1.1 In the context of present thinking and the proposed consultation paper the following is submitted as the joint views of the Leasehold Advisory Service and the British Property Federation on aspects of leasehold law appropriate for reform; in the paper the Leasehold Advisory Service works predominantly from the leaseholders' position, the British Property Federation from that of the landlords. In most cases there is a consensus on proposals for reform, where there are differences they are set out. The paper includes issues previously raised with DETR and matters raised for discussion in the Labour Party policy paper "An End to Feudalism".
1.2 The Leasehold Advisory Service (LEASE) provides free, impartial, advice on all aspects of residential leasehold tenure to all participants in the sector, although the majority of enquiries are from leasehold tenants; the service is presently responding to over 1,200 enquiries per month. In addition to enquiries, LEASE maintains close working relationships with the Council of Mortgage Lenders, the British Property Federation, the Association of Residential Managing Agents, the Association of Retirement Housing Managers, as well as pressure groups and campaigning organisations such as the Campaign Against Residential Leasehold Abuse (CARLA) and the professional bodies. As such LEASE is ideally placed to distill present problems and thinking on the joint issues of the shortcomings of residential leasehold tenure and what should be done about it.
1.3 The British Property Federation (BPF) is the trade association of the property industry in the UK, representing the interests of those who own, manage and invest in property. The Federation was actively involved in lobbying for its members' interests during the passage of the 1993 Act, and the Housing Act 1996, and has sought to develop a constructive dialogue with Government to promote workable legislation.
In anticipation of the forthcoming consultation exercise on leasehold reform, a BPF Working Party drawn from those actively involved in the residential leasehold sector, whether as owners, managers, valuers or lawyers, has examined the issues which it believes need to be addressed. The Working Party's approach has been based on four key principles, which meet the landlord's concerns, which are fair to both freeholder and leaseholder, and which we believe should inform the review of this area of law. These are:
The proposals in this paper reflect this approach.
1.4 Matters raised in this paper are all issues raised with LEASE by leaseholders, professional advisers and lenders and with the BPF by its members; it is fair to say that there is a substantial expectation by the estimated two million leaseholders in England and Wales of concrete proposals for reform action by the Government. The paper works from the situation of existing leaseholders and does not address problems of entry into leasehold tenure; this will be the subject of further representation.
2.1 The central and enduring problem for the leasehold tenant is the unequal balance between equity and control in the building: the tenants will (in all but a few cases) own the great majority of the value in the building but will have insufficient rights. The exercise of this control is entirely disproportionate to the respective parties' investment in the building. For example, consider the situation of the average inner London Edwardian house converted into five flats, all with 75 years lease remaining; each flat will have a market value of, say, £100,000 making the total equity held by the leaseholders £500,000. By contrast the market value of the freehold (subject to the leases) is likely to be only £6-10,000 (average of LVT determinations in London). The same ratio applied to long leasehold houses in the Midlands, South Wales and the North-East becomes even more extreme; with a house on a 999 year lease with a market value of, say £45,000 the market value of the freehold may not much exceed £250. Whilst the leasehold system remains as it is, the situation will prevail that those parties with the greatest financial investment in the building have the least power to influence the factors affecting that investment in that they have no direct control over the management and maintenance of the building, nor of the terms of their leases.
2.2 The result is a class of owner-occupiers, considered as owners by themselves and virtually everyone else, including the Government (viz Survey of English Housing) but subject to regulation by third parties governing their expenditure, their ability to sell the house or flat, its market value, and ultimately their right to remain in the home they have bought. LEASE considers it questionable, approaching the 21st century, for the situation to remain whereby a landlord with perhaps no more than a 5% equity in the building can, by manipulation of the law be in a position to deprive a owner-occupier of his home, leaving him not only homeless but with the continuing burden of the mortgage he raised to buy it.
Successive legislation has provided partial solutions through the enfranchisement rights of the Leasehold Reform Acts 1967 and 1993 and the increased rights for leaseholders provided by the Landlord and Tenant Acts 1985 and 1987 as amended in 1996. However, enfranchisement is not always appropriate (or possible) and the Landlord and Tenant Act remedies have been more directed toward the alleviation of symptoms of the problem rather than addressing the root cause, the imbalance of control.
2.3 There is little argument that there is a place for the leasehold system to satisfy a market need for medium and short term letting and occupation, particularly in central London; what is inappropriate is for such a system to form the only means of ownership of flats and for it to encompass up to half a million houses. There is a demonstrable need for radical reform of the system, with the introduction of Commonhold ownership of flats as the primary direction, but including a drastic modification and redefinition of leasehold tenure.
The major objective of leasehold reform must be to provide a new system of ownership appropriate to the 21st century, such as Commonhold, whilst ensuring measures for the resolution of abuses within the present system in the tran sitional period. This paper does not, therefore, deal with Commonhold but focuses on improvements to the existing system.
