Grounds for concern: losing your flat due to rent arrears

Assured Shorthold Tenancies (ASTs) can be forfeited if there are arrears of rent. Arrears of rent is a mandatory ground for possession, meaning that the court must grant an order for possession if the landlord can demonstrate there are rent arrears. In the short-term lettings market this mandatory power to bring a lease to an end is proportionate as the landlord retains a significant interest in the let property. However, where a landlord has sold a long leasehold interest in a property (usually a flat), you would not expect that a landlord could forfeit the long lease (usually granted for a term exceeding 99 years) due to a small amount of rent arrears.

But due to a technical loophole, tenants that own long leases are increasingly finding themselves in this position. Under the terms of the Housing Act 1988 (HA 1988) any residential leaseholder that pays an annual (ground) rent of more than £250 (or over £1,000 for properties in London) will technically have an AST. If there are rent arrears, an unscrupulous landlord could apply to the court for possession of the flat and the court would have to give a possession order.

In our experience, this issue is having a significant effect on residential transactions. We have found buyer’s solicitors advising purchasers to pull out of transactions and high street lenders refusing to lend where this issue arises without corrective action being taken.

We have been able to overcome this issue by bringing it to the lender’s attention at the earliest opportunity. This, along with a combination of independent valuation advice and an indemnity insurance policy to insure the lender against any forfeiture, has given purchasers and lenders sufficient reassurance to proceed with transaction.

The Government in response to its consultation on ‘Tackling unfair practices in the leasehold market’ has stated that it intends amend the HA 1988 to close this loophole in 2018. Until that happens, this issue will continue to give leaseholders, lenders and conveyancers alike, grounds for concern.