The Leasehold Advisory Service (LEASE) welcomes the opportunity to comment on proposals for Commonhold and Leasehold Reform. However, it is hoped that so far as Commonhold is concerned that it is not only positive covenants that are uppermost in the minds of the Lord Chancellor’s Department (LCD), but, as flats are likely to be the main target of Commonhold, that their well documented problems will be borne in mind resulting in the provision of a type of tenure that addresses ownership and management issues for flats beyond just the passing of the burden of positive covenants.
We are aware of, and share, disappointment that the proposals include no provision for any limitation on new leasehold developments. Whilst we fully accept that the new tenure must be market led we would welcome provision in the Bill for a power for the Minister, at some time, to be able to prescribe a future date for a prohibition on new leaseholds.
At part 2.3 of the commentary to the Bill reference is made to Commonhold being created out of leasehold in respect of commercial or industrial units. However, it is made plain that this will not apply to residential or mixed residential and commercial premises. Whilst we appreciate the references to the underlying principles it seems to us that it ought to be possible for Commonhold to arise out of leasehold in the residential and mixed residential context, for example if there is a lease of 999 years or other substantial period. Alternatively, it seems to us that Commonhold could be applied out of leasehold where a local authority or the Crown has the freehold. In this way long-term ownership would remain for the local authority and the Crown but provides to leaseholders the benefits of membership of the Commonhold Association to the same extent that it would have it been a conventional Commonhold.
In Australia, specifically New South Wales, the Strata Schemes (Leasehold Development) Act 1986 provided for land to be developed by strata schemes on land where the freehold is held by public authorities, and this was recently amended by the Strata Schemes (Leasehold Development) Amendment Act which removes the restriction of leasehold strata title to just public authority land and now allows any landowner to develop their land by means of leasehold strata title. We appreciate that the schemes highlighted refer to "development" rather than the application of Commonhold to premises already existing, but we feel that this is a means by which the concerns of those holding leases under the Right to Buy would feel that they were a part of the real decision making for their premises. Time may not allow for the full consideration of such an approach, and it may provide more questions than answers at this stage, but we feel it is an approach worthy of consideration.
In the event that a group of Right to Buy lessees have enfranchised by the "Part II regime", and there exist secure tenants over whom the local authority has been granted a leaseback it is hoped that the requirements for the consent of all the leaseholders will, as a matter of policy, make it mandatory for local authorities to provide such consent within a limited period. Alternatively such consent could be deemed to apply in such circumstances and in that way facilitating the lessees in converting to Commonhold and easing the burden on the local authority in having to consider the scheme presented to it by the nominee purchaser.
It is difficult to be sure how much call there will be for commercial Commonhold. It would go a considerable way to encourage developers to use this new tenure or those looking to transfer to Commonhold if ‘model by-laws’ were provided. Clause 25 of the bill appears to anticipate this and we would hope that steps are taken to give more than general guidance.
Commercial leases should be capable of being granted out of Commonhold units in commercial developments. In the event of the termination of the Commonhold scheme the position of the tenant should be akin to that of a lawful sub-lessee where a mesne landlord’s interest is surrendered. In this way the tenant is able to continue as before but the reversion to the units will belong to the Commonhold Association rather than the former unit-owner. At the end of the lease the procedures set out in Part II of the Landlord and Tenant Act 1954 would then operate, assuming the Act applies to the tenancy.
The length of a tenancy from a residential Commonhold we would suggest should be no longer than seven years. This matches the length of leases to which Section 11, Landlord and Tenant Act 1985, implies a repairing obligation on a landlord of residential premises and it is convenient that the two should be the same.
We feel that it should be required of each unit owner proposing to sub-let, in a residential Commonhold, that the unit-owner will:
If consent is required then it should not be unreasonably withheld, and we would
suggest that there is implied into each tenancy that the lessee will comply with the rules and regulations in the CCS. Inevitably the Housing Act 1988 may need to be amended so that the breaching of the rules and regulations is a ground for possession. Furthermore, the CCS may need to have a covenant that in the event of a breach by the lessee of the rules and regulations that the CA, having taken a vote, can require the unit-owner to enforce the breach.
Where short-term leases are to be granted we think that provision should be made relating to a perpetually renewable lease so that section 145 and Schedule 15 to the Law of Property Act 1922 will not apply. This would prevent the creation out of Commonhold of fixed term leases of 2,000 years.
The CA we feel should be able to borrow funds for the purposes in its CCS. However, we do not feel, generally, that any CA should be able to charge any part of the common parts to secure such borrowing. Rather we believe that the ability to charge may be dependant on the nature of the Commonhold. Commercial Commonhold comes to mind as an example. Commercial commonhold developments should be able to make commercial decisions on this issue. We would not wish to see commonhold being rigid, rather it should be able to be flexible to suit the nature and intentions of the unit owners. They, we would suggest, can make this decision for themselves. Furthermore, the "common parts" under the bill are not limited to the premises containing the units(see clause 19) . Therefore the restriction on the charging of the common parts could be more particularised to the common parts that form part of the building(s) containing the units , but leave the remaining parts capable of being the subject of a charge , provided all the unit owners agreed.
If a residential Commonhold is to be allowed to charge its common parts , then the protection we would envisage is to require a decision to be taken by a large majority of the unit owners , rather than it being left to the Board of Directors of the Commonhold Company.