2.4 Finally, it is an obvious, but necessary, point to make in any discussion of the problems of the leasehold system that all landlords are tarred by the same brush, and that the abuses of the few reflect upon the proper activities of the majority. However, sufficient abuses exist as to require remedy and effort must be made in the introduction of amending legislation to protect and extend the rights of the leaseholder without undue prejudice toward the responsible landlord.
3.1 There are a number of areas where reform of leasehold law can equalise the balance of powers and rights of leasehold tenant and landlord through the provision of additional powers to leaseholders.
3.2 Prior to consideration of these points it is worth examining the purposes of the landlords' controls. There is a strong argument, particularly from the traditional family and trust landlords in London and other cities, that the leasehold system has preserved the continuity and standard of notable housing, for example, the London squares. It may, perhaps, be questioned whether such powers should be in the hands of developers or landowners rather than exercised by appropriate groups of owner-occupiers or possibly the local authority, although any reduction in landlords' controls over the external appearance of buildings must be balanced by alternative controls if the fabric of the building is not to suffer. Additional powers could be provided through greater controls in conservation areas or through variations in the Article 4 direction (General Development Order 1988) procedures, or in the reopening of applications for Estate Management Schemes. Additional responsibility devolved upon local authorities may be problematic in uniformity of implementation and is not supported by the British Property Federation.
3.3 In this context the point should perhaps be made as to motivation for preservation of exteriors. The traditional landlord's objective is clear in the protection of the value of his assets; if this responsibility is to be passed to any more significant extent to local authorities or owner-occupiers efforts must be made to ensure both the incentive and the resources for the controls. It would be counter-productive if transfer of control from landlords resulted in any deterioration of housing stock.
3.4 A leaseholder with a defective lease, for example a lack of a mutual enforceability covenant, has no means of obtaining a variation without the landlord's consent, normally at a charge. The charge is usually non-negotiable, as the landlord has complete discretion in granting the consent, and a leaseholder having difficulty in selling the flat due to the defect has no option but to pay. This has generated a market situation where landlords routinely demand substantial sums for consent and can obtain higher prices for the freehold on enfranchisement. For example, at a LVT hearing in Bournemouth (Twin Pines, Southbourne, LR5/96/D) the landlord was able to argue successfully additional compensation on the price of the leaseholders' purchase of the freehold on the proposition that his standard price for consent for a variation was £2,000 and this represented a recognised business asset.
There is a corollary arising from enfranchisement rights under the 1967 and 1993 Leasehold Reform Acts where an enfranchisement of one or more houses or one block of flats within estates with common service charges (or one part of a large block of flats) throws all the service charge percentages of the other houses or flats out of line. At present the only way of dealing with this is to make application to the Court in respect of all remaining leases.
3.4.1 Whilst Sections 35-37 of the Landlord and Tenant Act 1987 provide powers for parties to apply to court for variations, this procedure is uncertain and expensive. There would be merit in following 1996 Housing Act principles in transferring jurisdiction for this to the Leasehold Valuation Tribunals with simplified procedures.
3.4.2 LEASE would propose a concomitant solution to enact that all residential leases be deemed to include various "standard" covenants e.g. mutual enforceability, rights of support, rights of access; this is no more than an extension of the covenants for title (see Law of Property Miscellaneous Provisions) Act 1994.
This proposal is not supported by the BPF which does not favour the introduction of legislation which would overwrite covenants freely entered into, particularly covenants which may have been specifically included or excluded by the landlord when granting the lease. The BPF maintains the right of the landlord to make a charge for the grant of a variation.
3.5 At present the landlord holds leaseholders' reserve funds, subject to a legal requirement for trust status, (S42(1) Landlord and Tenant Act 1987) The leaseholders have no rights of information relating to the funds, nor rights of access to them. Whilst both the law governing trusts and the RICS Code of Management Practice should ensure the safe custody of the leaseholders' money this is not always so; substantial sums of leaseholders' money have been lost arising from landlords' insolvency. It is little compensation to the leaseholders that the landlord might then be liable to prosecution and a possible fine that will not be paid due to his insolvency.
3.5.1 The trust provisions do not provide adequate protection to leaseholders and should be replaced with a requirement for bonding; no-one should be allowed to hold service charge monies unless there is some form of bonding in place, with the charges not legally collectable without evidence of the bonding arrangements. (comparable to restrictions provided by S48 Landlord and Tenant Act 1987). This could be a standard requirement or by specific requirement of the leaseholder (It is appreciated that this could have cost implications for leaseholders).
3.5.2 In addition leaseholders should be given rights of inspection of bank statements relating to the account.
3.6 There seems little justification for leaseholders of houses to be denied the right of first refusal available to leaseholders of flats when their freeholds change hands.
It is accepted that there may be practical difficulties arising in notification of individual leaseholds of houses in portfolio estate sales and with the delays arising from such notification. The application of the auction procedures provided by S5B Landlord and Tenant Act 1987 may be appropriate in such cases.
3.6.1 LEASE believes it would be reasonable to extend the application of Part I of the Landlord and Tenant Act 1987 to leasehold houses in single occupation.
This is not supported by the BPF.
