16/09/2018

When a long lease is a shorthold.

[Post rewritten on 1 March 2020]

While on leasehold issues, this has been floating around for a bit, but I don’t think it has had the attention and awareness it deserves (perhaps particularly from conveyancers). With all the fuss/scandal around leasehold houses and multiplying ground rent clauses, a more general issue with long leases and ground rent has been overlooked.

The simple issue is that any long lease commencing after Housing Act 1996 came into force is potentially an assured shorthold tenancy if:

a) the ground rent is over £250 per year (or £1000 per year in London); and

b) the property is the only or principal residence of the leaseholder.

There is nothing in Housing Act 1988 which sets a maximum term on an assured shorthold tenancy. So, if the conditions above are met, one could have a 999 year term AST.

This would also be the case where a ground rent clause in a lease triggers an increase in ground rent to over £250/£1000. The lease would become an AST, regardless of when it was entered into (as long as the property was and remains the only or principal residence of the leaseholder at the relevant time).

In some ways, this is wholly irrelevant. Section 21 would only come into play at the (distant) end of the fixed term, statutory rights to a lease extension still apply, there is unlikely to be a deposit, and so on. Though it also appears that a statutory periodic tenancy would arise on expiry of the lease term.

But there are consequences that are important.

The first issue is the ‘right of first refusal’ under Landlord and Tenant Act 1987.  S.3(1)(d) states that an assured tenancy under Housing Act 1988 is not a qualifying tenancy for the purposes of s.1. So leases that are an AST a) do not have to be notified of intended sale of whole or part of the building, and b) do not count towards the 50% of total premises required to trigger the ‘first refusal’ obligation.

However, lease extension, enfranchisement and right to manage rights are not affected, as they use a different definition of ‘qualifying tenant’ (Leasehold Reform, Housing and Urban Development Act 1993 – s.5).

The second issue is potentially more significant, but also much more complicated.

If a long lease is an assured shorthold tenancy, then section 7(6) Housing Act 1988 applies, which rules out the landlord gaining possession on any other basis than the grounds for possession in Schedule 2 Housing Act 1988. All of the usual rules around forfeiture (and indeed relief from forfeiture) do not apply. So, the usual thresholds for the age of rent arrears, or the threshold amount of unpaid service charges are irrelevant, as are the rules requiring determination of breach of lease and a section 146 notice on other breaches of lease.

Now this could be a very significant concern. For example, there is ground 8 – the mandatory rent arrears ground.

Both at the date of the service of the notice under section 8 of this Act relating to the proceedings for possession and at the date of the hearing—

(a) if rent is payable weekly or fortnightly, at least eight weeks’ rent is unpaid;

(b) if rent is payable monthly, at least two months’ rent is unpaid;

(c) if rent is payable quarterly, at least one quarter’s rent is more than three months in arrears; and

(d) if rent is payable yearly, at least three months’ rent is more than three months in arrears;

and for the purpose of this ground “rent” means rent lawfully due from the tenant.

As an example, take an annual ground rent payment of £1200, payable on 1 January. If at least £300 of that payment is not paid by 31 March, a section 8 notice can be served and then proceedings issued. If the £300 remains unpaid at date of court hearing, the court must make a possession order, ending the lease.

Under the usual long lease forfeiture provisions for rent arrears, the court had wide ranging powers to grant relief from forfeiture if arrears are paid off, even after a possession order has been made. Ground 8, however, admits no such discretion.

While a mortgage lender (if there is one) will usually step in on arrears cases to preserve its security, the relative speed and unfamiliarity of ground 8 proceedings present a risk.

But, and it is a but, Section 7(6) and 7(6A) Housing Act 1988 also states that for a fixed term assured tenancy, which is exactly what a long lease AST is, the landlord cannot obtain possession on a Schedule 2 ground unless the lease makes provision for termination of the lease on that ground:

The court shall not make an order for possession of a dwelling-house to take effect at a time when it is let on an assured fixed term tenancy  —

(a) the ground for possession is Ground 2, Ground 7A, Ground 7B or Ground 8 in Part I of Schedule 2 to this Act or any of the grounds in Part II of that Schedule, other than Ground 9 or Ground 16; and

(b) the terms of the tenancy make provision for it to be brought to an end on the ground in question (whether that provision takes the form of a provision for re-entry, for forfeiture, for determination by notice or otherwise).

