Ground rent issues and Labour’s Renters’ Rights Bill

We have been closely following the progress of the government’s Renters’ Rights Bill, which was recently introduced to Parliament.

In this blog, we will be delving further into the impact that the proposed legislation will have on flats with long leases (for example, where individuals have purchased a flat with 99 years on the lease).

Long-term leases will no longer be classified as assured tenancies

The proposed changes state that leases of seven years or more will no longer be classified as assured tenancies.

The current issue is that ground rents above £250 per year (above £1000 in London) are a concern. If you fail to pay your ground rent, the landlord has the ability to take possession of your flat and end the lease. This is because the current law treats the long lease of a flat as if it is an assured tenancy.

Due to the fact that the lease is classified in this way, the freeholder is exempt from having to go through the lengthier process of ending the lease known as “forfeiture”. That longer forfeiture process allows flat owners who haven’t paid their ground rent to defend the action, gives them more time to bring their payments up to date, and also offers wider protection to any lenders with a mortgage over the flat.

The fact that the freeholder can take possession of the flat more easily has led to difficulties for flat owners with ground rents over the limits set out above, or those with rapidly increasing ground rents. This has resulted, in some cases, in the flat owner being unable to sell the property because potential buyers (or more importantly, the mortgage companies those buyers are borrowing from) view the ground rent amounts (or provisions) as unacceptable. Currently, owners of flats where these issues are in place are having to seek variations to their lease from freeholders to make the lease more acceptable. This is reliant on the freeholder’s willingness to agree such variations, or any other proposals the freeholder decides to put forward.

By removing long-term leases from the assured tenancy category, landlords will no longer be able to use these automatic possession grounds, providing tenants with stronger protections from any freeholder seeking possession of the flat.

The end of deeds of variation and indemnity insurance?

This change could also reduce or eliminate the need for tenants to seek deeds of variation to alter their lease to ensure it explicitly removes the landlord’s ability to take possession. A deed of variation can also be used to update the lease to bring annual ground rent under the thresholds and protect against automatic possession.

Some tenants on long leases have also taken out indemnity insurance to protect themselves against the risk of possession claims under assured tenancy rules. In recent times, however, most lenders have shown themselves unwilling to proceed even if insurance is taken out.

It remains to be seen how the industry and lenders will react to the proposed amendments, and whether they will alter their requirements relating to ground rent provisions within leases.

It is likely that there will still need to be a lender notification or mortgagee protection clause included within leases where a mortgage is place, to ensure that lenders are notified about any claim or breach. This is because, even after long-term leases are no longer classified as assured tenancies, lenders will still want to ensure their financial interests are protected in case of any breach of the lease or possession claims that could affect the security of the loan.

Seek specialist legal advice

Whether you are a tenant looking to understand the ground rent in your lease or a landlord concerned about the impact of the Renters’ Rights Bill on your business, our specialists are on hand to help. Give us a call on 0330 221 8855 or email enquiries@attwaters.co.uk to book an appointment with us.