Beware…Long Residential Leases can be classified as ASTs

22 Jan 2019

Whilst Assured Shorthold Tenancies (ASTs) are usually thought of as short term agreements, the legislation governing ASTs does not specify a maximum term.  Therefore, any residential lease can constitute an AST irrespective of its length, provided it satisfies the relevant statutory criteria.  This can lead to unexpected consequences, entitling a Landlord the right to terminate the long lease.  Under an AST a Landlord has the right to terminate during the term of the lease if it can prove specified grounds (which include a certain level of rent arrears) and if the lease provides for termination on the ground in question (subject to an exception).  In contrast to forfeiture, where the Tenant can apply to the courts for relief from forfeiture, under the Housing Act 1988 a number of these grounds are mandatory thereby removing any discretion of the courts to reinstate the lease. 

Tenants with a long lease of residential property should consider whether their lease would now or could in the future be classified as an AST as this will affect its marketability, especially as lenders are now becoming more attuned to this issue and refusing to lend against such properties unless they are given certain protections within the lease.

A lease will constitute an AST where all of the following conditions are met:-

  • The Tenant is one or more individual;
  • At least one Tenant occupies the property as their only or principle home;
  • The annual Ground Rent is between £251.00 and £100,000.00 (inclusive) or between £1,001.00 and £100,000.00 (inclusive) in Greater London (On the basis the Lease was granted after 1st April 1990); and
  • The Tenancy does not fall within an exception defined in the legislation (Housing Act 1988)

Although the lease may not now be classified as an AST, future known rent increases or increases determined at future rent reviews could bring the annual ground rent within the bracket to satisfy that AST condition.  Once a long lease is classified as an AST, it can be at risk of termination during the term of the lease thereby depriving the leaseholder of its asset and any mortgagee of its security. 

Protection may be provided to a leaseholder and any mortgagee by incorporating certain provisions in the lease, either when granting the lease or by way of Deed of Variation if the lease is already in existence.  However, this is a relatively untested area as there has been limited litigation to date. 

There is also some doubt as to whether the Courts will terminate a long residential lease under the Housing Act 1988 on a standard forfeiture clause notwithstanding it meets the criteria for an AST.  The Courts may instead require the relied upon Housing Act 1988 ground for termination to be specifically cited or its requirements repeated in full in the terms of the lease before a landlord can invoke the Housing Act 1988 to apply for an order for possession.  Notwithstanding the doubts lenders do not appear to be willing to take the risk and many are requiring protections to be incorporated into the terms of long leases before they will lend.    

If you are a Landlord being asked by your Tenant to grant or vary a lease with consideration to the above or you are a leaseholder concerned or being asked to deal with the issue by a lender, please contact Lydia Scally on Lydia.Scally@www.colmancoyle.com or telephone + 44 (0) 207 354 3000.

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