A not so short assured shorthold tenancy

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The ground rent scandal can give rise to accidental ASTs with unexpected consequences

You might think that an assured shorthold tenancy (AST) has to be, well,  short. In fact, there is no limit on the maximum length of an AST. Provided the tenancy was granted after 15 January 1989 and meets the criteria in the Housing Act 1988 (the 1988 Act) it will be an assured tenancy and all the statutory regulation associated with that status will apply.

If it was granted after 28 February 1997, the assured tenancy will automatically be an assured shorthold. In the light of the growing trend for leases with higher than nominal ground rents, this can lead to some worrying consequences.

A tenancy or lease of whatever length will be an assured tenancy if it is of a dwelling house, so long as its tenant occupies that dwelling house as his or her only or principal home. There are various exceptions which are set out in Schedule 1 to the 1988 Act, including an exclusion for tenancies at a low rent.

It is this exclusion that has kept most residential leases out of the clutches of statutory regulation. But many new leases are now granted with ground rents which are significantly higher than the low rent limit.

The current low rent limits for assured tenancies are set out in paragraph 3A of Schedule 1 to the 1988 Act. A tenancy will be excluded from the act if it was entered into on or after 1 April 1990 and has a rent of £1,000 a year or less in London or £250 or less elsewhere.

Accordingly, if a long lessee lives in his or her flat and is obliged to pay rent at a rate higher than these figures, he or she will inadvertently become an assured tenant. But there are a number of problems which flow from this.

Possession

When a long lessee is in breach of the terms of his or her lease, the ultimate sanction is forfeiture. But if the lessee is an assured tenant, section 7 of the 1988 Act provides that the court can only make an order for possession on one or more of the grounds set out in Schedule 2 of that Act.  The court will not ordinarily entertain the proceedings unless the landlord has first served a notice on the tenant which complies with section 8.

As the grounds in Schedule 2 include a breach of covenant and rent arrears, it might be thought this was a difference of form rather than substance. But there is one significant distinction. If possession is granted on the grounds of forfeiture, the court has a wide discretion under section 146 of the Law of Property Act 1925 to grant a tenant relief from forfeiture on such terms as it thinks fit.

If, though, possession is granted on one of the mandatory grounds contained in Part 1 of Schedule 2 to the 1988 Act, the court has no jurisdiction to adjourn, stay or suspend the execution of the order or postpone the date for possession – section 9(6) of the 1988 Act.

The mandatory grounds include rent arrears. Ground 8 will be satisfied, for example, if rent is payable yearly and at least three months’ rent is more than three months in arrears, both at the date of service of the section 8 notice and at the date of the hearing.

This means that if the rent under a long lease is payable annually in advance and the tenant fails to pay it for three months, the court would have no option but to make an order for possession if the arrears subsisted at the hearing.

Shared ownership leases

In practice, the biggest problem area has been with shared ownership leases. In Richardson v Midland Heart Ltd [2008] PLSCS 205 the claimant had purchased a 99-year lease of 50% of her home for £29,500 and rented the other 50% from the housing association on an assured tenancy.

She was forced to leave her home following threats of violence and move into a hostel. She got behind with the rent and the landlord issued possession proceedings under mandatory ground 8.

An order for possession was made in her absence. By that time the property was worth about £151,000 and the tenant argued in later proceedings that, as she had paid a premium for her shared ownership lease, she had acquired a 50% share in the property and was entitled to 50% of the proceeds of sale.

The court, however, found that as Ms Richardson’s tenancy fulfilled all the requirements of section 1 of the 1988 Act, it was an assured tenancy. As the assured tenancy had been properly determined in accordance with the Act, she had no interest left and was not entitled to any of the proceeds of sale.

Where the arrears are paid by the date of the possession hearing, no order for possession can be made. But if an assured tenant ignores the court proceedings or fails to pay for whatever reason and an order for possession is made, the court has no jurisdiction to grant relief.

A long assured lessee may find himself or herself not only being evicted but also being deprived of his or her investment.

Other consequences

There are some other surprising consequences of a long lease being an assured tenancy. For example, Part 1 of the Landlord and Tenant Act 1987 (the 1987 Act) confers a right of first refusal on “qualifying tenants”. Under section 3 of that Act an assured tenant is expressly not a qualifying tenant.

The landlord may not know whether its long lessee occupies the flat as his or her only or principal home so it cannot be sure whether or not the tenant should be served with an offer notice under section 5 of the 1987 Act.

Similarly, difficulties may arise in working out how many qualifying tenants there are for the purposes of forming the requisite majority to accept any offer. The draftsman of the 1987 Act presumably also assumed that an assured tenancy would be short.