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Residential Leasehold Reform In England and Wales Residential Leasehold Reform in England and Wales - A Response to the Consultation Paper by the Leasehold Reform Working Party

1. Terms of Reference

The Leasehold Reform Working Party was constituted in the spring of 1998, with the support and approval of DETR officials; its agreed terms of reference were to act as a representative body for parties interested in leasehold reform and to convey advice and views to Government.

2. Membership

Ron Armstrong - Chairman
David Bogle/Ron Gregory - Association of Retirement Housing Managers
Anthony Essien - LEASE
Stella Evans - Coalition for the Abolition of Residential Leasehold
Gerry Fox - Fineman Lever/RICS
Kathryn Greig - Association of Tenancy Relations Officers
Muriel Guest-Smith/Phillipa Turner - Federation of Private Residents Associations
Peter Haler - LEASE
David Hewett- Association of Residential Managing Agents
Fiona Hoyle - Council of Mortgage Lenders
Richard Innis - South-East Surveys/RICS
Richard Lambert - British Property Federation
David Marcus - Jay, Benning & Peltz
Andrew McKeer- Capital Property Management
John Paterson - London Forum of Council Leaseholders
Peter Ward - Trowers & Hamlins

We are grateful for specialised input to sub-committees from the following :

Charles Boston, Roland Cullum, Tim Curran, Denise Field, Anthony Griffiths, Geoff Holden, Peter Robinson, Nigel Ross, Duncan Salvesen, Gwyneth Taylor

3. Summary

The Working Party welcomes and supports the Government's proposals, as set out in the consultation paper for the reform of leasehold legislation sufficient both to solve many of the problems presently occurring and to introduce new rights and standards of management.

Chapter 1

* we note the Governments clear appreciation of present problems but urge the bringing forward of proposals for common-ownership of flats as an alternative to leasehold.

* we see no justification for the exclusion of tenants of local authorities and registered social landlords from rights presently available or proposed and recommend the introduction of a level playing field for all leasehold tenants, irrespective of their landlord.

* the consultation paper does not include proposals relating to lease extension or enfranchisement of houses and we hope the Government will take this opportunity to address present anomalies.

Chapter 2

* the Working Party supports proposals for the easing of qualification requirements for collective enfranchisement. We would ask the Government to re-examine the justification for a residence qualification although we concede a need for it in terms of further management . We welcome the proposed increase in the percentage of the non-residential element in the building but see a better alternative in a lease-back arrangement which could operate without any limitation on the commercial parts.

* we propose the valuation date to be fixed as the date of the landlords counter-notice; we see no justification for the continued exemption of resident landlords from collective enfranchisement.

* on valuation issues we accept the Governments position on marriage value but propose a statutory limit of 100 years above which marriage value shall be deemed not to accrue; the marriage value should be divided equally between landlord and tenant. We make proposals for the simplification of the valuation process and cautiously support the principle of prescribed yield rates and relative values, subject to further research.

* we found a statutory limitation on landlords costs to be impractical and recommend a statement of proposed costs by the landlord in his counter-notice.

* the Working Party expresses major concern at present delays in the functioning of the Leasehold Valuation Tribunals and calls on the Government to carry out a radical review of the system and its support mechanism. We make proposals for a fast-track procedure to operate as an alternative to a fully hearing.

* the Working Party found no practical means of providing a leaseholders right to participate in an action for collective enfranchisement, but proposed the service of a notice to ensure all tenants are aware of the proposals in time to participate.

* we make proposals for a model ownership structure.

Chapter 3

* the Working Party commends the Government for introducing proposals for a tenants right to manage; we recommend that this should be a no-default right, exercisable by a simple majority of qualifying tenants, but subject to no more than 25% of the tenants opposing the proposal; the scheme must be as simple as possible otherwise it will be difficult to operate.

* The tenants should step into the landlords shoes in all matters other than receipt of ground rent and have full management authority.

* the Working Party strongly recommends the right being subject to a clear and unequivocal structure, set out in regulations, governing the duties and responsibilities of the parties, the tenants= company etc; we do not support any variation in duties to be assumed by the tenants.