2.2 Commonhold Associations not to own unitsThe ownership by the CA of units within the scheme should not be possible. It seems logical to us that a where a building is a Commonhold that it is made up of either units , held by entities other than the CA , or common parts ,which are owned by the CA. Accordingly we would agree with the suggestion that the CA have under its direct control an "exclusive use common part".
In considering the "exclusive use common part" our attention was drawn to clause 7 of the bill. Here it appears transitional provisions are provided to account for the time between registration and the sale of the first unit. However , in sub-clause (3) it provides that when someone other than the applicant (for registration of the Commonhold) becomes the registered proprietor of "one or more but not all" of the units then the CA becomes the registered proprietor of the common parts. It is not clear from this whether the other units actually exist for the purposes of registration, or , alternatively , are they exclusive use common parts. Clarification of this point would be helpful in the light of the points made at 3.2 of the Bill’s commentary.
2.3 Relations Between Commonhold AssociationsWhere there are neighbouring associations it seems that one or other of the associations should own the shared area. The necessity of having a separate CA , with the attendant cost of setting up , seems unnecessary when instead rights can be granted by the one association to the other , or its unit owners. This provides for the principles applicable to easements to be used in such circumstances.
At 3.4 of the commentary to the Bill a problem is highlighted that in the event that two developers have registered a Commonhold, but one or more of them wish to withdraw how should this be addressed.
Where the Commonhold scheme has been registered, presumably under clause 7, then we would suggest that an additional sub-clause be provided that allows the parties to terminate the scheme provided that a third party has not been registered as the proprietor of one of the units. This would be a more simple procedure separate from the Bill’s other termination provisions. The provisions of clauses 35 to 41 appear to anticipate that most, if not all of the units, have been disposed of hence the need for termination resolutions etc.
The developers , we would presume , would have entered into a development contract, which will provide for the consequences in the event of one or other of the parties should seek to terminate the contract. Hence , it seems unnecessary where none of the units have been acquired by a third party to apply the parts of the CCS matters which concern termination. Instead we would suggest that clause 8(b) be used so far as termination in these circumstances is concerned , leaving it to the contract between the developers to address termination.
It follows from the previous paragraph, in the interests of consumer protection, that consideration should be given to a prescribed ‘development contract’ between developer and unit owner being applicable where units are purchased whilst development is ongoing. This is the method adopted in New South Wales what they call "stage development contracts". The content of these documents is set out in Division 2A of the Strata Schemes (Freehold Development) Act 1973. Such a requirement in the bill would enable developers to , beyond the "transitional period" particularised at clause 8 of the Bill, finish the scheme without hindrance from unit owners of the first stage of the development or from the CA. At the same time it would provide protection to unit owners as they would be aware of what must be built and what may be varied. This , arguably , could already be a matter for the contract between the parties rather than something prescribed by statute. However, in the interest of the tenure being adopted by the public they may , at least during the sales process of a Commonhold unit ,wish to have more detail than a developer may otherwise provide at that stage. The contract could be one of the items required for registration at the Land Registry allowing prospective purchasers to inspect the contract and reflect on the developer’s intentions before purchasing.
If a Commonhold were to be capable of becoming insolvent then we would accept the proposals put forward.
We would accept the proposals put forward.
With the intention that Commonhold will put in the hands of the unit owners control of their affairs it is plain from the experience of other jurisdictions that disputes concerning what the bill calls the "Commonhold Assessments", amongst other things, are destined to arise. Hence, the need for a credible, swift and efficient means of resolving disputes between unit owners, and between unit owners and the Commonhold Association. Paragraph 10, page 82, of the paper touched on this point briefly.
To encourage the resolution of disputes before they become bitter and the source of distress amongst unit owners, there ought rightly to be an attempt at mediation before applying, one assumes, to the Leasehold Valuation Tribunal (LVT). The type of dispute that could be mediated, although not an exhaustive list, would be repairs, noise problems and parking.
Should mediation fail then we would suggest that the next stage involve the submission of written representations by the parties to a single member of the LVT. A written decision would result, without the need for a hearing. If one or more of the parties then wishes to appeal then a hearing would take place in front of the a full panel of three members. Appeal from the LVT would be to the Land’s Tribunal with the leave of the LVT or the Lands Tribunal itself.
The scope of the jurisdiction of the mediator, and the tribunals has to be considered. In New South Wales disputes dealt with by the Strata Schemes & Mediation Services Branch include:
If the LVT is to deal with Commonhold it should deal with all the practical issues of running the Commonhold, rather than limiting its jurisdiction to just determining Commonhold Assessments. Thus it would include the interpretation of the CCS for example.
While RTM will be welcome by leaseholders, we feel that there are aspects of the proposals that require further consideration.
(a) Leaseholders
(i) Qualification
Whilst agreeing generally with the proposals put forward, so far as qualifying tenants are concerned, we suggest that lessees with shared ownership leases should also be eligible as qualifying tenants to participate in RTM even if they have less than 100 per cent of the equity. Shared-ownership lessees pay 100% of the service charges irrespective of the percentage of their equity in the flat, they should, therefore, have a full opportunity to take part in the management and the setting of the service charge. Qualification for RTM should relate to liability for payment of charges, not relative equities in the flat.