3.7 There is, at present, no requirement for a managing agent, or landlord-manager to have any specific qualification, training or experience and there is no regulation of general performance. Similarly, managing agents are the only professionals holding third party monies who are not subject to statutory control. Whilst the efforts of the Association of Residential Managing Agents (ARMA) and the RICS are fully acknowledged in attempting to raise standards, this falls far short of the degree of regulation imposed elsewhere. A managing agent has huge responsibilities for the maintenance of the leaseholders' and the landlord's assets and the collection, safeguarding and expenditure of the leaseholders' money as well as health and safety aspects of the building.
Much could be achieved in both standards and accountability of managing agents in the introduction of measures similar to the New South Wales legislation (Managing Agents and Property, Stock and Business Agents Act, 1941) imposing business standards punishable in breach by fines and daily penalties, and for bonding arrangements. (See 3.5.1 above). It would also be useful for requirements for disclosure of all commissions arising from the management, such as commission on insurance. This is a requirement of the two (non-obligatory) statutorily approved Codes of Management Practice by the Royal Institution of Chartered Surveyors and the Association of Retirement Housing Managers.
3.7.1 Statutory requirements and procedures for the regulation and registration of managing agents : these principles are fully accepted and supported by ARMA, the BPF and the RICS; registration would provide additional safeguards to both landlords and tenants and would further ensure standards. LEASE will explore the issue with the DTI.
3.8 Major steps forward have resulted from the introduction of the new LVT procedures by S83, Housing Act 1996; as yet it is too early to comment on their effectiveness. However, the complexities of the procedures and the costs involved (both the Tribunal fees and professional fees arising) render the procedures out of reach to many leaseholders who may consider it uneconomic to attempt to challenge a service charge bill where there was less than œ500 in dispute. For lesser issues the procedure may seem disproportionate to the benefits and thought needs to be given to some alternative dispute procedure, at a primary or initial level which should not preclude leaseholders from further access to formal resolution. In this context attention needs to be given to the present prohibition on access to LVTs in cases where the lease includes an arbitration clause, or where the leaseholder has, perhaps in ignorance, elected for arbitration. (S.19(2c) Landlord and Tenant Act 1985)
3.8.1 Models for dispute resolution are provided by the recently introduced PACT scheme (Professional Arbitration on Court Terms) for lease renewal in the commercial sector, which has the advantage of the parties having a choice of procedure relevant to the matters in dispute, and by the procedures operated by the Australian Strata- Title Commission which has the advantage of availability of expert advice and dispute resolution in one place.
3.8.2 An effective, and cheaper, procedure could be through written representations by the parties, to be dealt with by one member of the LVT or other accredited expert (this is discussed in 4.7.2 below in relation to LVT valuation).
3.8.3 There may be merit in a minimum level of dispute in order to discourage vexatious litigants.
3.9 It is reasonable, in terms of their greater financial investment in the building that the leaseholders should have greater control of or influence in the overall management and maintenance of the building, and thereby, their personal asset. There are a number of options:
These issues were considered, in some depth, at Commons' Committee stage in the 1996 Housing Bill.
The issue of self-management is crucial to any consideration of reform of leaseholders' rights but, within the existing system, presents considerable difficulties. Any transfer of powers must provide a number of safeguards, not necessarily mutually compatible to landlord and leaseholder.
In long leasehold the objectives of the parties tend to be personal and subjective rather than objectively pursued for the benefit of the building. Whilst most leaseholders can be expected to adopt a responsible attitude in the maintenance and repair of the building, there will be inevitably be some for whom the principal motivation is reduction of expenditure, eventually to zero. When house owners neglect their property, their neglect has no other victim other than themselves, whereas in a building in flats the actions of those leaseholders influencing the management of the building will impact on others, including other leaseholders and the landlord as well as mortgage lenders. The veto or other influencing rights to be provided to the landlord should not be sufficient to limit unduly the powers of the leaseholders to manage the building as they wish but must, on the other hand, allow adequate influence to maintain the value of the asset. Similarly, no single leaseholder should have disproportionate influence, and provision must be made to override undue cost -cutting in management or maintenance, or equally, to limit unsuitable expenditure.
It is suggested that a no-default right to manage be provided, subject to the provision of positive covenants which the landlord may enforce in the leasehold er's default. It is important to all parties that the block be managed to proper standards, subject to some statutory guidance; it is suggested that such guidance could be provided by giving statutory force to Codes of Management Practice approved under S87 Leasehold Reform Act 1993. Additional security could be in the mandatory appointment of a professional managing agent (the requirement could perhaps exclude all buildings comprising, say, five flats or less). Subject to the improvement and regulation of managing agents as proposed in (iv) above, the proviso for professional management would provide the means for tenant control and also ensure a pragmatic long-term approach to the preservation of landlord's and leaseholders' assets.
3.9.1 The introduction of a no fault right to manage, subject to safeguards on standards.
3.9.2 Arrangements should include rights for landlords to seek return of management powers similar to appeals for variation of orders for the appointment of a manger under S24(9) Landlord and Tenant Act 1987.
