An Assured Shorthold Tenancy, not what you signed up for?

An Assured Short hold Tenancy (AST) is a tenancy of a residential property usually regarded as a short-term tenancy. However, the legislation governing AST’s does not specify a maximum term a lease has to be for it to be an AST. Therefore, a long residential lease could satisfy the criteria. It is important to know if your long residential lease is an AST as it provides Landlords with certain mandatory rights to terminate the lease during its term and takes away a tenants right to first refusal.

Typically a long residential lease is one granted at a premium (i.e. a capital price up front) for a term exceeding 50, or more usually 99 or 125 years.

The criteria for an AST:

1. the tenant is one or more individuals;
2. the tenant occupies the dwelling as their only principal home;
3. the rent is between £251 and £100,000 (£1,001 and £100,000 for Greater London);
4. the tenancy does not fall within any of the exceptions contained in the Housing Act 1988, such as, a business tenancy or holiday letting.

Therefore, where the ground rent on a long residential lease exceeds £251, it will constitute an AST.

What this means for Landlords vs. what this means for Tenants

Termination

If a long residential lease constitutes an AST, this will give Landlords the right to terminate during the term of the lease, if they can prove a specified ground for taking possession and the lease provides for termination on such grounds. The Landlord will then be able to terminate without having to compensate the leaseholder or its mortgagee(s). 

The grounds for termination can be found in section 7(6) of the Housing Act 1988; this article will focus on ground 8 which allows the Landlord to terminate the lease where rent is in arrears upon serving notice on the Tenant. Ground 8 is a mandatory ground, and so if the landlord can demonstrate the ground then the court must grant the order for possession.  

Nevertheless, the lease must provide for termination on such grounds, and it is unclear whether a clause allowing for termination of a lease for non-payment of rent, but not specifically referring to ground 8, will satisfy the Housing Act 1988. There have been cases surrounding this but for shorter leases, for example, Artesian Residential Investments Ltd v Beck [1993] where a ten year lease included a provision for re-entry and termination of the lease if the rent was 14 days in arrears; the Court of Appeal held that the lease did not need to specify the requirements of ground 8 to satisfy the Housing Act. However, it is uncertain whether the court would interpret this differently for a longer lease. Therefore, in order for Landlords to rely on this ground to terminate, it is advisable to make express reference to the grounds within the lease.

For Tenants, on the other hand, this means that there is a significant risk that it is easier for a Landlord to terminate their lease during the lease term if they are behind on ground rent. One way to prevent this for a tenant, is to ensure the long lease cannot be an AST by negotiating a clause within the lease to ensure rent remains below the minimum threshold of £251.

Right of first refusal

Another impact is that Tenants under an AST are not ‘qualifying tenants’ for the purposes of rights of first refusal. This means that, the Landlord can sell the freehold without first notifying the tenants and giving them an opportunity to purchase or put forward a purchaser for the freehold of the property.

Going forward

Landlords should be aware that the Government has confirmed it intends to legislate to ensure that long residential leaseholders are not subject to unfair possession orders. In December 2017, the Government released a consultation paper entitled Tackling Unfair Practices in the Leasehold Market, which proposed to:

• restrict the sale of new builds as leaseholds;
• limit ground rent to ‘peppercorn’ rates (a small or insignificant rate) for new leases of terms exceeding 21 years;
• exempt those leaseholders who are potentially subject to ‘Ground 8’ possession orders.

Nevertheless, neither draft legislation nor any legislative timetable has been announced yet.

Need further advice?

Our Commercial Property team can answer any landlord or tenant enquires you may have. We can also review your current tenancy agreements, or negotiate/draft new leases.

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