Ground Rents


Notes on a Scandal: Freeholders & Medieval Robber Barons is published today in New Law Journal

New Law Journal has many attractions for the legal author, not only is the turnaround for articles quick, publication can be within a couple of weeks, making it topical, but the quality of writing is high so one can bask in the reflected glory of being in the company of the other contributors in a respected legal journal. NJL is also very good with its copyright arrangements, which means that I can now reproduce in full Part 1 of Notes on a Scandal from the 8th March’s NLJ here now:

Comparisons were being made between freeholders and medieval robber barons (see, eg Hansard 18/7/2000 col 246) long before ‘The leasehold mis-selling scandal’, which, by some estimates, left over 100,000 homeowners stuck with leasehold properties they cannot sell, primarily as a result of escalating ground rent provisions (although there are widespread complaints about hidden charges and other onerous lease terms). Leaseholders feeling themselves thus afflicted, might well liken one particular side effect of escalating ground rent provisions — ‘The Housing Act trap’ — to being robbed by the baron and then flung into the dungeon sewer for good measure. However, as those familiar with films set in medieval castles know, the castle sewer can sometimes offer a means of escape.

This speculative two-part article considers whether, through the mechanism of derogation from grant, the sewer might do so in this case.

Perhaps the pithiest summation of derogation from grant is Lord Denning MR’s in Moulton Buildings Limited v City of Westminster [1975] 30 P & C R 182 at [186]:

‘If one man agrees to confer a particular benefit on another, he must not do anything which substantially deprives the other of the enjoyment of that benefit: because that would be to take away with one hand what is given with the other.’

It is sometimes mischaracterised as rule of construction, or as an implied term or covenant, but, while it may so manifest itself in particular cases, it is an independent rule of law that can give rise to a cause of action or even, as in British Leyland v Armstrong Patents [1986] AC 577, [1986] 1 All ER 850 afford a noncontracting party a defence to a claim brought by one of the contracting parties if the enforcement of that party’s strict legal rights would amount to a derogation from grant.

This introductory article explains how escalating ground rents give rise to the trap, which deems long leases assured, or assured shorthold tenancies, notwithstanding that they were sold at or about comparable prices to similar freeholds and, until the advertising watchdog put an end to the practice, were often marketed as ‘virtual freeholds’.

Escalating ground rent clauses
Historically, ground rents associated with long leases tended to be small and for a fixed amount, but from about 2007clauses with escalating ground rents were introduced by national housebuilders who
also increased the number and proportion of free-standing dwellings sold with long leases rather than as freeholds. Although there is one early newspaper report dating back to 2007 of a sharp-eyed buyer having picked up that the Taylor Wimpy ten-year-doubling ground rent starting at £300 a year would have reached £9,600 per annum by 2057, appreciation that there was a problem with escalating ground rents did not really break until midway through 2016.

At the 2016 Lease Conference, which was held in February, there was no talk of them; by the following February there was a clamour.

The Housing Act trap
One of the consequences of escalating ground rent clauses, described as ‘The Ground 8 trap’, was noted in the government’s consultation paper Tackling Unfair Practices in The Leasehold Market
(December 2017), at para 75: ‘The government is aware that, where ground rents exceed £250 per year or £1,000 per year in London, a leaseholder is classed as an assured tenant. This means, for even
small sums of arrears, leaseholders could be subject to a mandatory possession order if they were to default on payment of ground rent.’

‘The Ground 8 trap’ is something of a misnomer and ‘The Housing Act 1988 trap’ would be a more accurate description because The Ground 8 trap is only the most obvious consequence of a wider problem. The trap arises from interplay of s 1(1) and (2) and Sch 1 of the Housing Act 1988, which, respectively, define assured tenancies and list those tenancies which cannot be assured tenancies. Section 96 of the Housing Act 1996 then operates to make assured tenancies entered into on or after 28 February 1997 an assured shorthold tenancy unless it falls within one of the exceptions. Since the basic definition provides that any tenancy under which a dwelling is let as a separate dwelling ‘is for the purposes of this Act an assured tenancy’, a long lease could always theoretically have been caught, but the historically low levels of ground rent associated with long leases meant that most
did not exceed the £250 per year or £1,000 per year in London used to define ‘Tenancies at a low rent’ under Sch 1, para 3A. The idea that many long leases would be outside the exception was dismissed when the then Housing Bill was debated in the House of Lords—Hansard (Lords) 24 October 1988, Volume 500, Col 1461-2.

Ground 8
Ground 8 is one of the mandatory grounds for possession under the Housing Act 1988, Sch 2 and it applies when—at the date of the service of the notice under s 8 of the Act and at the date of the hearing:

    •  if rent is payable weekly or fortnightly, at least eight weeks’ rent is unpaid;
    •  if rent is payable monthly, at least two months’ rent is unpaid;
    •  if rent is payable quarterly, at least one quarter’s rent is more than three months in arrears; and
    •  if rent is payable yearly, at least three months’ rent is more than three months in arrears;

Its effect is not just that small amounts of arrears of ground rent can result in leaseholders being subject to a mandatory possession order if they default on payment but that there is no ability to
apply for relief from forfeiture. While it is right that the arrears must still be outstanding at the date of the hearing, not every defaulting leaseholder will be in a position to pay, notwithstanding that they may have considerable equity locked up in their leasehold property. That equity is lost when the possession order is made. Moreover it is not always the leaseholder who loses; a possession order determines the leasehold interest and any mortgagee loses their security as well—also without any possibility of rectifying the matter by applying for relief against forfeiture. With higher initial levels of ground rent and escalator clauses, a long lease can either be outside the tenancy at a low rent from
the outset or cease to be a tenancy at a low rent within a relatively short time thereafter.

Ground 8 is not the only trap
Ground 8 is not the only mandatory ground which could potentially apply to a long lease not at a low rent, the other mandatory grounds are:

    • Ground 7A, conviction for certain offences or antisocial behaviour;
    • Ground 7B, immigration status; and
    • Ground 6, if the lease gives the freeholder the right under certain circumstances to carry out work on the leasehold property.

Additionally, while a court may be unlikely to exercise its discretion under any of the discretionary Grounds 9 to 17 in Sch 2, that they may apply at least gives rise to a risk that a leaseholder may end up facing proceedings from an aggressive freeholder (it is not as if history suggests that aggressive
freeholders do not exist). Furthermore, the right of first refusal on a sale of the freehold for leaseholders of flats under the Landlord & Tenant Act 1987 is also ousted because that too has
a low rent test.

Might derogation from grant provide an escape?
Part 2 will consider the protean nature of derogation from grant, the remedies to which it gives rise and whether the effect of the Housing Act trap on a long lease is to take it below the irreducible minimum implicit in the grant so as to amount to a derogation.

First Published in New Law Journal 8th March 2019
© NLJ & Rawdon Crozier