3.10 It is common for leases to provide for the insurance of the building to be arranged through the agency of the landlord and recharged to lessees in their service charges; this can lead to abuse in overcharging, excessive commission etc. Whilst these charges are within the new provisions for determination of reasonableness by Leasehold Valuation Tribunals further regulation would be advantageous. Most larger landlords purchase insurance cover in bulk direct from the insurer and then sell on to the leaseholder through a brokerage set up for the purpose. Whilst responsible landlords can use this to produce a discount for their leaseholders some disreputable landlords use the broker procedure to produce insurance costs up to 100% above what the leaseholders could obtain themselves in the market.
3.10.1 Leaseholders should have the right to obtain alternative quotations for insurance cover from a reputable company on the same terms as the landlord's. Where there is a difference of 10% or more in the premium the landlord's insurers should be asked to match that quotation; if they prove unwilling or unable to do so the landlord should be obliged to accept the leaseholders' nominated insurer.
It is accepted, in the interests of both parties, that such arrangements will need to include adequate controls to ensure adequate insurance cover.
3.11 In the context of the inequality of powers between landlord and leasehold tenant the leaseholders consider there is a case to be made for the removal of the landlord's right of forfeiture in cases of leasehold disputes. Whilst this provides a protection to the legitimate landlord against abuse of his asset it is disproportionate, in the majority of cases, to the offence, for example, for single-year arrears of low ground rents. Forfeiture is applicable in cases of breach of covenants which can include arrears of rent charges and major misuse of the property but also for minor issues such as breach of painting or repair covenants. Presently the only protection leaseholders have against forfeiture is through the 1996 amendments requiring evidence of reasonableness of arrears of service charges; there are no other statutory defences, although there is of course the courts' power to grant relief.
The rights of forfeiture are felt by LEASE to be inappropriate to modern residential leasehold ownership and too open to abuse by the unscrupulous landlord. However, the right provides the only certain solution to the reputable landlord in event of arrears or other breach and there will be considerable resistance to its abolition in the absence of adequate alternatives. There is an urgent need to address the present abuses and then to devise replacement remedies more equitable to the parties. (Forfeiture has, of course, been examined at length by the Law Commission (Forfeiture of Tenancies 1985 and Termination of Tenancies by Physical Re-Entry, 1998) although more in the context of commercial property)
The BPF maintains that it cannot support the principle of abolition unless it is satisfied that there are effective alternatives.
3.11.1 Rent-arrear abuse can be resolved by statutory provision that rent shall not be due until properly demanded.
3.11.2 Forfeiture should be abolished in respect of residential property, subject to adequate replacement with more equitable remedies for non-payment and breach. No immediate solution is presented other than options for county court action for debt or specific performance or a court order for sale. A sale order would ensure the landlord the payment of any arrears, but without opportunity for profit, and leave the leaseholder with the residue of the estate; it will also protect the lender's position. (The sale order solution will require careful consideration in terms of first charges in order to ensure settlement of the landlord's debt)
If the principle of abolition of forfeiture is to be acceptable LEASE/BPF will develop proposals for alternative remedy in discussion with interested bodies.
3.12 Under the provisions of Sections 21(3) and 58(1) Landlord and Tenant Act 1987 leaseholders of housing associations and local authorities are excluded from the right to appoint a manager. It is inequitable that leaseholders of registered social landlords should have lesser rights than private-sector leaseholders and the right should be extended to them.
3.12.1 For the purpose of S.21, Landlord and Tenant Act 1987, registered social landlords should no longer be exempt.
4.1 The rights available to leaseholders to renew their leases or purchase, individually or jointly, their freeholds are of great benefit and do much to ameliorate difficulties and abuses of the system. However, they are widely criticised for their unnecessary complexity, for their restrictive elements and for the process by which prices are decided. Improvements could be made to the 1967-1993 Leasehold Reform Acts to remedy these shortcomings, including simplification of procedures to vary a notice.
4.2 The amendments made to the 1967 Act have made enfranchisement available to all but a small percentage of leasehold house owners. Schedule 9, Housing Act 1996 placed a restriction in the contrived situation of a leaseholder whose original lease term did not exceed 35 years and the house was in a rural exclusion area. Although this only affects a few hundred householders there are grounds for investigating further the reasons why they should be excluded from a right of acquisition available to all other lessees.
4.2.1 Whilst the low-rent test is required as a litmus in other circumstances, for example, in determining the basis on which the house is to be valued, there seems a case for its complete abolition as a restriction on freehold house acquisition.
If the low rent test is to be removed there may be some merit in reconsidering the present definition of a "long lease". 21 years is not considered, in the property market, as a long lease and there is an active market in mid-range (20-30 year) leases. The suggestion has been made that, to assist this market, the long lease definition could be raised from 21 to 35 years without major detriment to leaseholders' enfranchisement rights.
