A residential long lease would most certainly provide for a “Ground Rent”, which is an annual sum pay to the Landlord. Typically these sums are not particularly high, they average at about £100 to £300 per year, and generally go up periodically at a similar rate to inflation throughout the duration of the term of the Lease. Legally speaking, these Ground Rents are purely profit sums, in other words the Leaseholder is not receiving any particular service in exchange for paying this sum. It is simply part of the bargain of the Lease contract as at the date it was first granted.
However, what at first glance may seem innocuous can still cause some considerable issues for Leaseholders. We have seen from a previous article that the government as sought to address this somewhat by preventing any new leases from containing any ground rent provisions. However, this does not address current leases that can contain high ground rents.
One such issue are “doubling ground rents”. These are leases originally granted by developers that have rents that double every 10 or so years. When an exponential calculation is employed, those rents reach astronomical levels, rendering those leases effectively time-bombs and unmarketable. There are some developers, such as Taylor Wimpey that have voluntarily agreed to address such issues, by agreeing to vary such leases so that the clauses no longer double but are calculated according to inflation, by referencing the Retail Price Index (RPI).
However, this is not the only potential problem.
In recent times, mortgage lenders, and therefore purchasers have become increasingly aware of an unintended impact of a provision within the Housing Act 1988.
The provision in question concerns Assured Tenancies, which most would be familiar as the typical 12 month tenancy agreements used by leaseholder landlords throughout the county.
If the lease qualifies as an assured tenancy (AT) and there is unpaid ground rent, the Landlord can apply to terminate the lease and the court must end the lease and give possession back to the landlord, which the Landlord does so under Ground 8 in Schedule 2 of that Act.
The landlord does not have to compensate the tenant (i.e., the leaseholder) or the lender.
How does this impact long leaseholds?
Due to increasing ground rents, some long leases now qualify as ATs. A long lease can qualify as an AT if:
the rent exceeds £250 per year, or £1,000 per year in Greater London
• it is occupied by the leaseholder as their principal home and
• the leaseholder is an individual (i.e., the Act does not apply to limited companies).
Ground 8 applies in several circumstances, but of particular relevance to long leases is the provision that:
• if at least one quarter’s rent is more than three months in arrears, if the rent is payable quarterly (which it will be in most long leases) and
• the landlord makes an application to terminate the lease under Ground 8
This means, even for small sums of rent arrears, leaseholders could become subject to a mandatory possession order if they default on payment of ground rent.
There is no maximum lease term to qualify as an AT under HA 1988, provided that the lease was entered into after the Act came into force.
If the lease does not include an exclusion preventing the operation of the Act, a mortgage lender may require a deed of variation to ensure the Landlord does not use the provisions.
Some mortgage lenders may accept indemnity insurance.
What can the leaseholder do?
A Landlord can voluntarily agree to carry out a variation of the Lease. Provided does agree, he will likely want some compensation for the loss of rent. Furthermore the process itself will require the Leaseholder to engage a Solicitor to represent them in carrying out the extension, and the Landlord will also no doubt have legal representation whose costs the leaseholder will also be expected to indemnify.
But if the Landlord is not willing to agree, or some deal is not viable, then the only recourse available to the Leaseholder is to carry out a statutory lease extension. One of the side-effects of extending the lease in this way, is that the ground rent shall be reduced to a peppercorn (nil).
In conclusion, it is best that leaseholders and conveyancers alike be familiar with the impact of Ground Rents provided under the terms of a lease. If you require further information on the subject, do not hesitate to get in touch.
The Right to Manage legislation, as enacted under the Commonhold and Leasehold Reform Act 2002, enables groups of leaseholders to join together to claim the entitlement to take over the management of their building.
In many cases, this has worked very well for those thousands of leaseholders who have successfully done so.
However there has been one major criticism of this law in particular in relation to how it deals, arguably inadequately, for situations in which different blocks of flats share the usage of common areas between them. Such as parking spaces, gardens, outhouses, garages and various rights of way over such parts (referred to as “Appurtenant Parts”). The important questions is, “who is responsible for managing these joint areas?”