* we are concerned as to the practicability of self-management without some concomitant reduction in individual tenant=s rights; the assumption of the rights of management requires a high level of responsibility by tenants, sufficient to sacrifice some individual rights for the benefit of the whole. We propose arrangements for amendment of defective leases and the approval of yearly budgets, with removal of the right of challenge of reasonableness. Although this seems drastic, we are convinced that the right will not be operable without the proposed changes.

* the right to manage should be available to tenants of local authorities, registered social landlords and resident landlords.

* the Working Party makes proposals for notice procedures.

Chapter 4

* the Working Party strongly supports the principle of regulation of management. This should include all managers of property, landlords, tenant managers and the public sector as well as professional managing agents. We make proposals for protection of tenants' monies and for mandatory application of approved Codes of Conduct.

* we found difficulties in finding satisfactory means of controlling insurance abuses and, pending further approaches to the insurance industry, make proposals for greater transparency in declaration of commissions and other renumerations.

* we set out a full proposal for a framework for regulation and commend this to the Government.

Chapter 5

* we express concern at the remaining inconsistencies in leasehold legislation, most notably the present denial of certain rights to the pubic sector leaseholder and seek that such tenants be included in the rights of first refusal and appointment of a manager under the 1987 legislation.

* we strongly support proposals for enfranchisement and other rights for leaseholders of houses which have previously extended leases under 1967 legislation, and for rights of first refusal for tenants of houses.

* the Working Party is concerned at present abuses of the forfeiture procedure but acknowledges the need for a means for a landlord to pursue breaches, including arrears. We make detailed proposals for a fast-track procedure, as an alternative to forfeiture, offering greater protection to tenants whilst pursuing the landlord=s rights.

* we propose the raising of the cost limit for statutory consultation on major works to 100 per flat but recommend that the consultation also include works of improvement.

The Working Party welcomes this opportunity to comment on the Governments proposals and remains grateful of officers of the DETR who attended and advised our meetings.

Chairmans Introduction

The Working Party and its Sub-Groups, with a membership from a wide variety of interested organisations, is the latest attempt to harness the forces pressing for reform of the system of ownership currently operating in England and Wales in relation to flats. No other country in the Western World still has a system like our leasehold ownership and however helpful and well-intentioned is this latest in a long series of amendments to our system, it will not solve the fundamental problem. To quote from the original 1984 Report from the Building Societies Association - the landlord-tenant relationship is incompatible with true home ownership. The Working Party therefore supports the implementation of a commonhold system; the BSA in 1984 called for the adoption of the New South Wales Strata-Title package and the Government will be aware of the huge merits of using well-tried systems founded in English law.

The Consultation Paper is, however, a worthy document; it may be only sticking plaster but it is good quality sticking plaster, written in straightforward language and backed by a thorough knowledge of the problems gained by the constructive participation in the Working Party meetings of DETR officials.

The rules on Collective Enfranchisement are certainly heading in the right direction of increased user-friendliness with a fair balance of landlord/tenant rights, the Right-to- Manage proposals will, to be successful, need to be strictly prescribed in terms of permitted schemes and the regulation of managing agents will have to be universal and cover all types of manager including tenant-managers. The Working Party is concerned, however, at the apparent failure to converge the rules governing public sector leaseholders. Aside from any key characteristics demanded by local authority legislation, the approach surely ought to be that ownership is ownership and that public sector leaseholders should so far as possible be treated as if they were in the private sector.

All in all, the Working Party believes that the Governments direction is right but its objectives must be clearly seen as ameliorating the current rules only as a short/medium term solution on the way to a proper ownership systems for flats in England and Wales. The members of the Working Party are ready to assist in this urgent process

Chapter 1 - Problems and Progress

1. Whether or not one agrees with the Governments view expressed in the consultation paper that leasehold is a fundamentally unsatisfactory tenure, particularly for flats (a view which the overwhelming majority of the Working Party strongly supports), the need for its reform is incontrovertible. In addition the system is not widely understood with tenants generally unappreciative of their contractual rights or their obligations to the landlord and the diminishing nature of their asset and insufficient numbers of the legal and surveying professions able to provide sufficient expert advice and guidance in this area (something their professional bodies ought to address). All this has resulted, in the worst instances, of virtual harassment of leasehold tenants and in general to difficulties in mortgage lending.