We are concerned at the possibilities of undue influence arising in the operation of the RTM company through individuals or companies with multiple ownership of flats in the building. This is addressed in collective enfranchisement legislation by the limitation in S5 (5), Leasehold Reform Act 1993 on individuals owning more than two flats in the building participating in an application for enfranchisement. We suggest a similar prohibition should relate to multiple ownership in RTM.
Excepted from qualifying are business leases coming under Part II of the Landlord and tenant Act 1954 (see clause 57(3)). However, with the increasing development and occupation of "live-work" premises will RTM apply, at least so far as a particular flat is concerned, if the business activity is a significant purpose or part of the tenant’s aim in occupying the property (Cheryl Investments Ltd v Saldanha [1978] 1 WLR 1329). Assuming that these tenants are not intended to be excluded, even allowing for the significant business use of their premises we would suggest that the proposed legislation needs to account for this. An approach could be to provide that a flat will still be a qualifying unit where it was granted with the intention of being mixed use. Only if the sole purpose of the letting of the property was for business use should it be excluded from RTM.
(b) The Building
The Bill proposes that converted premises, of no more than four units, and where the landlord (or an adult member of his family) lives in one of the units and has done so for twelve months will be exempt. Similar provisions exist in both the Leasehold Reform Housing and Urban Development Act 1993(subject to some proposals for reform, see clause 89) and the Landlord and Tenant Act 1987. All bear a striking resemblance to the exclusion under section of the Rent Act 1977. There, one presumes, the intention is to not provide tenants in those circumstances with security of tenure. However, under the Bill, and the other legislation mentioned, the particular reasons for this exemption are unclear. A landlord who has converted, or purchased the reversion to, converted premises has in the granting of the leases accepted inherently that these lessees are owner-occupiers. In the interests of being even-handed to all leaseholders this exemption should be removed.
(a) Mixed premises
Whilst we argue that the right should be available to tenants of part commercial property we do not support the proposal (although recognising the commonality with proposals for collective enfranchisement). Neither tenants or landlords will welcome the transfer of management of the commercial element, the tenants will only be concerned with the residential part and we suggest that this is what the right should refer to. If the RTM relates simply to these parts there need be no need for an artificial limit on the non-residential parts, all buildings will qualify, the tenants would manage the residential, the landlord would retain management of the commercial.
If this route is followed there will need to be provision for the management of common parts and services and this could be by a residential / commercial Board on a weighted voting basis according to relative equities in the building. The equities can be established by one independent valuer (agreed between the parties or, in default, appointed by the LVT or President of the RICS) and jointly paid for. Similarly, there will be a need for provision for the establishment of what comprises the common parts and services; this may be by agreement between the parties prior to the operative date of RTM or, in default, established by the LVT.
(b) Premises owned by local housing authority
Tenants of local authorities, including leaseholders, can in certain circumstances create tenant management organisations. It is this right that is used to explain in the Bill the exclusion of leaseholders of local authorities from the right to manage. This exclusion may have been more plausible had lessees enjoyed the right that secure tenants have to vote on large-scale transfers. There is already an imbalance between these two groups of tenants within the public sector housing system, this exclusion is unjust and should be removed.
As with collective enfranchisement (see below) RTM should not be limited, in application, to a single building but should extend to other buildings within the same ownership / service charge regime, for example, blocks on a clearly defined estate sharing common facilities and management.
The right should not be limited to flats but should also be available to tenants of houses on defined estates, particularly so in cases of mixed flatted / housing estates. This is directly relevant in the retirement sector where it is common for tenants of both houses and flats within the estate to share common facilities, eg warden, common room, laundry facilities etc, where providing RTM to only part of the estate would be entirely impractical.
We can appreciate possible difficulties in the application of RTM to certain estates of houses, notably the great London estates, but consider that these should already be protected through Estate Management Schemes declared under 1967 Act provisions.
The use of a company seems a necessary part of the procedure in the light of the nature of the rights created by RTM. With the ability for the RTM company to enter into contracts there must be a readily identifiable legal personality.
We would agree that the memorandum and articles of association have prescribed minimum requirements, and that the objects clause should include the management of the property and the acquisition of the freehold.
Whilst we agree that all lessees should be members of the management company, we are concerned at the intention that landlords should also be members of the company. First of all if the lessees have qualified for RTM and taken on the burden then they should take it on fully, as opposed to a partnership of sorts with the landlord. Secondly by including the landlord in the company has necessitated the creation of a very complex proposal of weighted voting. The arguments can already be anticipated as to whether a landlord as been given his due allowance of weighting. It seems simpler, and more appropriate, to allow the lessees to manage the premises. In the alternative, as in the 1987 Act, they should be able to exercise RTM over the part of the building containing their flats.
The landlord will retain rights as freeholder (or head lessee) and will also receive rights under RTM for inspection etc, he may also have voting rights relating to flats in his ownership. Further involvement in the management process seems both unnecessary and an intrusion on the tenants’ proposed rights. With his reserved rights as freeholder and the situation that the landlord will always be in a minority and unable to influence decisions, what function is intended to be served by his inclusion in the RTM company?
(a) Obtaining information
There is a clear need, prior to the exercise of the RTM, for gathering of information as provided in Sections 11 and 42 of the Leasehold Reform Act 1993. Tenants would be most unwise to attempt to take management of the building or estate without basic information, eg tenancy details, arrears / pre payments, current management arrangements, contracts and other agreements, the amounts and whereabouts of monies. Provision is needed for these details to be obtained, by right, from an uncooperative landlord and the 1993 Act procedure provides an ideal model.