4.3 Section 14 of the Leasehold Reform Act 1967 provides a right for some house leaseholders to extend their lease for a period of 50 years but subject to no right of enfranchisement or security of tenure at the completion of the term. Many such extended leases will have changed hands since the grant of the original extension but the restriction is rarely understood. It results in another group of disadvantaged home owners not only unable to acquire their freeholds but also having to vacate at the end of the lease. The problem is likely to become more acute in that most such leases were granted soon after 1967 and therefore likely to expire in next 20 years. Such tenants should be granted rights of security and enfranchisement in common with other long leaseholders of houses.
If rights of enfranchisement are provided to such leaseholders it is reasonable that the landlord receive adequate compensation in recognition of his earlier grant of extension at no premium; if it is suggested therefore that the calculation of price in such cases be by the Special Valuation Basis.
4.3.1 Rights of security of tenure and enfranchisement should be provided to lessees of houses holding 1967 Act 50 year extensions; in cases of enfranchisement, valuation to be according to S9(1A) procedures, Leasehold Reform Act 1967.
The BPF believes that contracting-out provisions should remain, both in relation to current cases and for the future. LEASE is concerned that the purpose and impact of such arrangements may be misunderstood and/or misrepresented during the currency of a long lease and therefore demurs.
4.4 In all cases the right to enfranchisement or lease extension is subject to proof of residence; for enfranchisement of a house the requirement is three years residence, for a new lease for a flat it is three years but for collective enfranchisement of a building in flats half the participating leaseholders require only one year residence. Similarly, in the case of a house the lessee's three year residence must have been in the capacity of a lessee, for flats the residence can be in any tenure; the house lessee must be in residence at date of application, the flat owner need not be. There seems no justification for these different requirements.
The requirement for residence has raised criticism, both from central London where there are large numbers of expatriate owners and more generally from leaseholders working elsewhere in the UK or in Europe. It is fully accepted that the original purpose of the residence test was to ensure that the enfranchisement rights were of benefit to the genuine homeowner; it also acted to deny enfranchisement to company-owned flats, particularly important in cases of collective enfranchisement. There is a need for a clearer statutory definition of "residence", particularly to clarify the position relating to expatriate and other leaseholders absent for reasons of employment.
It is relevant to refer to avoidance devices by landlords requiring leases to be taken out in the name of a company rather than the individual purchaser, to re move the danger of enfranchisement through the amassing of a residence qua lification; where the lessee then wishes to sell the landlord refuses consent to assign subject to a continuation of the same arrangement. This could be remedied by the introduction of improved procedures for variations through LVTs (see above). There is a counter-argument here for the landlords that the landlord's ability to retain ownership (which has been confirmed by the Court of Appeal in numerous cases) should not be interfered with.
4.4.1 The abolition of residence requirements will greatly simplify the enfranchisement/lease extension process but, if this is to be achieved, will need to be replaced with a restriction of enfranchisement rights to private individuals to exclude company ownership. Such abolition is likely to be opposed by the property interests as not being in keeping with the original rationale of the legislation.
4.4.2 If a residence qualification is to be retained it should be standardised for all rights under 1967/1993 Acts as one year prior to service of the notice or three years in the last ten, under a common, improved, definition of residence.
The BPF proposes that the leaseholder be required to be in residence at the time of the service of the notice; this is not supported by LEASE.
4.5 In addition to residence requirements the qualification requirements for collective enfranchisement are byzantine and restricted to long leaseholders. It is arguable that the acquisition of a freehold should have the support of the majority of the residents of the building and that is what is required for acceptance of the Right of First Refusal under the Landlord and Tenant Act 1987 - a simple majority of tenants. It would be a simplification to apply that 1987 Act principle of eligibility to 1993 Act enfranchisement qualification, in place of the complex formula of "two-thirds" etc.
There is a counter argument that the eligibility requirements for collective enfranchisement under the 1993 Act and compulsory acquisition under the 1987 Act are already identical (two-thirds of long-leaseholders) and that there should be different criteria in cases of voluntary and enforced sales by landlords.
Ultimately the appropriate criteria for collective enfranchisement differs from the landlord's and tenant's perspectives although both sides find difficulty with the complexity of the present rules and would welcome revision.
4.5.1 Eligibility for collective enfranchisement to be by a simple majority of qualifying tenants rather than the present two-thirds; the majority to represent more than half the total number of flats in the building.
4.5.2 Whatever majority is determined for collective enfranchisement it would be helpful to include a statutory right of participation. Only the statutory qualifying majority are required in order to proceed and there are no exercisable rights available to individual leaseholders left out of the action, for whatever reason; LEASE has experience of individuals deliberately excluded from collective enfranchisement actions by the participating tenants.
4.5.3 A final issue on collective enfranchisement is the need, anticipating the introduction of a system of Commonhold ownership, for a simple fast-track route of a collective purchase into a commonhold in one procedure, reducing legal complications and legal and registration fees to the leaseholders. (There may, however, be some merit in delaying application of commonhold ownership to existing property pending its application to new-build in order to settle the "teething troubles" endemic in new tenure legislation.)
