Assured tenancy traps – the unexpected AST

Posted on 9 May 2017

Assured tenancy traps – the unexpected AST

Most people think of an Assured Shorthold Tenancy (AST) as a short-term let. It may come as a surprise, therefore, that long leases of say 125 years can also sometimes be ASTs. For a leaseholder, this won't always be good news.

Traditionally long leases were granted for a peppercorn rent, which meant they could not qualify as an assured tenancy. Today ground rents can be higher. If you are buying a leasehold property with a ground rent over £250 (over £1,000 in London), then the lease falls within the Housing Act 1988 and will be an AST. 

There has been some press coverage of long leases with clauses doubling the ground rent every ten years or so. This may lead to ground rents rising much faster than inflation in the long term. 

The press has mainly focused on the valuation effect.  However, these "escalator" clauses will also mean that long leases will qualify as ASTs once the rent exceeds £250 (or £1,000 in London).

Why does this matter?

The main issue is lease termination. Most leases give the landlord a right to "forfeit" if rent goes unpaid for 21 days. But the courts normally have power to grant relief, cancelling the forfeiture so long as the arrears are paid off.

The problem is that the power to grant relief does not apply to ASTs if at least three months' rent is more than three months overdue. The court has no choice in such cases: it must terminate the lease and give possession back to the freeholder.

These draconian rules apply only if the rent is outstanding both when the landlord serves notice demanding possession, and at the date of the court hearing. Prudent lessees will pay promptly, but a bank with a mortgage over the property may not find out until it is too late.  Some banks are questioning whether a lease with a high ground rent or escalator clause is acceptable security for a mortgage.

Effect on right of first refusal

A freeholder of a block of flats who wishes to sell must normally offer first refusal to the "qualifying tenants". However, an AST is not a qualifying tenancy. This could also mean that the block as a whole becomes exempt from first refusal, which applies only if more than half the flats are held by qualifying tenants.

Any exceptions?

A lease is not an AST if the lessee does not occupy the property as their only or principal home. So if a long leaseholder rents out the property to a subtenant, then the subtenancy is an AST but the long lease is not. And if a lease is granted to a company, it also cannot be an AST.

Possible solution?

An obvious solution would be to amend the Housing Act so that it only applies to tenancies under 21 years. We are in a busy period politically and the issue is unlikely to be top of the government's agenda, but this simple change would be enough to protect leaseholders' interests.

For more information, please contact a member of our Real Estate team.

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