There will clearly be a need to protect confidentiality in certain circumstances, including tenants’ arrears and sensitive commercial information.
(b) Invitation to participate
In the light of the proposal in the Bill to allow any lessee to join the RTM group at any time it seems unnecessary to include, as an additional layer of the procedure, invitations to participate. It would be a different matter if there was a limited time for lessees to elect to join the RTM company. But as a copy of the notice exercising the right has to be served on them at the same time the landlord is served these lessees can then, in their own time, elect to join the company.
(c) Claim notice
It follows from our comments at (a) above, that there need not be a two-week wait from invitation to participate to service of the notice on the landlord.
(a) Counter –notice
We concur that the only basis for challenging the tenants’ application, would be on qualification, the particulars of that building and the lessees and the RTM company meeting the proposed requirements.
We feel that the important issue, is that the LVT is geared up to act swiftly and accurately on matters that are disputed. For a group exercising this right the present delays of around six months to wait for a hearing, and then a further delay for the written decision is simply too long.
(b) Reasonable costs
For what, we hope, will be a simple system for the exercise of RTM the idea of the recovery of costs is a great concern. Even if preceded by the word ‘reasonable’ this often takes a group of lessees no further. We would suggest a statutory to cap on these costs, and that only on determination by the LVT could costs in excess of the capped figure for the particular property be recovered. This would also entail a differing cap depending on the number of flats in the building concerned, much like the fee arrangement that currently exists when applications are made to the LVT under section 19 of the 1985 Act and section 24 of the 1987 Act.
Costs arising from the LVT should not be recoverable by order of the LVT or any court, as is the position currently under the 1985, 1987 and 1993 Acts. The hoped for simplicity of the RTM scheme should militate against the use of professionals, and therefore militate against the need to incur professional fees.
There should be provision for withdrawal of the claim notice. However in keeping with our previous comments subject to liability for a capped or otherwise reasonable recovery of landlords’ costs.
We do not agree that RTM applications where there is an absent landlord should be dealt with by the court. This seems to be by analogy to the vesting order procedures under the 1993 Act but we would suggest that the more appropriate analogy is that of Section 22(3) of the Landlord and Tenant Act 1987, the authority of a LVT to dispense with the service of a preliminary notice for the appointment of a manager. The 1993 Act relates to a proprietorial right, where the court is the appropriate venue, management should be within the remit of the LVT.
In addition we are concerned at implications for representation in court procedures, if the application is to be made by the RTM company will it, as a company, be required to have professional representation? We are aware that a group of lessees who had served notice under the 19993 Act and used a company to act as the nominee purchaser would not be heard by the judge in the County Court because he was entitled to insist, that as a company, it had to be professionally represented in those proceedings.
We are greatly concerned as to the practicality of the RTM company attempting to take management responsibility without possession of all necessary monies and documents and do not therefore agree with the proposed arrangements. Any attempt to manage on this basis raises considerable dangers of breakdowns in service provision, and financial shortfalls and contractual difficulties. Whilst the tenants will wish to take control as soon as possible, we feel that there must be some transition phase for the proper and efficient transfer of management arrangements. This might be achieved by the formal hand over to occur on a specified date following the operative date of the notice, say, the three month period proposed or the next quarter day whichever is the later, with all documents and monies in place, at pain of prosecution.
Any such transitional arrangement will require built in protections for the tenants during the period, plus a requirement for budget and service charge approvals to be subject to approval by the RTM company.
It is vital for all tenants in the building for management to continue uninterrupted by the move to RTM and time must be allowed for this whilst providing the RTM company with sanction arrangements on charges and budgets.
We would also suggest a statutory requirement for Professional Indemnity Insurance for the RTM company.
The right of access may be necessary, but whether it should be a general right of access for any purpose in relation to the exercise of the right to manage seems too general. The commentary suggests that it may be particularly relevant over matters of qualification e.g. the amount of non-residential use in the premises. We would suggest that the right of access is limited to the need for establishing qualification, and that when giving notice this is set out in the notice itself.
We are generally in agreement with the proposals. It is accepted that the management must be in accordance with the lease but have some concerns at the likely wording of the proposed prescribed management functions, specifically that any provision in the Bill that includes improvements as a "management function" should not give the impression of allowing such a function where the lease does not already make such provision. Most leases, at least in the private sector, do not provide for improvements. Bearing in mind those lessees who bought their flats with the usual covenants concerning repair, maintenance etc did so appreciating that these would be the costs that they would contribute towards, rather than improving the premises. This is particularly important when one remembers that the RTM will be exercised by half the leaseholders in the premises. There may be a substantial group who are not members of the company, or even support the exercise of the right, and as such they should be under no burdens greater than they bargained for in the way of items of expenditure.
This is a difficult issue to address but we would suggest that matters relating to the structure of the building, common parts, and services would be a matter for the RTM company. Those matters particular to the flat, which do not infringe on the matters just mentioned, should remain for the landlord to address. The situation should be analogous to a head lease arrangement with the landlord as ‘tenant’ of his sub let flat responsible to the RTM company as for service charges etc, relating to the overall repair and management of the block but to his own tenant for the matters relating to the interior of the flat.