Whilst the measures proposed in the Paper, and discussed below, will do much to curb the abuses and radically empower leaseholders by giving them greater control over their homes, there remains a pressing need for a legal basis of flat ownership which reflects and responds more accurately to the aspirations of modern British society. The Working Party strongly urges Government to bring forward as a matter of urgency proposals for a common-ownership tenure.

2. The Working Party remains concerned that any proposals must be developed not only in close conjunction with the property industry and the other participants in the leasehold sector but should also take advantage of the wealth of experience offered in other countries operating common ownership systems. The proposals contained in the draft Commonhold bill of July 1996 were, in the main, unsatisfactory and insufficiently researched, with no reference to existing ownership structures outside the UK . There would be considerable merit in learning from systems presently functioning elsewhere, where the problems and teething troubles had been already resolved.

Whilst there are some advantages in common-ownership systems operating in the USA the Working Party is more attracted to the model of Strata-title operating in Australasia, South Africa and the Pacific and best exemplified by the New South Wales and the Queensland legislation. Whilst this paper is concerned with the shorter-term repair of the English leasehold system, the working Party urges Government to bring forward proposals for a common-ownership legislation structured around Strata-Title and Community Association ownership (as originally proposed by the Building Societies Association in its 1984 Report). The Working Party is anxious to assist both Ministers and officials as much as is required in the research and drafting of such proposals.

3. The Government, in the paper, has referred to difficulties experienced by leasehold tenants of local authorities and registered social landlords following acquisition of flats through Right-to-Buy arrangements although quotes unattributed research to indicate that Athe great majority of RTB leaseholders consider their purchase to be value for money@. The Working Party, on the evidence it has seen does not consider this an appropriate conclusion. It is assumed that the research referred to is that produced by the School of Advanced Urban Studies in 1994 which, inter alia, concluded that less than 2% of RTB tenants had problems with mortgage red-lining and only 5% had troubles with service charges. The findings of this report disregarded the conclusions of the Association of Metropolitan Authorities report ARight to Buy but no Right to Sell@ of October 1993 and was strongly criticised by the London Borough Association as unrepresentative, being based on a sample of only 835 RTB tenants, 84% of whom lived in ground, first or second floor flats. The Working Party express concern that the position of the local authority or registered social landlord tenant is presented in the Consultation Paper in artificially favourable terms in order to justify their exclusion from proposals for change.

It is the view of the Working Party that proposals in the Paper do not adequately address the particular difficulties faced by the tenants of social landlords, housing associations as well as local authorities, and including those Asecond generation@ tenants who purchased ex-RTB flats on the open market. There are major differences in management practices between the private and public sectors but lesser legal rights of remedy for the local authority and RSL tenant.

The Working Party considers public sector tenants to be severely disadvantaged and can find no logical reasons, in most cases, for their exclusion from rights enjoyed by or proposed for tenants of other landlords. There is considered to be a substantial case for the establishment of a level field for all leasehold tenants, with equality of rights and remedies, irrespective of the status of the landlord. This submission includes proposals for provision of additional rights to tenants of social landlords to remove their second-class status in the sector.

4. The Working Party is sensible of the proposals set out in the consultation paper 'The key to easier home buying and selling' to improve the purchase and conveyancing procedures for residential property, including leasehold houses and flats. The Working Party welcomes the Government=s recognition that there is a need to ensure that those buying leasehold property understand exactly what it is they are buying and the obligations they take on in so doing. Individual organisations represented on the Working Party will have responded to the Consultation Paper on the proposals and no further comment will be made here other than to express support for Government in addressing the problems.

