If you’re buying or selling a leasehold property, you may have come across the legal term AST, or Assured Tenancy Agreement. Over the last few years, onerous levels of ground rent have created a cause for concern among lenders, solicitors and indeed, both buyers and sellers.
Ground rent that is payable on leasehold properties varies vastly and widely. In some cases, ground rent can be reduced to a peppercorn as a result of extending the lease or as a deed variation. Ground rent can then sharply rise, with current ground rent levels that exceed £250 outside of London (£1,000 in London) causing the biggest issue among leasehold properties, as it stands in 2022. Whilst ground rent levels may not already hit the £250 mark and above, doubling ground rent terms can still cause an issue during the process of a sale.
Does A High Ground Rent Amount To An Assured Tenancy?
Onerous ground rent levels are a cause of concern. As it stands in 2022, if ground rent levels fall within certain levels prescribed by the Housing Act 1987 (‘the 1987 Act’) could mean that a long lease is deemed to become an assured shorthold tenancy (‘AST’). The current levels dictate that when a ground rent exceeds £250 per annum outside of London and £1,000 within London, then the lease becomes an assured tenancy. Whilst current ground rent levels below £250 are not classed as an AST, if your lease has doubling ground rent terms in the not so distant future, then the issue surrounding assured tenancies could still become a problem when it comes to selling up, as mortgage lenders are becoming more insidious about onerous ground rent levels.
What Does An Assured Tenancy Mean?
An assured tenancy has to meet the following conditions in order to be classed as an official AST; (a) The tenant/leaseholder is an individual (not a company); (b) The property is the tenant/leaseholder’s only or principal home; and (c) The tenancy/lease is not one of the exceptions set out in the 1988 Act. If the leaseholder was to default on their ground rent payments (not pay them within the demand date), then the landlord could potentially take complete repossession of the property, and the mortgage lender would not be able to do anything about it. This would leave the mortgage lender with nothing, and no way to recoup debts. This small condition is actually quite a big one for mortgage lenders, and anyone involved in the sale of a leasehold property.
The financial handbook that mortgage lenders have access to is constantly being updated, and mortgage lenders will not lend on ground rent in excess of £250 without certain conditions being met prior to this. However, it is also causing issues for those with ground rent levels that are far less than £250. I have heard of some owners with a ground rent of £150 which increases with the rate of RPI every 10 years, with 8 years still off this and this issue is still rearing its ugly head. Many don’t even know about the issue surrounding onerous ground rent levels until they are in the buying/selling process of a leasehold property.
What Ways Are Around Buying & Selling A Property That Is An Assured Tenancy?
If you’re trying to sell a leasehold property where the ground rent already exceeds £250, there are a few different ways that you can resolve this issue for your buyer. The first two are the most enviable for the buyer and their solicitor, and it will make your property much more attractive.
- Lease extension – in extending the lease through a deed variation you also reduce the ground rent payable to a peppercorn. This can only be done if the seller has owned the property for 2 years, so if you’re looking to buy an leasehold with an AST you would need the seller to start proceedings for you if they’ve been there more than 2 years. There is no guarantee that the freeholder will accept this. This is one of the more expensive routes as the premium that will be made payable will be the result of how much potential ground rent the freeholder is going to miss out out over the remaining years of lease, in reducing it to a peppercorn. You will also be responsible for the cost of legal fees to draw this agreement up, which can be costly depending on your freeholder. For this route, we are talking about a sum of thousands of pounds.
- Deed of variation – a standard deed of variation is the one thing that was requested to me when selling my leasehold property. It essentially means capping your current ground rent payment to stop it rising in the future. The deed of variation protects the lender and buyer, but £250 was still already considered an onerous ground rent level. So for me, the lease extension would have been a far better option. For this route, I was quoted in the region of £10-14k plus initial enquiry fees of £2,400. Whilst this is an option to remove the AST issue, the lease extension is far more favourable than anything as the whole issue is ground rent, and removing that.
- Indemnity Insurance Policy – the AST affects the lender in the first instance, and they want to protect themselves against their investment. By a stroke of luck, the buyers lender of my property did accept an indemnity insurance policy, but I am hearing more and more sellers that are not having them accepted now due to a change in the lenders financial handbook. This route is the cheapest and quickest route out as the other options can take months to implement.
- Find a cash buyer – this is NOT a legal suggestion, but one that can be a way around avoiding the AST issue as a cash buyer is direct and does not require a lenders intervention. If the buyer wants a quick sale and doesn’t care about future saleability then you should be able to swerve this issue. I know there are many that have gone this route, but it can mean having to reduce the asking price because of the ‘lease defect’, as my solicitor called it.
There are more and more leasehold properties that are on the radar of becoming an assured tenancy in the not so distant future and it is part of one of the biggest housing scandals that is not yet near enough currently reported on. Raising ground rent levels, onerous charges by a freeholder are causing major issues. Many are faced with the ‘but if I don’t spend the thousands of pounds to rectify this, my flat is virtually unsellable’, it is indeed a very scary position to be in, as I found myself. The good news is that there are ways around leaseholds with an AST, for a wealth of more information on this topic and everything relating to leasehold properties, please join the Facebook group National Leasehold Campaign which is full of leasehold owners going through the exact same thing. If you found this interesting, you may also want to read my blog on how to sell a flat that has ground rent over £250.