4.6 The other major restriction to qualification for collective enfranchisement is the 10% limitation on areas of non-residential use within the building. This is unnecessarily low and effectively excludes all flats over shops and blocks within estates built over garages. Again comparison with the Landlord and Tenant Act 1987 is relevant, where the non-residential limit is 50%. An increase, even only to 25%, would extend enfranchisement rights to huge numbers of lessees presently disadvantaged; the landlords of the commercial units would, of course, retain the right to leaseback they currently enjoy (S36(1) 1993 Act).
Such a proposal would be resisted by the commercial property market which would argue that the issue was less concerned with proportions of floor-space but of value. A landlord of a prestige shop or office portion of a primarily residential building would be reluctant to lose control of the whole in fear of a deleterious effect on his commercial element arising from neglect of the residential exterior frontage. The argument raised earlier in Section 2 relating to the disproportionate equity interests held by the parties is relevant in this context, where a commercial element in a prestigious location will dramatically improve the proportion of the landlord's equity against that of the leaseholders.
In that the leaseholders' motivation for purchase relates to management rights and lease extensions a solution could be provided in a leaseback arrangement. The leaseholders should be able to form a management company to which the freeholder grants a 999 years headlease on the whole building at a peppercorn rent; the leaseholders' company then leases the non-residential element back to the freeholder on a similar basis. This will provide all relevant benefits to the leaseholders while retaining for the landlord influence over upkeep of the exterior (as freeholder) and full management rights over the commercial element.
4.6.1 The present 10% limit on non-residential property is too restrictive and should be increased to 25%, subject to the suggested leaseback arrangements.
4.7 Certainly the greatest area of uncertainty for leaseholders contemplating enfranchisement or lease extension is the matter of cost; present procedures produce high levels of criticism by, and opportunities for, exploitation of the leaseholders. The principal problem arises in the traditional adversarial process of negotiation with each party's professional working from an extreme position within a range of figures. This raises expectations on both sides and makes it virtually impossible for leaseholders, when organising for a bid for the freehold, to have any clear idea of their eventual contribution. The leaseholders' disadvantage is compounded in that he bears the full cost of his own valuer, and that of the landlord. The valuation guidelines laid down in Schedules 6 and 13 to the 1993 Act are highly complicated and do little to reduce the gap between the respective valuation positions of the two sides.
Leaseholders do not fully understand the valuation process and find it hard to accept the variations. The LVT hearing is, of necessity, also adversarial and does little to gain the confidence of the lay leaseholder in the procedures or the profession. This needs to be addressed in the simplification of the price to be paid and the means for it to be determined.
For valuation of unexpired terms of more than 100 years a simple procedure could be established based on a capitalisation of ground rents by a set formula or by analogy to the procedure for valuation of minor intermediate interests set out in paragraph 7(7) to Schedule 6, Leasehold Reform Act 1993.
For all other leases the present lengthy and confrontational LVT hearing could be replaced by one based on the "pendulum principle" where the LVT reaches its own conclusion on value without prior sight of either party's valuation, the determined price to be paid would be whichever of the two valuations was closest to that produced by the Tribunal. This would force valuers to be more objective in their bids but, not being fully objective, could lead to unfairness.
The optimum solution proposed is for valuation disputes to be determined by a fast-track process analogous to commercial rent reviews based on written submissions only. The submissions would be made to an appointed expert who would be duty bound to take account of the views expressed and to make a reasoned award. Using this as the standard route for such cases would give rise to a quicker process and would remove the confrontational nature of the hearing. A timetable could be specified for responses, perhaps following the Arbitration Act 1996. This would overcome the problems of delay and backlog, in removing the need for hearings; professionals would also be more willing to act as the appointed experts if they felt it could be fitted in as extra to their normal work. Leaseholders would no longer be subject to the daunting experience of a hearing nor intimdated by the experts employed by landlords. It would greatly speed up decisions and drastically reduce costs.
Whatever attention is given to the valuation process it is a matter of urgency for the limitation of the automatic right of appeal from the Leasehold Valuation Tribunals on 1993 Act determinations. It is understood that in excess of a third of all determinations are subject to appeals, or threat of appeals, by landlords to the Lands Tribunal. In many cases the appeal is a transparent ultimatum to force a higher price out of the leaseholders, than that awarded by the LVT, on threat of substantial costs from a successful Lands Tribunal appeal.
4.7.1 A statutory formula should be established for valuation of unexpired terms of 100 years and over.
4.7.2 LVT procedures should be replaced by single expert determinations based on written submissions.
4.7.3 Procedures for appeal from the LVT on 1993 Act issues should be rationalised with those of the 1996 Act, that is, no automatic right of appeal but only by leave of the LVT or the LT on new evidence or points of law. This will greatly relieve undue negotiating pressures on leaseholders and will not limit powers of action for responsible landlords assisting to argue a genuine case.
4.8 A major obstacle remains in any attempt at simplification of the valuation process, that of marriage value; this often makes up the greater part of the purchase price, or premium, and is the subject of the widest variations at negotiation. If marriage value is to remain part of the statutory procedure there would be advantage in fixing its distribution on a straight 50:50 basis, to avoid another area of dispute and to simplify the valuation rules in the Schedules. It is relevant to note that there has been only one LVT determination which departed from the 50:50 split.
