such properties because if the borrower falls into rent arrears, the landlord could use the Housing Act provisions to take back the property, and the lender would lose its security and, therefore, the money it has lent. 

 

There are statutory protections for long leaseholders where landlords are trying to forfeit flats and take back possession. In most forfeiture actions (unlike the Housing Act possession ground above) both the leaseholder and lender have a right to be served with forfeiture notices by the landlord in these forfeiture proceedings (known as a Section 146 Notice). The leaseholder and lender can normally get back the lease by claiming relief against forfeiture, which the court can grant so long as the breaches of the lease are remedied. 

 

Conveyancers acting for buyers of such sheltered accommodation units are required by their lender’s instructions to review onerous ground rent provisions and report these issues to the borrower and the lender and obtain consent from the lender before proceeding. 

 

One way that such leases might be made acceptable to lenders would be for the landlord to agree to a Deed of Variation where the ground rent could be reduced to £250 or less outside Greater London or £1000 or less within Greater London. However, because the ground rent over the term of the lease is being reduced, this affects the landlord’s investment income stream and therefore most landlords will require a premium of several thousand pounds as the price for such a Deed of Variation.  

 

It is also important to note that, even if the ground rent at the beginning of such a lease is below the £250/£1000 per annum threshold, some leases have quite onerous rent review provisions so that the ground rent may double every 10 or 25 years, in which case at that point (unless there is a change in the law) the Housing Act provisions would also bite.  

 

Another alternative way that such leases could be made acceptable to lenders is for the landlord either in a new lease or, if the lease has already been granted, in a Deed of Variation, to agree a provision stating that if the tenant is in arrears of ground rent then it will not use the statutory Housing Act ground to take back possession. We have seen such a provision being used on some new developments recently, where the developers are seeking to protect their rental income stream over the term of the lease.

 

Another point that is often missed with tenancies or leases of any length is that if they are an assured tenancy, they can also quite easily be an assured shorthold tenancy. An assured shorthold tenancy allows the landlord to let a property, whilst retaining the right to repossess a property at the end of the term. Any residential tenancy granted after 28 February 1997 is automatically an assured shorthold tenancy (AST) unless the landlord serves notice on the tenant stating that it is not an AST.  

 

In order for a tenancy to be an AST, the tenant must be an individual, and the property must be occupied as the tenant’s only or principal home. The tenancy also must not fall within one of the various exceptions in the Schedule to the Housing Act. For example, the annual rent must not be outside the specified rent parameters (currently between £250 per annum outside Greater London or £ 1,000 inside Greater London, and £100,000 per annum).  

 

Landlords should remember that with assured shorthold tenancies, the Consumer Rights Act 2015 applies to contracts. There will also be statutory duties imposed on a landlord under an AST including a duty on a private landlord to check the tenant’s right to rent i.e. to check the immigration status and status of any adult living with the tenant. 

 

This adds another administrative layer to care home operators.  It is a criminal offence not to carry out such checks. There are also obligations at the beginning of the tenancy to provide an Energy Performance Certificate, a Gas Safety Certificate, and a copy of the Government’s latest guide ‘How to Rent’ if the assured shorthold tenancy was started or renewed on or after 1 October 2015.

 

It is harder for a landlord to evict an assured shorthold tenant if the required information has not been provided. Furthermore, any deposit payable under an assured shorthold tenancy must be protected with a UK Government approved deposit protection scheme. If the landlord fails to do this, then the tenant can claim tenancy deposit scheme compensation and it will be more difficult for the landlord to end the tenancy. 

 

There are also landlord’s repairing obligations relating to the structure and exterior of the property including roof, chimneys, walls, guttering and drains and a landlord must make sure that the equipment for supplying water, gas and electricity is kept in safe and working order. Most care home operators would do this in any event.

 

Landlords also have a duty to have a gas safety check carried out every 12 months by a Gas Safe registered engineer and make sure any furniture meets safety standards and ensure electrical equipment provided meets safety standards. 

 

With all of the above in mind, there is an argument perhaps to avoid such long leases becoming assured or assured shorthold tenancies by simply ensuring that the rent is kept at a low level, i.e. below the statutory thresholds, and as recompense, the care home operator could charge a higher premium for a dwelling being sold on a long lease in order to recover his potential lost ground rent  income.  

 

This article first appeared in the July 2019 issue of The Care Home Environment

 

Disclaimer: The above article is not intended as legal advice and must not be relied upon as such.

 

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