Ground Rent, Assured Tenancies & s.8 of the Housing Act (1988)
In recent weeks the introduction of the Leasehold Reform (Ground Rent) Act has brought to the fore the subject of ground rents and the implications for landlords under the new legislation.
In this technical blog, Jacy Donoghue of our Real Estate team, looks at the subject of a lease being interpreted as an ‘assured tenancy’, where ground rents that are (or will be) in excess of £250 per annum, raise direct concern for lenders on the value and saleability of property when action is considered under section 8 of the Housing Act 1988.
Overview:
To place this article in specific context, it is important to note that any long-term lease that commenced after the introduction of the Housing Act 1988 can potentially be interpreted as an assured shorthold tenancy if:
- The ground rent is over £250 per year (properties outside of London) or £1,000.00 (properties in London) and
- The property is the only principal residence of the leaseholder
Essentially, this means that all of the usual rules around forfeiture (and indeed relief from forfeiture) do not apply. So, the usual thresholds for the rent arrears, or the threshold amount of unpaid service charges are irrelevant, as are the rules requiring determination of breach of lease.
Section 8 Housing Act 1988 - The Mandatory Rent Arrears Grounds
As readers may be aware, under the usual long lease forfeiture provisions for rent arrears, the court has 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 will usually step in on arrears cases to preserve its security, the relative speed and unfamiliarity of ground 8 proceedings can be seen as presenting a tangible risk.
The Key Issue and How it Affects Lenders
It is important note that from a lender's perspective, as long as the leaseholders pay their ground rent pursuant to the terms of the lease, there should be no issue. However, because lenders have no way of ensuring that the owners of a leasehold proper pay the ground rent, they remain concerned by the provisions in the housing act and specifically, how s8 can be interpreted. If, for example, a leaseholder falls into ground rent arrears of 3 months, then a landlord has a right to apply to the court to repossess the property under section 8 of the Housing act 1988, and subsequently result in putting a lenders security at risk and dramatically reducing the mortgage-ability and saleability of the property.
A Section 8 Notice…
Primarily, a section 8 notice can only be issued to a tenant who has breached the terms laid out in the tenancy agreement and if certain conditions have been met, the most common being one involving rent arrears.
Equally, the landlord cannot evict the tenant without first obtaining an order for possession from a court. Before applying to the court for such an order, the landlord must serve a section 8 notice to quit to the tenant. The notice states that the landlord intends to seek possession of the property. The notice must be laid out in a prescribed format and must specify which grounds the landlord intends to use to gain possession and the landlord's reasons for relying on those particular grounds.
Issuing a S8 Notice
Under section 8 of the Housing Act 1988 there are 17 separate grounds* on which a landlord can seek possession of a property.
Notably, for ground 2, the landlord must give two months' notice. For other grounds such as 8, 10, 11, 12, 13, 14, 14A, 15 and 17 they can give just two weeks' notice.
A section 8 notice must be given in the prescribed manner, this is important because any errors the landlord makes when serving the section 8 notice are likely to lead to serious delays.
Does a Section 8 Notice to Quit Guarantee a Possession Order?
Issuing a section 8 notice to quit on a tenant does not guarantee that the court will grant a possession order. It depends largely on which grounds are relied upon as well as the strength of the landlord's argument.
Grounds 2 and 8 (described below) of a section 8 notice are mandatory, meaning that if a landlord relies on one of these grounds and can prove to the court that one of them applies, then the court will have no choice but to issue the landlord with a possession order.
- Ground 2 relates to a lender's right to possession. If the property is subject to a mortgage the landlord will often be required to serve this notice on the tenants.
- Ground 8 relates to serious rent arrears and is the main ground used by landlords of Housing Act 1988 tenancies seeking possession for rent arrears. Both at the date of the service of the notice under section 8 of this Act and at the date of the hearing:
- if rent is payable weekly or fortnightly, at least eight weeks' rent is unpaid;
- if rent is payable monthly, at least two months' rent is unpaid;
- if rent is payable quarterly, at least one quarters' rent is more than three months in arrears; and
- if rent is payable yearly, at least three months' rent is more than three months in arrears.