This difficulty comes from the law that states that only a single RTM Company, formed by those qualifying leaseholders from a building can only exercise the Right to Manage over one single self-contained building in conjunction with the appurtenant parts to which are enjoyed by the leaseholders of that building (as expressed within the terms of their leases). This was the subject matter of the case of Triplerose Ltd v Ninety Broomfield Road RTM Co Ltd.
This creates a potential problem where the separated RTM building is required to manage those areas, but the managers of other blocks of buildings also have those same obligations. In other words it creates a situation of “double management”. Who is carrying out these functions and from whom can they collect service charges for such expenditure?
This problem went to the Court of Appeal in the case of Gala Unity Ltd v Ariadne Road RTM Co Ltd  EWCA Civ 137, and in that case, the court held that indeed the situation of double management was the outcome that accords with legislation, and the court suggested that these parties effectively work out between them how best to share management over these areas. This was understandably considered an unsatisfactory outcome by most practitioners, as there was nothing to compel parties to do so, nor any mechanism for dispute resolution.
However this subject matter has now been further tackled and clarified within the 2022 Supreme Court case of FirstPort Property Services Ltd (Appellant) v Settlers Court RTM Company and others (Respondents). The decision here confirmed that the Right to Manage is only concerned with a restrictive definition of the Building and Appurtenant Parts “enjoyed exclusively” by those leaseholders of the building in question. In other words areas that it can only manage on its own.
While this does assist in the crossover of management obligations with other managerial parties of other blocks.
The Judge, Lord Briggs, in the case, stated that appurtenant property can only be “Physical objects” – not intangible rights of way.
However, this outcome cause potential problems of their own.
How does one define exclusive appurtenant parts?
If all blocks exercise the Right to Manage, then there will be “RTM islands” and “communical seas” that are still managed by the original management company. There is also the question of access to the non-exclusive property, do those leaseholders lose access to areas they were entitled to, they after all can no longer receive service charge demands from the management company who has retained those parts, since their leases are managed exclusively by the RTM company.
It has been suggested that this outcome will likely result in further litigation in order to clarify some of these new points.
However the important take away for those seeking to exercise the Right to Manage for a building which shares appurtenant property with other blocks is that depending on the definition of exclusivity, they may not gain any control over such parts and furthermore could be disenfranchised from them.
It is worth noting that the decision in this case also has connotations for Collective Enfranchisement (purchase of the Freehold), since that process shares much of the qualifying criteria as the Right to Manage legislation.
Any new residential leases created after 30th June 2022 are subject to the provisions of this legislation. The legislation prohibits leases granted after this date from carrying a ground rent aside from a ‘peppercorn’, which means Nil. Apart from new build leases created by Developers, this legislation also impacts lease extensions, since these are “new leases”, and therefore prohibits lease extensions from carrying provisions increasing the ground rent beyond those that are were expressed within the current lease.
In other words, a new lease extension may continue to provide for the same ground rent as contained in the current lease, but from the commencement of the extended period, the rent must become a peppercorn (nil).
A Landlord that seeks to collect illegitimate ground rent from such a qualifying lease will be liable for penalties under the provisions of the Ground Rent Act 2022.
The advent of this legislation will certain have an impact on the number of “informal” lease extensions granted by Landlords, considering one of their main motivations for granting such lease extensions was to increase the ground rents due under the lease, thereby increasing the value of the freehold. Which is something that could never be done under the statutory regime method which requires that ground rent must be reduced to a peppercorn. As such, Landlords no longer have a vested interest in being pro-active in the grant of lease extensions, and the prediction is that many will simply await the receipt of a formal claim notice (known as a “section 42” notice) from a leaseholder before cooperating with the grant of the extension. This Act is the first stage in a list of proposed leasehold reform by the government. It remains to be seen to what extent other proposals reach the statute books, but we eagerly await new developments.