However, if the proposed review of leasehold law is to be from first principles there may be merit in re-examining the issue of marriage value. In the majority of decided cases marriage value makes up well over 50% of the purchase price; proportions over 90% are not unusual (analysis of LVT determinations). This is a source of great irritation to leaseholders who view the marriage value as a windfall gain to the landlord that could not be obtained on the open market.
However, the comparison with open market sales is not entirely relevant in that statutory enfranchisement and lease extension is by compulsion and there is a case to be made that the unwilling landlord should not be deprived of the hope value of his asset to which he is entitled.
Notwithstanding the leaseholders' concerns it must be accepted that marriage value is real, representing the latent increase in value of the property arising from the joining of the landlord's and tenant's interests. There is no question, in all but cases of very long unexpired terms, that the value of the leaseholder's interest will rise as a result of the enfranchisement or grant of new lease; whether the leaseholder chooses to realise it not does challenge its existence. It is a share of this profit to the leaseholder that the landlord lays claim to as marriage value.
The confusion to the leaseholder is, perhaps, one of visibility. The value of the flat increases and the tenant has a choice to realise that profit or not; the landlord, in relinquishing his interest is forced to realise his portion of the profit immediately in the form of the payment of marriage value by the leaseholder.
In that neither party can release the latent profit without the other it is reasonable that it be shared, so long as reasonable procedures can be established for its assessment. Some improvement to present methods could be achieved in the fast-track LVT procedure set out in 4.7 above or there could, perhaps, be a statutory addition to the calculated value or premium after the fashion of a home loss payment under the Compulsory Purchase Code.
If marriage value is to remain there would be merit in clarifying the issue relating to the flats of non-participating leaseholders in a collective enfranchisement. It has been confirmed by LVTs that marriage value is only attributable to the flats of the participating leaseholders and this has raised disputes as to the hope value of the non-participating flats, that is the potential for future value arising from premiums for lease extensions.
This could be resolved in allowing landlords a statutory right of leaseback of the non-participating flats. Such a scheme would provide adequate compensation for landlords, and conversely, would in the case of an unpopular landlord encourage greater levels of participation in collective enfranchisement actions.
4.8.1 The division of marriage value be statutorily determined at a 50:50 division.
4.8.2 A right of leaseback be provided for landlords in respect of flats of non-participating leaseholders in collective enfranchisement.
4.9 It is necessary to fix a date for the valuation and the 1967 and 1993 Acts provide different requirements, each resulting in disadvantages to the respective parties. There is a need for a consistent approach or a fairer method.
The 1967 Act sets the valuation date at a definite date, that is the date of the Tenant's Notice. The 1993 Act provides, where the parties cannot agree, for the valuation date to be the date of agreement of documents or a date set by the LVT (usually the date of the hearing). It is all too easy to fail to agree documents in order to get the date postponed. With an inflationary economy and a diminishing lease it is clearly in the leaseholder's interest for the date to be fixed as early as possible in the procedure, for the landlord as late as possible. This is particular disadvantageous to the landlord of houses, particularly high-value houses, where no time limits apply, and it is specifically in the leaseholder's financial interest to serve his notice and then delay settlement as long as possible. The converse, of course, applies with the 1993 Act.
As well as establishing a commonality of valuation dates for 1967 and 1993 Act procedures there would be considerable merit in common application procedures, particularly in introductory to the 1967 Act of the 1993 Act requirement for the Tenant's Notice to specify the proposed purchase price (S13(3)(d), 1993).
4.9.1 It would be sensible to provide a single, consistent, procedure for applications for enfranchisement and lease extension for both houses and flats. This should include clear time limits for completion of action, for example, the valuation date could be fixed as the date of the landlord's counter notice, or, where no counter notice is served, a date not later than two months after service of the Tenant's or Initial Notice.
There is some attraction in the principle of payment of interest or other compensation as a deterrent to deliberate delays by either side, but this will require further investigation.
4.9.2 Amendment of the requirements of the Tenant's Notice (Leasehold Reform (Notices) Regulations 1997) to specify the proposed purchase price.
4.9.3 An additional approach, to speed settlement without interference with present valuation date provisions, could be to introduce into both 1967 and 1993 Act procedures a facility for "settlement offer" by the landlord, a "without prejudice" offer to the enfranchising leaseholder(s) to accompany the landlord's counter-notice as an inducement to an early settlement of the transaction. This would encourage an objective approach by the landlord who has the greatest incentive in a rising market to complete the deal. Where the offer is not accepted by the leaseholder(s) the process would continue as at present with the landlord's offer to be disregarded in future negotiation/LVT determination.
4.10 This is another area of uncertainty for leaseholders embarking on an application for the freehold or a new lease. The requirement for reasonableness, capable of determination by the LVT, is not generally seen as sufficient protection to leaseholders against overcharging (it will, of course, involve the leaseholder in addition legal expenses in challenging the costs at the Tribunal).