(6A) In the case of a dwelling-house in England, subsection (6)(a) has effect as if it also referred to Ground 7 in Part 1 of Schedule 2 to this Act.

(The only exception to this is ground 7B, which is the Right to Rent ground and that is irrelevant to long leases as right to rent doesn’t apply.)

So the key question is whether the lease specifies the schedule 2 grounds. For most ‘accidental’ ASTs, where a provision for increasing the ground rent has taken it above the AST threshold, this seems highly unlikely. It is also not at all clear whether this was understood by those drafting leases for new sales whether the ground rent is or would be over the AST threshold either. But caution is needed – Artesian Residential Investments Ltd v Beck [1999] EWCA Civ 1033 held that a clause permitting forfeiture by re-entry on rent arrears of 14 days was sufficient for ground 8 to be relied upon, and such a clause is very common indeed.

If the lease does not specify that it may be ended on one or more of the Schedule 2 grounds (or clauses sufficient to engage them, as per Artesian), the landlord is largely, to coin a phrase, stuffed. Forfeiture is not available, but nor are the Schedule 2 grounds. For arrears of ground rent and service charge, the only option is a money claim (which may eventually result in a charging order and order for sale). For other breaches of lease, a damages claim in breach of contract, and/or injunction may be an option but only where the landlord has been caused some form of loss, with no subsequent threat of forfeiture being possible. The leaseholder’s tenure is about as secure as one could possibly get – more secure than a usual long lease.

If the lease does specify the schedule 2 grounds (or clauses sufficient to engage them, as per Artesian), however, the leaseholder’s tenure is far less secure than a usual long lease and, with the mandatory grounds, there is no possibility of relief from forfeiture. On the discretionary grounds, technically there is no relief from forfeiture, but the court has a discretion on whether to make an order and the terms of such an order.

But – and it is another huge but – all of this only applies where the situation satisfies the requirements of an AST. That is not just the rent level, but that the tenant occupies the property as their only or principal home. This status can come and go. A leaseholder who sub-lets for a while will lose AST status for that time, but the lease will again become an AST if they move back in. For the time the lease is not an AST, all the usual rules and risks of forfeiture apply.

This is, let us be honest, a complete mess. The lease may or may not be an AST, there may or may not be decreased or increased security against possession, there may or may not be an obligation to notify the leaseholder of a relevant disposal by the freeholder and there may or may not be an obligation to offer the leaseholders first refusal on a disposal. It all depends.

 

 

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts.

17 Comments

  1. Michael Hall

    Giles, Please can you let us know what you think the effect of section 7(6)(b) of the Act is in relation to this point about Ground 8. I am not aware that this has been decided. Surely a tenant or mortgagee could argue that it means the landlord must rely on a forfeiture clause in the lease, which means that the tenant is entitled to ask for relief against forfeiture which will normally be granted (unless the tenant and mortgagee refuse to pay the ground rent). Also section 7 makes the landlord’s right to a possession order subject to the tenant’s Convention rights, which of course include the property right protected by Article 1 of the First Protocol of the ECHR. If this were not so, thousands of would be vulnerable to automatic possession orders where ground rent has not been paid.

    Reply
    • Giles Peaker

      Hi Michael

      Section 7(6)(b) simply means that in order to end an AST during the fixed term, the tenancy agreement/lease must have some provision for re-entry.

      I think that section 7 as a whole means that the freeholder would have to use Schedule 2 grounds to end the lease, not forfeiture, if the lease is an AST.

      I don’t think section 7(3) does make the right to a possession order subject to convention rights where the freeholder is a private body or individual. But even assuming that the court’s requirement to act compatibly with convention rights was engaged, ground 8 is a mandatory ground. If the freeholder were a housing association, there maybe an argument about the bringing of ground 8 proceedings being a breach of their convention obligations, and so a defence, maybe.

      I’m afraid thousands are vulnerable to mandatory possession orders where ground rent is in arrears.

      Reply
    • KTC

      Shelter cite s45(4) to say that forfeiture is not possible for an assured tenancy. And since not an action for forfeiture, no relief from forfeiture (Artesian Residential Investments Ltd v Beck [1999] EWCA Civ 1033).

      Reply
    • Sam

      Michael – the case referred to by KTC decided your point (Beck). You need a right of re-entry to end a fixed-term assured tenancy but there is no right to relief from forfeiture.