If a tenant is able to reduce the rent arrears to below the relevant figure by the date of the hearing, the application will be dismissed. A landlord may wish to consider using Ground 10 and 11 at the same time. Therefore, if an application on Ground 8 fails it will still be possible to seek the order on the other grounds.
- Ground 10 can be used where some rent that is lawfully due from the tenant:-
- is unpaid on the date on which the proceedings for possession are begun; and
- except where subsection (1) (b) of section 8 of the Housing Act 1988 applies, was in arrears at the date of the service of the notice under that section relating to those proceedings.
- Ground 11 can be used in cases where the tenant has persistently delayed paying rent which has become lawfully due whether or not any rent is in arrears on the date on which proceedings for possession are begun.
If a Long Lease is an Assured Shorthold Tenancy
Where this is the case, 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 of the Housing Act 1988.
However, it should also be noted that Section 7(6) and 7(6A) Housing Act 1988 also states that for a fixed term assured tenancy, the landlord cannot obtain possession on a Schedule 2 ground unless the lease makes provision for termination of the lease on that ground.
An example of the type of clause that would need to be included can be see below:
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 I 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.)
Considering Potential Remedies
While the law remains as it is, there are potential remedies a leaseholder can explore to mitigate the ground rent issue - or make the property more appealing to lenders. These include:
Indemnity Policy:
Many lenders will provide security for a leasehold property subject to an indemnity policy which covers any losses they may suffer. This only protects the lender and offers no protection for leaseholder.
Deed of variation:
A better solution is if the landlord agreed to vary the terms of the lease to limit the ground rent below the threshold of £250.00 or £1000.00 in London. Landlords are under no obligation to vary the terms of a lease, however when using this option, a lender can request be a clause be included within a Deed or Lease that protects them against s8 Housing Act 1988, often referred to as a mortgagee protection clause.
To offer another specific example, the type of clause that would need to be included can be see below:
New Clause: means the following which is to be inserted as new clause “XX” under the “YY” Schedule of the Original Lease:
"For the purposes of this Clause the expression "any mortgagee" shall be limited to the proprietors of any mortgage charges that may for the time being registered as a legal charge at HM Land Registry against the Lessee's leasehold title. The Lessor shall:
- serve on any mortgagee a copy of any notice which is a statutory condition precedent to the bringing of any claim for possession of the property under Section 8 of the Housing Act 1988 (or any replacement or re-enactment thereof)
- give any mortgagee not less than 14 days prior written notice before commencing any claim for possession of the property
- serve on any mortgagee a copy of any claims for possession of the property that the Lessor may issue in the Civil Courts regardless of whether doing so is required by rules of the court and iv. accept payment of ground rent from the mortgagee if offered on behalf of the Lessee"
Note: that this clause will usually go under the Right to Re-entry clause in the original lease.
The clause would therefore offer lenders the assurance that they will be given the opportunity to rectify any breach of lease before the landlord serves a s8 notice on the leaseholder.
Summary
In conclusion, it is evident that buyers clearly need to understand any ground rent obligations and thresholds associated with their purchase, and similarly the costs associated with gaining indemnity or seeking a deed of variation to provide assurance to lenders. With the programme of leasehold reform in motion and establishing limits for ground rents on new leases, it is timely for developers and landlords to consider the practicality and viability of potential lease variation. Developers and landlords should consider the position of leaseholders, buyers and lenders but should always ensure that their position is sufficiently protected as well so that they can use the applicable remedies when necessary. Should you wish to discuss this subject and its implications, please contact our Real Estate team for further advice.
*https://www.legislation.gov.uk/ukpga/1988/50/section/8
