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How a 999 Year Lease Could in Fact be an Assured Shorthold Tenancy

Posted on 22nd February 2018 in Residential Property

Posted by

Nick Conner

Partner and Solicitor
How a 999 Year Lease Could in Fact be an Assured Shorthold Tenancy

An assured shorthold tenancy (“AST”) is traditionally used by buy-to-let landlords when granting a tenancy of a residential property and will commonly be for a period of between six to twelve months.

What is less well known is that leases granted for terms of, say, 90 years, 125 years or even 999 years can still qualify as ASTs (or assured tenancies, depending on when the lease was granted – the impact remains the same) and this can have serious repercussions for the owner and any mortgage lender.

Is it an AST?

While there are other criteria, the following are the relevant criteria for the purposes of this post in considering whether a lease will be an assured shorthold tenancy:

  • The owner of the long lease is an individual;
  • The owner of the long lease occupies the property as his or her home;
  • The annual ground rent exceeds £1,000 if the property is in London or exceeds £250 if the property is located in another part of the country.

Why does it matter?

If the lease is an AST and the ground rent is in arrears for 3 months or more (if the ground rent is paid yearly), then the landlord can seek recovery of the property from the owner. The court must make an order awarding possession to the landlord if the monies are outstanding at the date of making the order.

Impact

Taking forward this information, one could feasibly have a situation where someone pays £500,000 for a leasehold flat with an annual ground rent of £300. For whatever reason, the owner might fail to pay the ground rent for three months and, as a consequence, the owner finds that a court has granted possession of the property to the landlord. The owner has then lost his £500,000 asset over unpaid rent of £900.

Rent review

It is important to be alive to rent review clauses in a lease and how they can impact on the annual ground rent. Just because the annual ground rent today might be less than the £250 / £1,000 threshold if the lease includes provisions for review which could cause the annual ground rent to exceed these limits, mortgage lenders, in particular, will need to know this as well as buyers.

Marketability

Mortgage lenders will require solicitors to advise them where the lease either is or could become an AST unless the lease can be varied to combat against the issue. The Council of Mortgage Lender’s Handbook states: “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 an AST, then it must be considered that the terms of the lease are unsatisfactory.

There is a separate issue about the suitability of certain rent review clauses and that is an item we will look at separately in another post.

Indemnity insurance

Indemnity insurance companies are never slow to react where there is money to be made from an issue such as this. It is therefore of little surprise to see a number of insurers, such as Countrywide Legal Indemnities, offering lender-only insurance products. These will see an insurer financially compensate a lender during the life of the mortgage for any losses the lender suffers in the event of a landlord recovering possession from the owner due to rent arrears.

The legislation which has created the issues referred to in this post dates back to 1988, so the law here is not new. However, from our experience, there has only started to be awareness of this area in the past six months. Accordingly, it is not yet known how amenable mortgage lenders will be to proceeding based on indemnity insurance for this risk. We expect the majority of lenders would be happy to do so except where the annual ground rent is either very high or there are separate issues of concern with the lease, such as unreasonable rent reviews.

Legislation

The Government confirmed in its December 2017 consultation as follows: “the Government will take action to address this loophole and ensure that leaseholders are not subject to unfair possession orders.” It is stating the obvious to say that the Government has a lot on its plate at the moment. While it would be an easy piece of legislation to exempt long leases from being ASTs, it remains to be seen if the Government will find time to do so. The sooner the better, for all concerned.

If you require any advice regarding a matter similar to this, then please do not hesitate to contact our experienced team of residential property solicitors. 

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