We do not agree with the proposals. If tenants are to be given a right to manage they should assume full management responsibilities not the ‘halfway house’ proposed, the management rights and responsibilities should be analogous to a receiver. The proposals for enforcement of covenants are, in our view, impractical, these are functions to be properly carried out by a manager which should be the RTM company; the proposals place the RTM company as little more than an agent for an unwilling landlord.
We would propose that responsibility for enforcement of all covenants, including possession proceedings should pass to the RTM company, albeit with the absolute duty to report all breaches and the RTM company’s proposal for action for the landlord. We are concerned that an uncooperative landlord could neglect or deliberately choose not to enforce a covenant in order to destabilise the tenants management. It is not practical to share management responsibilities between two parties with different objectives, the RTM company must have everyday control if they are to function effectively.
We would make the point that, should our views in 1.6 above not prevail and the landlord have the proposed membership of the RTM company, this arrangement will ensure that he will become aware of all breaches in the knowledge of the RTM company and the company’s proposed response.
In the case of possession actions for arrears we are concerned as to the means whereby the RTM company may recover the arrears where the landlord takes and succeeds in the forfeiture action. It would seem more practicable for the possession action to be the responsibility of the RTM company who will then be statutorily liable to pass on the landlord the net proceeds of the possession after their recovery of the arrears and costs through sale of the unit.
We would agree with the proposals set out concerning consents. Where that consent concerns alterations, assignment or sub-letting and was being unreasonably withheld we would suggest that the same principles applicable under the Landlord and Tenant Act 1927 should be applicable. Additionally the procedures set out in the Landlord and Tenant Act 1988 should also be applied.
We would suggest that there should be the option for RTM to be applicable to a single building, or as an alternative to a number of properties sharing facilities or having common obligations under the terms of their leases. If the former is exercised then there must come with it an automatic adjustment of the apportionments, if not already addressed in the lease, so that those lessees contribute particularly towards the building’s costs via their RTM, but continue to contribute to the remainder of the estate via a charge that continues to be raised by the landlord.
If we are to consider that frustration arises, where:
(a) the subject matter of the contract is destroyed or unavailable;
(b) an event central to the contract does not occur;
(c) it is not possible to comply with a specified manner of performance; and
(d) where performance of the contract is illegal
then it is not immediately clear that the doctrine of frustration applies to contracts entered into prior to the exercise of RTM. To avoid such a situation havingto be resolved by the courts we would suggest that provision be made in the legislation for dealing with contracts. We would support the proposal in paragraph 92 of the Consultation Paper. This process could be carried out within the transitional period proposed in paragraph 1.11 above as part of the hand over arrangements.
Normal employment law should be applicable in relation to existing contracts and employees when RTM is exercised.
We would agree that the main sanction against a defaulting RTM company would be the appointment of a replacement manager , and the procedure should replicate that set out in Part II of the 1987 Act.
We agree that a RTM company should be able to withdraw but we feel that a four-year gap is too long before the right can be exercised again. The original group may move on , but that should not blight , for four years , the ability of another group who purchase flats in the building. It seems to us as likely that incoming lessees will want the option of exercising this right. Even the withdrawal of an application for collective enfranchisement under the 1993 Act only excludes a further application for 12 months. We feel that if there is to be a period in which the right cannot be exercised it should be no longer than 12 months, concurrent with the service charge year.
With regard to other legislation we have proposed in previous submissions that where tenants have taken the RTM option they should forfeit their rights to challenge service charges, on the general principle that power requires responsibility. There is little doubt, unless LVT procedures can be drastically improved, that long drawn out disputes on service charges can seriously destabilise a RTM company, where cash deficits cannot be supported.
We are aware of the Department’s earlier responses to this suggestion but repeat our concerns nevertheless.
We would agree that the low rent test be abolished for leases between 21 and 35 years.
(a) Non-residential floor space
The current proposal is to increase the limit from 10% non-residential use to 25% , certainly a step forward. However, under Part I of the 1987 Act the proportion is 50% and in the spirit of extending the rights to acquisition of the freehold, there may be some merit in the figure mirroring that of the 1987 Act, with protection for the landlord through the existing leaseback provisions.
(b) Resident landlord
It is proposed that an amended version of the resident landlord exemption will remain in the amended 1993 Act. We suggest that such an exemption be removed from the 1993 Act for the same reasons mentioned earlier at paragraph 1.1(b). Even if a landlord has converted his ‘home’ he has , by definition , and in exchange for a premium given up possession of the substantial part of the premises. These other parts of the premises are his home only in the reversionary sense.
We agree with the proposals for the abolition of the residence test and the recommended criteria for participation.
We agree the proposal for a corporate structure for enfranchisement in common with proposals for commonhold and RTM, for prescription of memorandum and articles and other attached proposals. However we consider that for tenants of smaller properties (paragraph 36) the corporate structure be optional. Although we acknowledge the difficulties arising from the Land Registry etc this is a present option for groups of four tenants or less and there seems no pressing reason to enforce a ‘nannying’ provision in these cases.
(a) Invitation to participate
We agree with the proposed requirement for an invitation to participate. However, unless the legislation is to provide a formula for valuation (see below) it will be difficult to require ‘an estimate of the cost’ in the invitation, particularly bearing in mind the very early stage at which the notice would be served.
The notice certainly should not include the proposed bid, this will almost certainly come to the landlord’s attention and may prejudice the tenants’ application.
(b) Initial Notice
We agree that a copy of the initial notice should go to all tenants but this is subject to our comments in 2.7 below.
