Escalating Ground Rents: Traps for the unwary

Whilst the controversies surrounding escalating ground rents in long leasehold residential properties have received significant press in recent months, there is a further hidden danger to be aware of. This issue has been brewing since the Housing Act 1988 (the “Housing Act”) came into force but the potential problem is only now being recognised.

It arises where the increase in rent on a review triggers the provisions of the Housing Act which were not intended to apply to the form of tenancy which was granted.

The definition of “assured tenancies” in section 1 of the Housing Act does not exclude long leases. When the rent is reviewed, in certain circumstances, and where the rent limit under the Housing Act is met, it may result in the long lease qualifying as an “assured tenancy” under the Housing Act.

Current low rent limits

To qualify as an assured tenancy, the annual rent must be above £1,000 in London and above £250 in Greater London.

Exclusions

Certain tenancies are excluded from qualification. These include those held by corporate tenants or those where the tenant does not occupy the property as their only or principal home. Likewise, tenancies entered into before commencement of the Housing Act in January 1989 are excluded, along with those tenancies that do not exceed the low rent threshold. It is worth remembering that during the life of the tenancy it may fall in and out of qualification.

The risk that arises

Under the Housing Act, a landlord has the ability to seek possession of the tenancy if certain grounds are established. The grounds are in Part 1 Schedule 2 to the Housing Act.

One such ground relates to arrears of rent (Ground 8). If the arrears threshold under the Housing Act is met, it is open to the landlord to serve a Section 8 Notice seeking possession of the property relying on Ground 8 and, on the expiry of the notice commence possession proceedings in respect of the arrears. This is a mandatory ground. This means that if at the date of the hearing

As Ground 8 is a mandatory ground, if the ground is made out the Court has no discretion but to make the Order, regardless of how draconian an outcome it may be for the long leaseholder and their lender. As this is not a forfeiture route, the usual mechanism for a tenant to apply for relief does not apply.

Practical Implications

Whilst it is acknowledged that this is not a route that has been widely utilised by landlords so far, following escalating ground rent reviews, higher numbers of leases will qualify as assured tenancies and instances of ground rent arrears may increase. Tenants and their lenders need to be aware of this mechanism which is available to landlords to secure possession and terminate the long lease in these circumstances. When faced with a hearing, tenants should seek to reduce the arrears to below the threshold so that the ground is not made out at the hearing. However absent leaseholders and mortgagees may well not become aware of the proceedings in advance of the order being made.