The Office of Fair Trading has prevented the RICS from publishing fee scales but there seems little reason why the costs should not be governed by fixed scales, capable of periodic revision by the Minister. For the valuer these could be based on an approach such as Ryde's Scale, for the solicitor on a scale of hours/hourly rates as determined by Minister (or LVT). This will provide certainty for the leaseholders and will serve to discourage the "overkill" of legal representation attempted by some landlords to discourage the leaseholders' actions.
A better solution may be provided by a requirement for the landlord's counter-notice to contain a quotation of anticipated costs, not to be exceeded without reasonable cause. The landlord would be required also to inform the leaseholder if the original estimate is likely to be exceeded, and the reasons for this, before it occurred. This would greatly assist leaseholders in seeking determination of landlord's cost at theLVT and would, at least, provide early warning to the leaseholder(s).
4.10.1 There is a need for further protection for leaseholders and transparency of dealing in the leaseholders' liability for landlords' costs. The introduction of fixed scales would be of assistance although there is an accepted difficulty in determining the appropriate levels, particularly with national variations.
4.10.2 An alternative could be a requirement for a fixed costs quote by the landlord in his counter-notice, not to be exceeded without reasonable cause, and still capable of determination by the LVT.
5.1 The above represents the matters considered to be the most significant issues of concern to leaseholders and landlords and other participants in the leasehold sector as requiring early reform; it is hoped that these issues will be included for wider discussion in the consultation exercise.
They, and other connected issues will be further refined through the newly established leasehold Reform Working Party to provide futher input to Ministers and officials.
Whilst the above is intended as a discussion paper rather than a set of answers there are a number of firm recommendations made for legislative and procedural reform:
6.1 Additional rights and obligations under planning powers or the re-opening of applications for Estate Management Schemes to ensure preservation of exteriors of buildings in circumstances where leaseholders assume rights of management. (3.2)
6.2 LVTs to have powers to approve lease variations (1987 Landlord and Tenant Act). (3.4.1)
6.3 All residential leases to be deemed to contain standard covenants and rights to licences (not supported by BPF). (3.4.2)
6.4 No manager to be permitted to hold leaseholders' funds without bonding. (3.5.1)
6.5 Leaseholders to have rights of access to bank statements and other information relating to their reserve funds. (3.5.2)
6.6 Provision of right of first refusal to leaseholders of houses when the superior interest is being sold. (not supported by BPF). (3.6.1)
6.7 Regulation of managing agents; obligations for disclosure of commissions; registration of managing agents. (3.7.1)
6.8 Provision of a quicker and more accessible dispute resolution service, as a stage prior to LVT. New LVT procedures for resolution of disputes through written representations for consideration by one member of the LVT or other accredited expert. (3.8.1 - 3.8.3)
6.9 Provision of a leaseholders' right to manage, subject to appointment of a professional managing agent for buildings comprising six flats or more and safeguards for landlords. (3.9.1 - 3.9.2)
6.10 Greater controls on landlord's insurance brokering arrangements, with leaseholder's rights to insure elsewhere. (3.10.1)
6.11 Payment of ground rent to be conditional upon being demanded; arrears not to be pursued without the prior demand. (3.11.1)
6.12 Removal of rights for forfeiture and possession for residential tenure, subject to development of alternative safeguards for landlords. (3.11.2)
6.13 Extension of right to appoint a manger to be extended to leaseholders of registered social landlords. (3.12.1)
6.14 Removal of the low-rent test as a criterion for enfranchisement; redefinition of long leases to 35 years. (4.2.1)
6.15 Provision of enfranchisement and security rights to 1967 Act 50-year lease extensions. (4.3.1)
6.16 Standardisation and revision of the residence test. (4.4.1 - 4.4.2)
6.17 Simplification of qualification criteria for collective enfranchisement; introduction of a right to participate. (4.5.1 - 4.5.2)
6.18 Direct procedural route from collective enfranchisement to Commonhold ownership. (4.5.3)
6.19 Increase in the proportion of the non-commercial element in qualification for collective enfranchisement; consideration of link headlease arrangements. (4.6.1)
6.20 Statutory valuation formula for leases of 100 years and over unexpired. (4.7.1)
6.21 New LVT procedures for determinations through written representations for one member of the LVT or accredited expert. (4.7.2)
6.22 Appeal to Lands Tribunal on valuation determinations of LVT to be only by leave of LVT or LT. (4.7.3)
6.23 Re-examination of assessment of marriage value; fix distribution at 50:50. (4.8.1)
6.24 Leaseback option for landlords of non-participatory leaseholders. (4.8.2)
6.25 Standardisation of application procedures for 1967 and 193 Act enfranchisement and lease extension, clarification of valuation dates with cleasr time-limits for completion. (4.9.1)
6.26 Requirement for inclusion fo poposed purchase price in Tenant's Notice. (4.9.2)
6.27 Fixed scales for landlords' costs or cost quote to be provided in counter-notice. (4.10.2)