5. The Consultation Paper does not include any proposals relating to applications for new leases under the 1993 Act or the enfranchisement of houses under the 1967 Act; nor does it address the problems arising in newly acquired blocks of flats. The Working Party considers there to be issues requiring resolution, particularly in establishing a commonality of any residence qualification for these rights with collective enfranchisement and the need for a common valuation date. It is hope that these issues will be addressed in further consultations.

6. This response follows the section headings of the Consultation Paper and makes additional proposals.

Chapter 2 - Collective Enfranchisement of Blocks of Flats

1. Pending the introduction of a Right to Manage, collective enfranchisement under the 1993 Act provisions remains the principal route for tenants to gain control of the building and, at the same time, address their diminishing assets. Whilst the legislation does function and has benefited substantial numbers of tenants, considerable difficulties have arisen in its application, most of which have been addressed in the Consultation Paper. The Working Party generally welcomes the proposals, directed toward the strengthening of tenants= rights and the proper protections and recompense for landlords.

The Qualifying Rules

2. Qualifying Tenants - The Working Party agrees that the right should continue to be restricted to long leasehold tenants and considers the present definition adequate. It is fully accepted that legislative means must be found to prevent limitation of tenants= enfranchisement rights through the company flats route although this must be considered in context; the issues of the terms of the original lease and the subsequent assignment must be taken into account. In some cases the existing lease will be entered into in the name of the company and its terms restrict assignment other than to another company; it is felt by the Working Party that such practices should not be interfered with, not only in that the lease was freely entered into but also because of the implications of retrospective amendment of contract terms which might have affected the premiums originally paid.

What can and must be addressed however is the practice of landlords requiring leases presently in the name of an individual to be assigned only to companies. It is proposed that legislation provides that a landlord=s refusal of consent to assign, on the ground that the assignee could subsequently enfranchise, would be by statute deemed to be unreasonable plus standard lease terms to provide that assignment not be unreasonably refused. Legislation could provide a statutory test of unreasonableness which it would be for the court to enforce, but not to decide.

This proposal would not only permit assignments between individuals but also, where the lease terms did not prohibit, the assignment of company leases to a director or shareholder able to fulfil a residence test, if such a test is to remain.

3.Qualifying Buildings - In the context of the present legislation, the Working Party fully supports the proposed increase in the proportion of the non-residential element to 25% and considers this to be the maximum acceptable in terms both of relative values and future management. It will mean that a typical urban development of a four-storey block, with shops on the ground floor, would qualify.

However, we recognise the remaining difficulties in attempts to enfranchise part-commercial property, particularly in instances of prestigious retail or other businesses comprised in the building. The value of the non-residential parts may be sufficiently high as to discourage enfranchisement, where the landlord declines to take a leaseback. We addressed the question of a mandatory leaseback, but did not favour this as being unduly restrictive where a landlord might reasonably fear a deterioration in the value of the commercial parts arising from future neglect in maintenance of the remainder of the building. This introduces alarming prospects of litigation between commercial tenants and the tenant-freeholders. It must also be acknowledged that the motive for enfranchisement will seldom include a desire to manage commercial property and the ideal solution is to formalise a means of separating the residential and non-residential elements.

The joint LEASE/BPF Discussion Paper of May 1998 proposed a leaseback arrangement to enable separation of ownership and management of the two elements.

This envisaged the leaseholders forming a management company to which the freeholder granted 999 year headlease of the entire building at a peppercorn rent; the leaseholders= company would then lease the non-residential element back to the freeholder on a similar basis. This would provide all relevant benefits to the leaseholders while retaining for the freeholder the influence over upkeep of the exterior (in his position of overall landlord) and full management rights over the commercial element.

Although that proposal might appear unwieldy it would fully satisfy both parties, it would not require the residential tenants to raise large sums to purchase an element of the building they did not want and would allow the landlord to preserve a valuable commercial investment. The major attraction of the proposal is that it would remove the need for any restriction on permitted non-residential use and provide enfranchisement rights to virtually any residential tenants in part-commercial buildings, whatever the respective proportions. There is no reasonable basis for restricting enfranchisement rights simply for administrative purposes and the Working Party urges the Government consider to further consider the leaseback proposal; the apparent complication of the process is not sufficient reason to deny enfranchisement rights to tenants whose buildings fail to fit a restrictive criterion.

