Leasehold thoughts from abroad

At this time of year many conveyancers are away on a well-deserved holiday – or looking forward to getting away and a welcome break from demanding clients. Good wishes to you all! Most will also welcome the Government’s consultation on long leasehold houses but will welcome less the mass of mis-information that has surfaced in the press. No mention to be seen of the Leasehold Reform Act 1967 which 50 years ago gave most owners of leasehold houses a right to compulsorily acquire their freeholds!

Many of the problems, according to many comments, seem to be the conveyancer’s fault – ‘I was not told that the rent doubled every 20 years and that this will mean the house is unsaleable’; or even ‘I was never told that the house was leasehold’! Already people are suggesting that such buyers should bring claims against their conveyancers… A colleague mentioned only recently that there were claims firms touting for business by offering to check the amount of SDLT paid by recent house purchasers to see if they had paid too much. They then offer to recover the excess – in return for a hefty fee, of course. And to be fair there can be thousands of pounds involved if the additional 3% on second properties has been wrongly paid or if the property could be classed as non-residential rather than residential. Let’s hope, though, that next year such firms won’t be asking whether house buyers were not advised correctly when buying a leasehold property. Perhaps we all ought to be looking carefully at exactly what we do tell buyers of leasehold properties.

But it has to be said that the issue as to whether a particular increase in ground rent will render a property unsaleable is NOT a legal issue; we cannot be expected to know/guess as to whether such a ground rent increase in 40 or more years’ time will or will not affect value. The effect of rent on value is surely a valuation issue, and we are not valuers  – although how a valuer can assess possible values so far into the future must also be questionable. However, it must be sensible when buying such properties that we do point out to buyers – and their lenders – that there is such a ground rent increase mechanism in place and suggest that they take valuation advice as to the impact of this.

The other issue that arises with long leases that has always fascinated me – yes, how sad I am! –  is the possibility that the lease will fall within the definition of an assured tenancy under the 1988 Housing Act. Like escalating ground rents this also affects both houses and flats.

The definition of an assured tenancy in the 1988 Act does not exclude long leases; rather it is based on the amount of the rent being paid by the tenant. If this exceeds £1000 in Greater London or £250 elsewhere then it is capable of being an assured tenancy. Whether it will be such a tenancy will depend upon other matters – and in particular whether it is occupied by the tenant (or one of them) as his or her only or main home. But, of course, many leasehold houses and flats will be so occupied. And if it is, then it will be an assured tenancy.

The snag here is that assured tenancies are subject to a mandatory ground for possession (Ground 8) if the rent is 3 months in arrears. Now, of course, the tenant can avoid this by ensuring the rent does not fall into arrears and even if it is in arrears and he/she is served a Section 8 Notice demanding possession on this ground, they can still avoid possession by paying the rent before the day of the court hearing. But what about the mortgage lender? There is no provision for a mortgage lender to be advised of these proceedings nor is there a provision (as there is with forfeiture) for relief to be granted if the rent is paid after the hearing. So the tenancy can be terminated without the knowledge of the mortgage lender who will thus lose its security. As far as I am aware this has never happened, but there is always a first time. Should we not be advising mortgage lenders in every case where the lease is already within the 1988 Act or will become so during the mortgage term because of the fixed rent increases?

When the Government eventually announces what action it will take following its consultation, wouldn’t it be nice if it proposed a simple Bill to deal with the problem of leasehold flats as well? They too could be affected by excessive ground rent increases, but they have been largely ignored in the current debate. The Bill could simply prevent long leases of residential property being granted at a rent. There is no legal requirement for a rent under a lease, so ground rent problem solved, for the future at least.

Or how about a Bill preventing the grant of leases of residential property for more than 21 years and then saying that the burden of positive covenants affecting freehold land would be binding on future owners?  So we could have freehold flats.  So no problem with ground rents or having to use leasehold to make positive covenants bind successors. Could it be as simple as that?

There is still the problem of existing leases, of course. There are big issues involved in depriving people of rights they have already acquired, particularly when many of the freeholders of long leaseholds will have bought them on the basis of the scheduled rent increases. Would it be possible to limit all future rent increases to the percentage increase in the Retail Prices Index, whatever the lease might say? It will be interesting to see what, if anything the Government decide to about these existing leases.

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