When is a Lease not a Lease?

In the UK, leases can sometimes automatically become an assured shorthold tenancy (“AST”), a classification that brings with it significant implications for both landlords and tenants.

Assured Shorthold Tenancy vs Lease

An AST is a type of rental agreement between a landlord and a tenant, and it is the most common form of rental tenancy. It is a legally binding agreement setting out the tenant’s right to occupy the property. Therefore, the tenant does not own the property. Most new tenancies are automatically this type.

A tenancy can be an AST if all the following apply:

• the landlord is a private landlord or housing association;
• the tenancy started on or after 15 January 1989;
• the property is the tenants’ main accommodation; and
• the landlord does not live in the property.

A lease however is a legally binding agreement setting out the leasehold ownership terms, where the property is owned for a set period of time (the lease term).

Ground Rent within a Lease and its Implications

Ground rent is a regular payment made by the leaseholder to the freeholder as set out in the lease. Traditionally, ground rent has been a nominal amount, but recent trends have seen significant increases, caused concern and prompting legislative scrutiny.

According to the Housing Act 1988, a lease can be deemed as an AST if the annual ground rent exceeds certain thresholds:

• Outside Greater London: exceeds £250 per annum.
• Within Greater London: exceeds £1,000 per annum.

This change from a lease into an AST has profound effects:

• A freeholder can seek to claim possession of the property where three months of ground rent become more than three months overdue, without having regard to the protections afford by the lease itself. Therefore, the tenant loses its security of tenure;

• A freeholder will not need give a mortgage lender notice of possession proceedings in the same way as is set out in the laws governing leases and therefore many lenders are not satisfied to lend against such leasehold interests. This makes and potential sale, purchase or re-mortgage difficult;

• If a freeholder of a block of flats wishes to sell, they must normally offer first refusal to the “qualifying tenants”.   An AST is not deemed to be a qualifying tenancy.  This could mean that either individuals or indeed a whole block become exempt from the right of first refusal as the right applies only if more than half the flats are held by qualifying tenants.

Part of the issue remains that there has been very little case law in relation to these issues and therefore there is little certainty as to how freeholders, lenders and courts will react in these circumstances.

Solutions and Recent Developments

The issue of high ground rents has attracted considerable attention from the Government. The Leasehold Reform (Ground Rent) Act 2022 introduced significant changes to address these concerns. Although the Act primarily targets new leases (granted on or after the relevant commencement date (30 June 2022)), existing leases with ground rent exceeding the thresholds continue to be interpreted as an AST.

There are potential solutions if your ground rent means that your long lease is an AST, including indemnity insurance (if your lender will accept it), a variation of the lease (which will require your freeholder’s cooperation) or exercising your right to extend your lease (which will reduce your rent to a peppercorn, i.e., nothing).

How Pinney Talfourd can help

For more information, please contact our Residential Property Litigation department who would be happy to assist in reviewing your lease and through any negotiation and litigation that may arise in resolving ground rent issues.