In consideration of the proportion of flats in the building to be held by qualifying tenants, the Working Party saw merit in a reduction from two thirds (66%) to 60% in order to avoid the common difficulties relating to the proper proportion for a house in five flats (where the 66% actually has to constitute 80%). However this difficulty will be removed through the later proposal for the reduction of the required number of participating tenants from two-thirds to one-half. Subject to this, the Working Party concurs with the necessary minimum of qualifying tenants remaining at two-thirds.

4. Residence Test - Before considering the details of the residence test the Working Party believes that the Government should examine the principle on which it is founded. It is generally assumed that the purpose of the qualification was to restrict the ability of absentee lessees to acquire the freehold with the intention of granting rights to the genuine home-owner rather than investors, but it may be appropriate to consider, in the context of the wider proposals for leasehold reform, the justification for this. Any consideration of the enfranchisement process should address the limiting effect of the residence qualification and there is a case to be made for its abolition in entirety, particularly in relation to central London blocks.

The Working Party feels that a justification for a residence test could be in relation to future management and has concerns as to arrangements in cases where a majority of tenants are non or only partially resident. There are possibilities that the genuine home-owners will find themselves in a minority in the management and functioning of the building with little input to decisions on service charges etc although, to the best of our knowledge this has not proved to be the case in acquisitions under the Right of First Refusal where there was a minority of residents. It may be that adequate safeguards will be developed within a statutory resident management structure (see below) sufficient to provide safeguards for the genuine resident but, pending development of regulated management, the Working Party concurs with Government=s view that the test should not be abandoned at this stage.

The Working Party supports the proposal for residence 'on the date the notice is served' but would welcome, in the legislation, some greater guidance on what constitutes Aresidence@ and a more helpful definition of Aonly or principal dwelling@, to avoid a flurry of Court actions by landlords seeking to challenge the new rules.

It is felt that the proposed amendment to the alternative test of eighteen months residence in the past five years may be restrictive in limiting qualification to only recent occupants and not a sufficient reduction in the qualification requirement. The amendment would remove from qualification tenants who qualify under the present rules of three years in the last ten years but who have not lived in the building for the past five years. It is suggested that the test be twelve months in ten years, that is, the applicant should be resident at the time of the notice or have been resident for periods totalling twelve months in the past ten years

The Working Party strongly recommends that whatever criterion is established as the residence qualification for individual tenants in a collective enfranchisement application should also be the qualification for tenants seeking a new lease under Part 1 of the 1993 Act or for enfranchisement of houses under the 1967 Act. We see no case for the present differential in qualification requirements between the three cases and urge the Government to standardise the process with one common residence qualification.

5. Other Group Tests - The Working Party supports the proposed reduction of the minimum proportion of participating tenants from two-thirds to one half. This will do much to facilitate collective enfranchisement actions in larger buildings where it has often proved difficult to assemble the requisite two-thirds. It will also reduce purchase prices, arising from the principle that marriage value accrues only to flats of participating tenants (Schedule 6, para 2, LRA 1993).

6. Resident landlords - The Working Party finds little justification for the exemption from the right of collective enfranchisement of smaller converted properties with the landlord, or a member of his family, resident on the premises (S10(1) Leasehold Reform Act 1993). The landlord=s presence in the building, as a fellow lessee, should not detract from the rights of the other lessees, who will own the majority of the equity in the building, to acquire the freehold.

Valuation

7. The Working Party acknowledges and shares the differing views within the leasehold sector on marriage value and makes no statement or expression of view on the issue; for the purposes of this response the majority has accepted the Government=s stated position that marriage value exists in the market and we have restricted our comments to its assessment and division.

