Laws with unintended consequences: HA 1988 Sch 1 para 3A and HA 1988 s8

27 April 2018

Mike Bowen FCILEx is head of residential property services at Jevons, Riley & Pope

Para 3A of Schedule 1 to the Housing Act (HA) 1988, reads as follows:

3A. A tenancy—
(a) which is entered into on or after 1st April 1990 (otherwise than, where the dwelling-house had a rateable value on 31st March 1990, in pursuance of a contract made before 1st April 1990), and
(b) under which the rent payable for the time being is payable at a rate of, if the dwelling-house is in Greater London, £1,000 or less a year and, if it is elsewhere, £250 or less a year.

This provision means that the lease can count as an assured shorthold tenancies (AST)/short assured tenancy (unless it fails for other reasons), and then entitles the landlord to use Ground 8 of the HA 1988 to obtain possession if the tenant fails to pay the rent. So far, as relevant, Ground 8 reads as follows:

8. Both at the date of the service of the notice under section 8 of this Act relating to the proceedings for possession and at the date of the hearing:
(a)…
(b) …
(c) if rent is payable quarterly, at least one quarter’s rent is more than three months in arrears; and
(d) if rent is payable yearly, at least three months’ rent is more than three months in arrears;
and for the purpose of this ground ‘rent’ means rent lawfully due from the tenant.

So, if the tenant owes such ground rent more than three months after it fell due, the landlord would have a mandatory ground to end the long lease.

This has been a problem that has been acknowledged for many years with shared ownership leases, and normally lenders’ instructions are to obtain an undertaking from the housing association that it will not issue proceedings under section 8 without giving 28 days’ notice to the lender.

However, the situation applies to any lease affected by the wording in para 3A and while this has been largely ignored both by lawyers and lenders, it has come to prominence due to the leasehold homes scandal. 

This has led to a change in lenders’ instructions for new build leasehold properties:

Affordability

Lenders need to establish if the lease will have any impact on the borrower’s affordability. It is a regulatory requirement for lenders to take account of all known future changes to a borrower’s income and expenditure, which could affect the affordability of their mortgage. As such, understanding the level of ground rents, how they increase over the mortgage term, and other known charges due under a leasehold agreement are relevant to lenders’ assessments of affordability. 

A lender’s risk might also be increased if ground rent, or other charges are disputed by the leaseholder borrower in the future and the borrower does not pay while in dispute, as in such situations the lease could potentially be forfeited and the lender’s security put at risk (New build leasehold properties, Council of Mortgage Lenders Handbook, author’s emphasis added).

It follows also that this should apply to existing leases: 

Good and Marketable Title

5.6.1 The title to the property must be good and marketable free of any restrictions, covenants, easements, charges or encumbrances which, at the time of completion, might reasonably be expected to materially adversely affect the value of the property or its future marketability (but excluding any matters covered by indemnity insurance) and which may be accepted by us for mortgage purposes (Council of Mortgage Lenders Handbook).

A title cannot be ‘good and marketable’ if a landlord can forfeit a lease for non-payment of rent. I have been reporting the levels of rent and this problem for years, and normally lenders have not responded. 

However, recently, lenders have become concerned. The following seems to be the standard HSBC reply, and doubtless more lenders will adopt this wording.

With regard to the escalating ground rent, we confirm we are happy to proceed on this basis subject to your confirmation there is a clause in the lease to prevent the lease becoming an AST in accordance with the Housing Act 1988 if the ground rent is unpaid. 

If there is no such clause in the lease we will require a Deed of Variation to be entered into to add the below clause to the lease to give the Bank appropriate notice before commencing action.

The landlord (a) shall serve on any mortgagee a copy of any notice which is pre-requisite to the bringing on any claim for termination of the lease or possession of the property, including but not limited to any notice under section 146 of the Law of Property Act 1925 or section 8 of the Housing Act 1998 (or any replacement or re-enactments thereof); and

(b) shall give any mortgagee not less than 14 days’ prior notice before commencing any claim for termination of the lease or possession of the property; and
(c) shall serve on any mortgagee a copy of any claim for termination of the lease of possession of the property regardless of whether this is required by rules of the court.*

Conclusion

I would suggest that even if your lender is not concerned, you must now protect the client as if they sell to someone who has a HSBC mortgage there will be a problem. The government is aware of the problem and is consulting on how to resolve it; however, until then we can expect to see an increase in the number of deeds of variation. 

Indemnity insurance may be available, but can be of limited value. If a landlord refuses to agree a deed of variation, there is little that can be done as under the Landlord and Tenant Act 1987 as this is not a ground that gives the First-tier Tribunal discretion under section 35. I do not think that section 37 will help, and the cost would be excessive in any event. 

It seems, therefore, that the government will have to legislate to deal with this (I assume) unintended consequence.

* This is wording that the author has seen HSBC supply.