The action of collective enfranchisement leads to three options post enfranchisement:
i) the RTM company becomes the nominee purchaser, in which case the memorandum and articles will have to require that the non participants no longer have any share in the company.
or ii) the non participants remain members of the company but with different voting rights, eg ‘A’ and ‘B’ shares.
or iii) a separate company is formed for the collective enfranchisement action with shareholders limited to participants, leaving the RTM company to continue management. The CE company will have no management responsibilities but will benefit from income from future lease extensions.
Of those options (ii) would seem to be preferable.
a) We agree that there should be a right to participate in an enfranchisement but have concerns as to the proposed timing. With the complication arising from the allocation of marriage value to participating flats we feel that the opportunity window is too long and would suggest a period for exercise for the right to be three months from date of service of the invitation to participate, not the initial notice. This is sufficient time to decide and, from the anticipated improvements to LVT procedures we would hope that the process will not need to take account of the ‘several months before a LVT hearing’.
b) We agree that tenants should have a retrospective right to buy into the freehold company. The valuation rules for determining a premium for a new lease are virtually identical to those for freehold acquisition and take account of the length of the lease at the time, for purposes both of the freeholder’s interest and marriage value. This will provide an adequate model for subsequent participation in the freehold without any requirement for other factors, providing that the freehold company has extended its own members’ leases and proposes to so extend that of the new participant. In order to protect this point it might be appropriate to make clear that the right to participate after an enfranchisement is, specifically, a combined right to a new lease together with a share in the freehold company.
(a) We agree that the valuation date should be the date of service of the initial notice.
(b) We agree that marriage value should in all cases be apportioned equally between the tenant and the landlord(s).
(c) We agree to a prescribed limit above which marriage value is to be disregarded but suggest that 80 years would be a more appropriate term. This is the term that almost all LVTs outside London apparently used as a threshold (pre the LT Abbathure judgement) and reflects general market levels of mortgagability.
It is accepted that there may be a case for a longer period for a very limited area of central London.
(d) We remain committed to a more accessible, less variable and cheaper route to valuation and wholly support the principle of prescription of variables, both yield and relativity; we have previously submitted such proposals to DETR.
The Report on Relative Values from the College of Estate Management (August 2000) concludes that prescription of both are possible although reserving the need for further research. We strongly recommend that the Bill contain enabling provisions for the Minister to be able to presumable yields and relativities from time to time, pending further consideration of details.
We agree that appeal to the Lands Tribunal should arise only with the leave of the LVT, or the Lands Tribunal itself.
3 Right for a Tenant of a flat to acquire a new leaseWe agree with the removal of the low rent test as a criterion for qualification
We do not agree with the proposal to replace the residence test. This effectively only improves the situation for tenants by one year and, in the light of the removal of the residence qualification for collective enfranchisement, we fail to see the justification for the test. The switch from prior residence to prior ownership will do nothing to improve the position of tenants buying a short lease flat, it will still be an obstacle to mortgagability. It appears entirely unjust and against the spirit of the Government’s stated wish to improve eligibility to set up restriction for the majority of tenants simply in order to prevent a minority of speculative ‘short term speculative gains’.
Notwithstanding our opposition to the proposed ownership test we wish to raise a potential problem should the test be introduced the effect of a change from being a sole owner to being a joint owner. Section 39(2)(a) will be amended by clause 101 of the bill substituting "is" with "has for the last two years been", and would say:
"(2) Those circumstances are that on the relevant date for the purposes of this Chapter-
(a) the tenant has been for the last two years a qualifying tenant of the flat;"
This means that the new test makes ownership part and parcel of being a qualifying tenant. This differs from the previous residence test, which was expressed as an additional requirement where the tenant was already a qualifying tenant. It currently says:
"(2) Those circumstance are that on the relevant date for the purposes of this Chapter-
(a) the tenant is a qualifying tenant of the flat; and
(b) the tenant has occupied the flat as his only or principal home –
Section 39(6) then deals with joint tenants by providing that the condition mentioned in subsection (2)(b) need only be satisfied by one of the joint tenants.
The difficulty we foresee is that because, it appears, the ownership requirement will be as much a matter of being a qualifying tenant as a long leasee, then at any time during a two year period, should a lessee become a joint owner, neither can qualify unless provision is made to allow a tenant, who has owned the flat for two years, to be a qualifying tenant irrespective of the flat becoming jointly owned at some stage in the preceding two years. Alternatively the new test could be set out in the same way as its predecessor as additional to the applicant being a qualifying tenant, in which case section 39(5) can remain as it is.
The same points can be made so far as the ownership test is concerned under the 1967 Act and for collective enfranchisement.
We agree with the proposals.
See comments in 2.8 above.
4. Leasehold Houses 4.1 Right to enfranchise after extension of the leaseWe would agree with the proposal that a lessee who has extended their lease should be able to enfranchise. In that the extension was granted without premium it may be considered appropriate that the price for the freehold should be calculated according to the ‘special valuation basis’ including marriage value, but it would seem more equitable that the valuation should be based on the original qualification prevailing at the time the extension was granted.
We agree that there should be security of tenure, for leaseholders who have exercised the right to extend their lease, when it expires.
We agree with the proposal that the schemes, where landlords are absent, should be the same for both enfranchisement of houses and flats. However, absentee freeholders often result in one or more lessees incurring costs in order to deal with matters that are their landlord’s responsibility. We would suggest that the LVT should be able to take into account these costs in determining the amount to be paid into court.
