Housing Act 1988 and how it affects your Lease

What is forfeiture?

Forfeiture is a provision in the lease which allows the landlord to bring the lease to an early conclusion. Usually, it is as a result of either failure to pay the rent on time or as a result of material breach of the lease. For example. Failing to repair. Under the Common Hold and Leasehold Reform Act 2002, Section 167 a property can only be forfeited for non-payment of rent if the amount exceeds £350 (and this has varied over the years and could change in the future) and has been outstanding for a period of 3 years. Again, this has changed in the past and the time period could change again. The landlord must have also made a formal demand for that rent within 18 months of it becoming due.

Housing Act 1988 – What is the problem?

A landlord could use the provisions of ground 8 of schedule 2 of the Housing Act 1988 if the lease qualifies as what is know as “an assured tenancy” and there is unpaid ground rent. In these circumstances provided the ground rent in the lease is for more than £250 (or £1000 in the Greater London area) the landlord can apply to bring the lease to an end and the court are obliged to end that lease and give possession of the property back to the landlord. In doing so there is no obligation on the landlord in paying compensation to either the tenant or if the tenant has a mortgage on the property, the lender.

This causes a major problem because it means even for small sums of rent arrears a tenant could be subject to a mandatory possession order made by the court if they fail to pay the rent.

Qualifying as an assured tenant under the Housing Act 1988

There is no maximum lease term to qualify as an assured tenant under the 1988 Act. You have to have rent that exceeds £250 a year or £1000 in Greater London and the property has to be occupied by the tenant as their principal home and as an individual so this would not apply to companies for example.

It is very important to note this because if you have a long leasehold property your ground rent may well be under £250 per annum but there may be provisions in your lease that increase the ground rent beyond this amount and if it goes over £25 per year you qualify as an assured tenant under the 1988 Act.

When can the landlord use the Housing Act 1988?

They can use ground 8 of schedule 2 of the 1988 Act in a number of circumstances but it is particularly relevant if you have a long lease that:

1. The landlord makes an application to terminate under ground 8 and

2. You have at least ¼ rent more than 3 months in arrears (if the rent is payable quarterly which it will be in most long leases).

The important thing to note here is that with forfeiture you can apply for relief from forfeiture within 6 months of a court order but with the 1988 Act, if the landlord applies under that Act the court must end the lease and give possession back to the landlord. There is no relief process as in forfeiture.

How to resolve the problem

Most lenders will not provide funding for long leasehold properties that fall foul of the Housing Act 1988. There are a number of ways to resolve it the main options being:

1. Have a provision in the lease to say the landlord will not seek possession under ground 8 of schedule 2 of the Housing Act 1988.

2. Obtain indemnity insurance.

3. If indemnity insurance is not suitable and if the lease does not have a provision stating the landlord will not make a claim under the Housing Act 1988 then have a Deed of Variation prepared.

What is a Deed of Variation?

Of the 3 options mentioned above a Deed of Variation is the best option if the lease has already been entered into and finalised. That will be the case in most leasehold properties that people buy because not all leaseholds have a brand new lease to start off with it is usually they are buying an existing lease in which some part of the term has already expired.

A Deed of Variation is a deed varying the terms of the lease to either:

1. Reduce the ground rent so it remains under £250 and does not qualify under the Housing Act or

2. Include a provision in the lease that the landlord will not make a claim under ground 8 of schedule 2 of the Housing Act 1988.

The Deed of Variation can then be registered against the property at the Land Registry.

Government plans for the future

The government are looking into introducing major leasehold reform which will make a provision that all new leases must have a peppercorn (therefore a nominal sum) as the ground rent. That will only apply to long term leases and at the moment it is just in consideration stage no legislation has been put forward. That would not resolve the problem of a number of existing leases falling foul of the 1988 Act but you would hope the over the years to come this issue becomes less and less relevant.

If you have a long leasehold we would strongly advise you to check your lease to find out what the current ground rent provisions are and what if any the rent review provisions are to make sure you do not fall foul under the 1988 Act and if you do then you should contact your solicitor and landlord to see if a Deed of Variation can be prepared.