An issue which is receiving increased attention in recent years when it comes to leasehold properties is the potential issues with rising ground rents.
Traditionally, the ground rent payment was a small fee, often just a few pounds a year. However, in more recent times, ground rent has evolved and in some cases is now a considerably higher annual sum. It is of concern when ground rents in a Lease exceed £250.00 per annum (or may exceed £250.00 per annum) during the term of the Lease. For properties in London this is of concern where the ground rent exceeds £1,000.00 per annum (or may exceed £1,000.00 during the term of the Lease).
This is due to the risk of the freeholder having repossession powers, which could provide the freeholder with the same rights as if the Lease were an Assured Shorthold Tenancy (‘AST’). Most people think of an AST as a short-term let and it may come as a surprise therefore that a Lease, even with many years remaining, can also sometimes be regarded as an AST. In the event that the ground rent exceeds £250.00 per annum (or £1,000.00 per annum in London), the Lease falls within the Housing Act 1988 and will be deemed to be AST.
What are the consequences of a property which falls into the AST Trap?
All leases give the landlord a right to "forfeit" if rent goes unpaid, but the courts normally have power to grant relief, cancelling the forfeiture so long as the arrears are paid off.
The problem is that the power to grant relief does not apply to ASTs if at least three months' rent is more than three months overdue. The court has no choice in such cases; it must terminate the lease and give possession back to the freeholder. The rules only apply if the rent is outstanding both when the landlord serves notice demanding possession, and at the date of the court hearing. Whilst prudent lessees will pay their rent promptly, a bank with a mortgage over the property may not find out until it is too late. As a result, some lenders are questioning whether a lease with a high ground rent is acceptable security for a mortgage. Due to this, potential buyers may be limited as to what lenders will lend against the property which can significantly decrease the market for such properties.
The AST rule does only apply to owner-occupiers and therefore, if the property is being let out to a tenant or not being used as their main residence, then the above forfeiture provisions do not apply. However, this may still deter buyers as it could mean that they are limited to selling to investors or cash buyers.
How should I navigate the AST Trap as a leaseholder or potential buyer?
Being aware of the AST Trap is the first step and carefully examining the lease for any clauses relating to ground rent. If the ground rent exceeds £250.00 per annum (or £1,000.00 in London), seek specialist legal advice to fully understand the implications. Whilst there are indemnity insurance options, the preferred stance is for the Landlord and Tenant to enter into a Deed of Variation in order to vary the ground rent to an acceptable level. The quicker this is actioned on a transaction, the better, to avoid further delays.
If you’re in the process of purchasing a leasehold property which fits into the above criteria and would like advice or assistance, please get in touch with Nadine Jasinski in our Residential Property Team via email - firstname.lastname@example.org or call 01603 610911.
Note: The contents of this article are for general information only and do not constitute legal advice. Specific legal advice should be taken in any particular circumstance. Seeking specialist legal advice from solicitors experienced in dealing with leasehold transactions is essential to ensuring you understand the investment you are making in a property and protecting that investment.