For most of you, it will have been impossible to miss the changes introduced by The Leasehold Reform (Ground Rent) Act 2022 (“the Act”) back in February 2022, banning ground rents (or, more specifically, reducing ground rents to a peppercorn e.g. no monetary value) for “regulated leases”. The Act was brought about against the backdrop of increasing concern and disquiet in the residential leasehold industry over high and “escalating” (those increasing over time) ground rents, and the effect such ground rents were having (or would have) on leaseholders’ financial investments in their properties. In this week’s Legal Update, we look at the lasting effects of high and escalating ground rents for those leases not caught by the Act.

“New” leases caught by the Act

Our Legal Update from February 2022 (here) sets out the main provisions of the Act and the “regulated leases” caught by the ban on ground rents. In essence, “regulated leases” are defined those granted on or after 30 June 2022, provided that they are :-

• A long lease of a single dwelling;

• Granted for a premium (unless pursuant to a deemed surrender and regrant of the lease, on or after 30 June 2022);

• Not granted pursuant to a contract entered into before 30 June 2022; and

• Not an “excepted lease” (including, for example, a statutory lease extension or a business lease).

The ground rent element of any “regulated lease” must be a peppercorn (ie a symbolic but ultimately valueless rent).   There are hefty fines for landlords who flout the rules and require leaseholders under a regulated lease to pay a ground rent banned by the Act.

So what about “old” leases?

Leases granted before 30 June 2022 (or granted pursuant to a contract entered into before that date) are unaffected by the ban on ground rents, meaning that those leaseholders are bound by the contractual obligations in their leases to pay the ground rents agreed and set out in the lease, however high or unreasonable it may seem. This is despite the fact that some old leases can see ground rents escalate to such exorbitant levels that the leases may be made virtually unsaleable.

What does this really mean?

It goes without saying that, potentially, older leases (granted prior to 30 June 2022) may be seen as less attractive to purchasers and lenders (and, therefore, less valuable) if a ground rent is payable, compared with a regulated lease caught by the Act, under which no ground rent is payable. This will, of course, come down to the level of ground rent payable under the old lease. It is unlikely to be a concern for those leases where the ground rent payable is nominal, and particularly where the ground rent is fixed and does not escalate over time.

However, higher and escalating ground rents still have the potential to cause very serious problems for leaseholders and for landlords or, importantly, RTM companies or RMCs otherwise with the benefit of enforcement rights, and those problems have not been addressed by the Act insofar as old leases are concerned.

Status

In the years leading up to the passing of the Act, concern had been raised in the industry over the legal status of a residential lease which has a high ground rent, that being :-

• Over £250 pa (for properties outside London); or

• Over £1,000 pa (for properties inside London).

Provided that certain other criteria applies (including that the dwelling under the lease is the leaseholder’s only or principal home), then it is likely that the lease would in fact be an assured (or assured shorthold) tenancy caught by the provisions of the Housing Act 1988 (“the 1988 Act”). The complications caused by this are addressed below.

Enforcement

Crucially, the rules for enforcement of tenant covenants under an assured tenancy differ under the 1988 Act to those which usually apply to a traditional residential long-lease (which is typically by forfeiture, governed by either the Law of Property Act 1925 or the County Courts Act 1984 - for more, see here). 

Where there has been a breach of tenant covenant (whether it be for non-payment of rent or some other breach), the procedure set out in Section 7 of the 1988 Act must be followed to enforce that breach of an assured tenancy (where possession is sought as opposed to some other remedy such as a money judgment or injunctive relief). This requires an order for possession to be sought from the Court, only once a notice served under Section 8 of the 1988 Act has been served, set out one or more of the grounds for possession prescribed by Schedule 2 of the 1988 Act and relied upon by the landlord.

The grounds for possession are either mandatory (under which, if proven, the Court must grant an order for possession) or discretionary (under which, if proven, the Court may grant an order for possession if considered reasonable to do so).

A full list of the grounds and the notice periods to be given in the Section 8 notice before a claim for possession can be issued in the County Court can be seen here, but the most common include :-

• Ground 8 - a mandatory rent arrears ground - e.g. if rent is payable annually (as is the case for most residential long leases), at least 3 months’ rent is outstanding;

• Grounds 10 and 11 - discretionary rent arrears grounds - e.g. there are some arrears outstanding or persistent delays in paying.

• Ground 12 - discretionary ground - breach of the tenancy agreement.

The 1988 Act contains none of the usual provisions for relief from forfeiture (to reinstate the lease on the same terms as the existing lease, provided that the breach is remedied in one of the prescribed methods), presenting a very serious and real risk to leaseholders that they could be ordered to give possession of their property even where only very little in rent arrears is owing. There appears to be uncertainty as to whether any of the provisions for relief from forfeiture in Section 146 of the Law of Property Act 1925 or Section 138 of the Courts Act 1984 apply in these circumstances, leaving leaseholders with little protection even if they are willing and able to remedy the breach.

It is important to note, however, that in order for a landlord to benefit from the grounds for possession set out in Schedule 2 of the 1988 Act to seek possession of an assured tenancy where the tenancy is still within the fixed term (as will be the case with the vast majority of long leases caught by these provisions), the tenancy agreement (e.g. the long lease) must contain express provisions stating that the agreement could be terminated on those specific grounds (e.g. rent arrears etc). This may be something that would have been overlooked by those drafting leases (who may have been doing so at a time long before this issue was ever called into question), and may therefore cause difficulties for landlords intending to enforce a tenant covenant by way of possession.

Concern for lenders

Inevitably, the potential status of a residential long-lease as an assured tenancy is the cause for serious concern to mortgage lenders also, particularly given that the 1988 Act contains no traditional relief from forfeiture provisions to protect the leaseholder’s interest and the lender’s security in the event of possession action being taken.

As a result, if one of the grounds for possession are made out and the Court makes an order for possession, the lender is put in a position where it stands to lose its (potentially very significant) security in the property secured by the mortgage. This potential risk has, certainty in the past, caused lenders to question whether they should lend against residential leases where the ground rents exceed the £250 pa (or £1,000 pa in London) threshold, potentially affecting the saleability and value of those properties.

Conclusion

The Act was introduced so as not to apply retrospectively and, despite industry pressure on landlords (and developers in particular), there is nothing to force a landlord to agree to any variation of the lease to change the ground rent provisions (although a statutory lease extension could be considered). As a result, the uncertainty and concern caused over the status of an old lease with a high rent and the enforcement of any breach of tenant covenant continues for leaseholders, landlords and lenders alike. Sadly, this is a situation which will continue until any change in legislation is brought about (which is considered unlikely) or any relevant case law clarifying the position is decided.

If you have any concerns over the status or enforcement of your lease, or have any questions on this week’s Legal Update, please contact a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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