      Reply
  2. DN

    I’m going to ask a potentially daft question here, but why wouldn’t an AST be able to be revived if the tenant ceases to live in the property as their only or principal home? I know s.15A(2) Housing Act 1988 would prevent revival of assured status if the tenant parts with possession of the dwelling house, or sub-lets the property in breach of the lease but that explicitly only applies if the landlord is a PRPSH.

    Reply
    • Giles Peaker

      Aaargh. I wasn’t thinking of s.15A – but yes that applies only to PRPSH. But now you mention it, it also wouldn’t apply because no prohibition on sub-letting.

      Damn, I think you are right. This just gets worse…

      I’ll amend.

      Reply
  3. SHO

    Recently spoke to a leaseholder faced with v costly repairs to a roof, following the freeloader- sorry freeholder carrying out a property inspection. I’m now wondering whether S11 Landlord and Tenant Act could apply, thus leaving the cost for structural and exterior repairs to be covered by the landlord? Just a thought!

    Reply
    • Giles Peaker

      No, specifically doesn’t apply to long leases. Leases under 7 years – s.13(1) LTA 1985

      Reply
  4. Simon Lazare

    If you turn this on its head, why couldn’t an unscrupulous landlord circumvent S24 by issuing a lease at a cost that covers all the prohibited charges including an unlimited deposit etc. with a ground rent that is the same as the rent that would normally be charged?

    Reply
  5. John Copeland

    In the December 2017 response to the consultation on “Tackling unfair practices in the leasehold market” it did state “The Government will take action to address this loophole and ensure that leaseholders are not subject to unfair possession orders” but I am not aware of any such action. Does anybody know of any?

    Reply
  6. Peter Williams

    In relation to shared ownership, in the case of Richardson v Midland Heart Ltd [2008] L&TR 31 the landlord did obtain possession on the basis of rent arrears, despite the tenant having paid a premium for the lease.

    Whether or not a tenancy is an assured tenancy is also relevant to the Minimum Energy Efficiency Standard, under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, which (in relation to domestic properties) applies to assured tenancies as a result of section 42(1)(a) of the Energy Act 2011.

    Reply
    • Giles Peaker

      Richardson – our post https://nearlylegal.co.uk/2008/09/shared-ownership-midland-heart-with-benefit-of-transcript/

      At that point back then, we took this to be an issue for shared ownership, due to the rent levels.

      Actually Richardson raises a question on the operation of s.166 and 167 CLRA 2002, as was dis-applied in that case as not ‘100%’ share.

      Yes on the energy efficiency standards, but of negligible effect (and also raises the question of whose responsibility efficiency works inside the demise would be in any event).

      Reply
  7. Michael Hall

    Sorry to be slow off the mark replying to postings of 16 September, but the Artesian Residential case was pre the operative date of the Human Rights Act 1998, so there was no discussion of convention rights. Otherwise the would, or at least should have made a declaration of incompatibility of Ground 8 in the Housing Act 1988 with Article 1 of the First Protocol. There is also a logical flaw in the argument that because forfeiture is not possible, as the statute provides an alternative method of terminating a lease, an application for relief against forfeiture is also impossible. The termination of the lease is just forfeiture by another name. The Act does not exclude the right to apply for relief against forfeiture. The Act does not provide an alternative method of claiming that the tenancy should be allowed to continue. The exclusion of the landlord’s right to forfeit was a measure Parliament intended to protect tenants, and it is a shield and not a sword. I know the court in Richardson v Midland Heart Limited [2008] found otherwise, but I think that was a mistake. The lack of protection for shared ownership leases is also alarming, but at least there is a right to claim compensation, if the lease is terminated on mandatory grounds, according to David Cowan’s article in the New Law Journal in such cases, if compensation is not provided voluntarily.
    https://www.newlawjournal.co.uk/content/ticking-time-bomb-0

    Reply
    • Giles Peaker

      There may indeed be an A1P1 incompatibility argument, though that, of course, would not save the individual leaseholder.

      Relief from forfeiture is ruled out, as the court has no power other than to make an outright possession order by statute. A statutory ground of possession is not just another form of forfeiture, and HA 1988 rules out possession by any other means than the statutory grounds.

      Prof Cowan’s suggestion of an A1P1 claim in respect of loss would only work against social landlords, if it were to work at all. After all, no such claim in respect of forfeiture, which has the same effect.

      Reply

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