We would agree with the general abolition of the low rent test as a criterion for qualification for enfranchisement.
See comments in 3.1 above, which equally apply to houses.
We agree with the proposals.
See comments in 2.8 above.
5. Leasehold Management(a) Definition of service charges
We agree with the amendment of the definition of service charges to include improvements and administration charges, which will do much to end abuses presently occurring; we agree that enabling provision be made for further amendment to ensure flexibility in case of further abuses arising; we agree that unreasonable administration charges should be an additional ground for appointment of a manager. However, there is a problem identified with service charges in the context of tripartite leases. We hope that this will be addressed in the new legislation, as it appears it will be by the statement in paragraph 67(page 179) of the commentary to the draft bill. Specifically, the problem is whether costs incurred by a management company that is party to the lease (as ‘relevant costs’ under Section 18) are recoverable by or on behalf of the landlord.
The cases found that costs raised by the management company have not incurred by or on behalf of the landlord and were therefore not relevant costs within Section 18 and not, therefore referable for determination of reasonableness by a LCT. This is crucial because it determines, amongst other things whether such a dispute can be determined by the LVT. Two cases in particular raise the need for these matters to be addressed they are Berrycroft Management Co Ltd v Sinclair Gardens Investments (Kensington) Ltd [1997] 22 EG 141 (CA), and Cinnamon Ltd and another v Fion Morgan (unreported), the latter was a judgment of HHJ Oppenheimer in Brentford County Court.
In Cinnamon Ltd the court dismissed the application to transfer the matter to the LVT as the service charges in question did not fall within s.18 of the 1985 Act, as only service charges meeting that section’s definition can be dealt with by the LVT. It is interesting to note that the court gave leave to appeal on the issue and in granting leave the comment on the N460 form (Reasons for allowing or refusing permission to appeal) was "…it seems odd and potentially unjust that the statutory regime in the L & T Act 1985 does not apply where the service charges were incurred by the 2nd Claimant Management Company, rather than the 1st Claimant Landlord". Whether or not the appeal will be made remains to be seen.
In the light of these judgments, and the comments in the N460 form, the position of lessees with tri-partite leases needs to be clarified. There are proposals in the Bill that deal with tri-partite leases in the context of the RTM. A suggestion is that the 1985 Act is amended so that, as in clause 71(9) of the Bill, management companies will be acting "by or on behalf of the landlord".
(a) Thresholds
We agree with the proposals, particularly that the sum or formula be set by regulations, therefore allowing periodic revision.
Clearly the present limits of £50/ £1,000 are inadequate and require upward revision but there is a need to provide some sliding scale to prevent undue loading on tenants of small buildings. The present limit allows a landlord to spend £1,000 on a two unit block without consultation and this is clearly, at £500 per tenant, well in excess of the £50 a head requirement where the block is much larger.
We propose an increase in the consultation sum to £100 per flat but with a sliding scale for maxima according to the size of the building, for example, £500 for 2 – 4 units, £1,000 for 5-10 units, £5,000 for 11 – 30 units, £10,000 above this.
(b) Consultation on long-term contracts
We agree with the principle proposed but have some concerns about the mechanisms of consultation. It would seem sensible to use the above statutory consultation thresholds as the de minimus guidelines to the contracts on which to consult to ensure a continuity of approach.
However, fixing the term at 12 months may encourage the letting of 364 day contracts and it may be preferable to link the period to the service charge year rather than a fixed term, or contracts that extend beyond the present service charge year.
We would ask the question as to whether such contracts are intended to include employment contracts for estate staff, this is not clear but it would seem reasonable that tenants should be so consulted.
We remain concerned as to the application of the existing and proposed consultation process to local authorities in Partnership Funding Initiatives and will welcome specific proposals to safeguard Council leaseholders’ rights whilst not endangering the scheme.
c) Consultation procedures
We are supportive of the proposals but would recommend a greater obligation on the landlord to notify tenants of the reason for his decision beyond just choice of contractor. We suggest that the landlord should demonstrate that he has ‘had regard to’ the tenants’ response to the S20 notices in, briefly, responding to the comments in a statement of his proposals. For examples, where the tenants have questioned the need for the work, or its proposed standard; to explain why the landlord intends to so proceed in the light of the tenant’s concerns.
We also suggest that in the S20 consultation notice, the landlord be required to identify any proposed contractor with whom he has any relationship.
d) Transfer to LVT
The transfer, to the LVT, of determining whether or not a landlord has compiled with these new provisions is welcomed.
6. Accounting for leaseholders’ moniesWe agree with the proposals and that tenants may withhold payments in the absence of evidence of the suitable account, and that the LVT should be the venue for disputes.
There is a need for information to tenants to be clear and it is suggested that statements provided on the account should include a bank reconciliation statement on a prescribed basis.
Particular comments about each of the proposals appear below. At this point we would like to suggest that those responsible for the management of properties should be required to keep financial information for the preceding 7 years. This should include receipts, bank deposit books or statements of withdrawals and deposits in order of date, cashbook and a register of payments from the leaseholders. There should also be some thought given to rules concerning the transfer of management, outside of RTM. Often lessees are left with difficult remedies in the event of change from one agent to another or the handing over of the freehold. We would suggest that the agent/freeholder relinquishing the management responsibility be under an explicit statutory duty to provide the requisite information.
