Member Article

David Leviten – partner at Clough & Willis – discusses the dangers of high ground rents in long leases of apartments or houses

The simple message of this article is that home purchasers must be aware of long leases that are subject to high ground rents and the problems they can cause including making a property un-mortgageable and thus un-saleable. This sounds like a scary scenario but situations like this are being common place as long leases with high ground rents become more and more prevalent.

Despite having paid a substantial price for a property, buyers could find themselves being treated as an Assured Shorthold Tenancy (AST). This would apply where all of the following occur; if the purchaser is one or more individuals; if the purchaser (or at least one of the purchasers) intend to occupy the dwelling as their only or principal home; if the annual ground rent is between £251 and £100,000 inclusive (or between £1,001 and £100,000 in Greater London).

However, it’s important to remember that if the ground rent is subject to an escalator clause you might find during the term of the lease that it rises and then falls within these figures; if that happens it may not initially be an AST but it could become one if the lease does not fall within any of the exceptions in Schedule 1 of the Housing Act 1988 – it is almost certain this will not apply to most long leases.

Whilst most leases give the landlord the right to terminate if rent goes unpaid for 21 days, the courts normally have the power to grant relief, cancelling the forfeiture as long as the arrears are paid off. The problem here is that the court’s discretionary power to grant relief does not apply to an AST if at least three months rent is more than three months overdue. The court now has no choice and must terminate the lease and give possession to the landlord. If that happens the buyer will have lost all monies paid for the property.

These rules only apply if rent is outstanding both when the landlord serves notice demanding possession and the date of the court hearing. The issue here is that if the purchaser pays promptly they would naturally think the issue is sorted. However, they would be wrong as the mortgage (or potential) mortgage company would most likely find out once it’s too late. The upshot is that many lenders are now questioning whether leases such as these are acceptable security. In reality that means even if a buyer is happy to pay a high ground or live with an escalator clause they may well be turned down by lenders, find their property’s value or their ability to sell is affected.

If a landlord is not prepared to amend a lease to mitigate these issues then our advice is clear: buyers should carefully consider not proceeding even if their mortgage company is prepared to lend because there is no guarantee that other banks and building societies would do the same in the future.

This was posted in Bdaily's Members' News section by David Leviten .