[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.