(a) Better clearer information
We agree that a summary of costs should be provided, as a matter of course, at the end of the financial year under the terms of the lease, and to the manner in which the information is proposed to be set out.
(b) Individual items of expenditure
We suggest that the proposed expenditure threshold be not simply a specific figure, but an amount that will vary depending on the number of service charge payers. The basis set out in section 20(3)(a) of the 1985 (subject to current amendment) Act we would suggest provide an example.
(c) Reconciliation of the accounts
We agree with the all the matters proposed.
(d) Different rules for different cases
Most landlords should send out a statement in the form of a balance sheet. If there is to be differentiation we would suggest it apply to properties of 4 or fewer flats where the reversion is held jointly by one or more of the leaseholders.
(e) Bank / Building Society statements
The provision of this information is a must. It not only benefits the lessee but also a purchaser, in the event that the flat is to be sold by providing real facts as to the buildings financial position.
(f) Certification
Whilst we certainly see the need for certification to continue we would think it helpful that small properties be able to serve a notice exercising the option to have their summary of costs certified.
(g) Notification of rights
We agree that demands for payment of any kind, where their reasonableness can be challenged, should be accompanied by an appropriate notification.
LEASE has previously identified such a notification as a need and has made proposals, in conjunction with ARMA, for a similar document to be included in the Seller’s Pack; we are completing drafting of the LEASE/ARMA document and will be happy to offer assistance to DETR in the production of the notification of rights to accompany service charge demands.
(h) Statements to be provided annually
We agree that statements should be provided annually, within six months of the year and as a matter of course. However, we remain concerned at the lack of any standard pro-forma for these statements leading both to difficulties in interpretation and, on occasions, to deliberate obfuscation of information. Whilst we are aware of the proposals of ARMA/RICS in introducing specific accounting standards / presentation of accounts for their members we feel that formal prescription of content of statements, including a balance sheet, would be productive.
(i) Access to receipts, quotations and invoices relating to a service charge
This right would be of particular assistance where there is no recognised residents association, and therefore we believe it is appropriate that the lessees be able to inspect on providing 21 days notice.
(j) Access to insurance policies and summaries thereof
We feel that not only should lessees have the right to inspect the document of their choice, but that if a property is held in a block policy scheme that the landlord be required to provide information to show how the property is apportioned as part of that scheme.
(k) Photocopies of relevant documents
Whilst we fully support the proposal we have some concerns at the means whereby the reasonableness of the landlord’s costs might be established, in that this might be used as a deterrent to tenants requesting information.
(l) Enforcement
The criminal penalties should continue where the current legislation, and its proposed changes, are breached. Additionally we would agree that it becomes, effectively, a condition of payment that statutory information like statements, notification of rights and (where appropriate) a certificate should apply.
We see no reason that these and other provisions that are proposed should not apply to these bodies.
See comments at paragraph 5.1(a).
7. Other mattersWe agree with the proposals relating to lease variations, but would like to see added on "recovery of expenditure" words that would reflect the effect of the acquisition of freeholds of blocks of flats on an estate. The service charge and other terms of the lease following such circumstances may need to reflect that the terms will be, if not already, limited to the enfranchised block.
The transfer of jurisdiction to the LVT is welcomed, but as in all the other new roles it is to have, its pace in dealing with applications has to improve.
With the new jurisdiction of the LVT we would presume that they would be able to interpret leases in considering matters under section 19 of the 1985 Act.
The points made earlier at paragraph 5.1(a), on the definition of service charges, would affirm the need to address tri-partite leases, and it follows that the same should apply to the rights under Part II of the 1987 Act.
Recently it has become apparent that it would assist lessees who share the same covenants relating to their development, but live in different buildings, if the appointment of a manager could be sought for the estate as a whole rather than building by building.
We agree with the proposals put forward, but would seek that the landlord’s name and address for the service of notices and proceedings also be included in the demand.
We agree with the proposals put forward.
8. Other Matters not included in the Consultation PaperUnder Part I of the 1987 Act a building must, amongst other things, contain at least two flats (section 1(2)(B)). To exercise the right the lessees, or the requisite majority must act throughout. However, under section 5(5)(b) a landlord need only serve notice on "all but one" of the qualifying tenants where there are less than 10 of them. Hence, in a property of just two flats it appears that a landlord need only serve notice on one of the qualifying tenants to have met his obligations. Although we feel that the spirit of the Act, where there are just two flats, suggest the notice should be served on both qualifying tenants it needs to be clarified. Hence, in the same way that a property consisting of two flats, both held by qualifying tenants, would require the participation of both to exercise RTM we would suggest that Part I be amended to require a landlord to serve notice on both qualifying tenants.
We reiterate our previous submissions seeking the application of the right to leaseholders of houses.
8.2 Estate Management SchemesWe would raise the issue of service charges paid by freeholders arising from Estate Management Schemes. In that there is no landlord-tenant relationship, the service charges payers are outside the controls or consultation requirements of the 1985/87 Acts under Schemes declared under 1967 or 1993 Acts. This does not seem reasonable in the light of the above proposals and is a matter on which LEASE has received representations.
It is suggested that provision be made that freeholders and others liable for service charges under Estate Management Schemes be deemed to have similar rights of consultation, information and requirements for reasonableness under Sections 18-30, Landlord and Tenant Act 1985.