End of the £250 / £1000 ground rent trap for leasehold properties - maybe???

eddddy

There are often posts here about the anomaly in section 8 the Housing Act 1988 - which makes a lease with ground rent over £250 (outside London) or £1000 (within London) an Assured Tenancy.

This makes it much easier for a freeholder to forfeit the lease (i.e. repossess the property) if ground rent is overdue.

So it's a bit risky for buyers, and mortgage lenders insist on indemnity insurance.



But it seems there's a 'sneaky' change hidden in the Renters (Reform) Bill which is going through Parliament at the moment - which might remove that problem...

TENANCIES THAT CANNOT BE ASSURED TENANCIES

Tenancies of more than seven years not to be assured tenancies 15 (1) In Part 1 of Schedule 1 to the 1988 Act (tenancies which cannot be assured tenancies), after paragraph 3C insert—

“Fixed term tenancies of more than seven years

 A fixed term tenancy of a term certain of more than seven years from the date of the grant of the tenancy.”

Link: https://publications.parliament.uk/pa/bills/cbill/58-03/0308/220308.pdf

I read that as meaning any lease over 7 years cannot be an Assured Tenancy (and typical residential leases are 99+years), and therefore the risk of mandatory forfeiture of the lease (i.e. repossession) for overdue ground rent goes away.

It'll be interesting to see if that's the case.


Edit to add...

That would only impact existing leases -  new leases must always have a peppercorn ground rent.

NameUnavailable

I'm surprised there's not been more in the news about this. The issue isn't just the fact that a lease becomes an AT, it's that many lenders won't lend now and won't accept the insurance policies either (also doubling ground rent / high ground rent that affects the saleability of a leasehold).

eddddy

NameUnavailable said:

The issue isn't just the fact that a lease becomes an AT, it's that many lenders won't lend now and won't accept the insurance policies either.

I'm not convinced about that.

FWIW, I did a quick read-though of what lenders say about this, my rough count is as follows:

• 24 lenders explicitly say they will accept ground rents over £250 / £1000 with indemnity insurance

• 2 lenders explicitly say they won't accept ground rents over £250 / £1000 at all

• 6 Lenders said details have to be referred to them

• The others don't mention either way

See: https://lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1852/


Lenders want indemnity insurance specifically because the lease could be an "Assured Tenancy".

If the lease cannot be an "Assured Tenancy", then the need for indemnity insurance goes away.



(There seem to be a lot of confused posts on this board which mention "mortgage refused" and talk about things like "doubling ground rent", "ground rent over £250" and "indemnity insurance". But frequently, the posters aren't clear on exactly why their mortgage was refused, so it's difficult to draw any real conclusions.)

SDLT_Geek

I do not read the proposed legislation as limited to leases granted after commencement.  This is the wording of the proposed section 21:

TENANCIES THAT CANNOT BE ASSURED TENANCIES 

21 Tenancies of more than seven years not to be assured tenancies 

(1) In Part 1 of Schedule 1 to the 1988 Act (tenancies which cannot be assured tenancies), after paragraph 3C insert— 

“Fixed term tenancies of more than seven years 

3D A fixed term tenancy of a term certain of more than seven years from the date of the grant of the tenancy.” 

(2) In paragraph 1 of Schedule 10 to the Local Government and Housing Act 1989 (security of tenure on ending of long residential tenancies), in sub-paragraph (1)(a) after “low rent” insert “and were not for a term of more than seven years”. 

(3) Where, immediately before the day on which this section comes into force, proceedings for an order for possession under section 8 of the 1988 Act in reliance on a valid notice given under that section of that Act have been commenced in relation to the tenancy and have not been concluded, or have not been commenced but have not become time-barred— 

(a) the tenancy remains an assured tenancy, and the notice remains valid, until any time when such proceedings in reliance on the notice become time-barred or are concluded, and 

(b) until that time the amendments made by subsections (1) and (2) do not apply in relation to the tenancy. 

(4) For the purposes of subsection (3), proceedings are “time-barred” after the time limit mentioned in section 8(3)(c) of the 1988 Act.

Section 21(3) would not be needed if the legislation did not apply to existing leases.

LegallyLandlord

Yes, I spotted this too. Good news for kings leases. They were never intended to be deemed ASTs, and this bit of the Renters Reform Bill makes it clear. 

louigi12345

Our ground rent it’s £200 increasing by £100 every 25 years. As it’ll be £300 within the next 25 years our buyers mortgage has just rejected an indemnity insurance.