However, in cases of very long terms unexpired where there is no substantive reversionary value to the freeholder, we consider there would be considerable benefit to all sides in a statutory limitation of marriage value by reference to years unexpired on the lease. The accepted definition of marriage value refers to the relative market values of the flat with its present term and the flat with the benefit of a new lease or share of the freehold. There is established market evidence that the potential for increase in value will, according to the local market, simply not exist in any realisable form beyond a certain present term, say between 70-100 years dependent on location.

Another problem has arisen from the interpretation by Tribunals of the phrase in paragraph 4(2) of Schedule 6 under Aunder the control of@ on the basis that there must be some purpose in the words being inserted. This has led to a number of Tribunals determining that there is marriage value where there have been terms in excess of 100/110 years on the basis that the control of the building has a premium value, despite the fact it is contrary both to market effect under the statutory guidance and marriage value given in Schedule 6 and 13 of the 1993 Act. The replacement with one word Aowned@ would make it clear that one is concerned only with the values of the participating leases and would remove the need for Lands Tribunals to look for hidden meanings.

It is therefore proposed that it be established by statute that marriage value be deemed not to accrue beyond a certain specified present term unexpired and that the residual value be determined by a statutory formula based on the value of the ground rent.

It is acknowledged that there may be some regional variations in market view of the relevant term but our conclusion is that one cut off point can be established with nation wide application, namely those leases which have more than 100 years unexpired.

Such a statutory provision will provide full transparency and will reduce professional costs to both sides.

8. Similarly, we consider there needs to be clear statutory provision for the division of the marriage value. The present provision of Aat least@ 50% to the landlord raises opportunity for costly professional dispute, with little result. In approximately 190 LVT determinations to date on 1993 Act valuations there has been only one determination departing from a straight 50:50 division between landlord and tenant. However, the Lands Tribunal has, on occasion, departed from the 50:50 principle in the division of marriage value accruing from a very short unexpired term of less than ten years.

We considered whether there was a case for a different approach for short leases but concluded that all terms within the criteria in paragraph 6 above should be treated the same. There is considerable merit in a division of marriage value in direct ratio to the parties= interests, but it was felt that this would further complicate, rather than simplify the valuation process, making the establishment of the relative values of even more importance in that the division as well as the amount of marriage value hung upon it.

The Working Party therefore recommends that marriage value should be subject to a statutory division of 50:50 in all cases, other than where the lease had expired when all the marriage value (if any) should accrue to the landlord.

9. The Working Party reached no conclusions on the inclusion or otherwise in the purchase price of hope value or insurance commission and was undecided on the proposal put forward by the LEASE/BPF joint paper of mandatory leaseback to the landlord of flats of non-participating tenants. It was agreed that this would resolve the issue of hope value but there was no consensus on the desirability of the proposal.

Both issues require further examination.

10. It is generally accepted that the task and costs of valuation would be much reduced through the introduction of prescribed discount rates and relative leasehold/freehold value tables of flats; such prescribed rates could be provided through regulations to enable periodic revision.

However, the Working Party was not persuaded that sufficient reliable evidence exists so as to guide the construction of such tables, particularly in relation to regional variations. This is primarily a Central London issue where, with the values involved, a point of discount rate can make substantial differences in value. This is seen as much less of a problem elsewhere where the discount rates employed by LVTs vary little. Although numerous models and commercial tables are available, the Working Party would wish to see more detailed research data. It was agreed, subject to satisfactory research, that prescription of discount rates and relative values may be a practical possibility, but that the system would need to build in allowance for regional variation; that degree of variation would again depend on research data.

The Working Party therefore cautiously welcomes the consideration of prescribed discount rates and relative values, accepting the degree of rough justice likely to arise, but recommends that DETR commission specific research into both issues; subject to availability of sufficient data to produce reliable regional trends the Working Party would wish to further examine the issues.

11. Landlords' Costs - The Working Party agrees that it is not appropriate for landlords to bear their own costs in actions under 1967/1993 Acts but that some means should be found to limit abuses of cost recharging. Actual artificial limitation of costs, by prescribed scales, was not found to be practical.

The Working Party preferred the advance notice of costs, with a limitation on excess and recommends the following: that the landlord be required to state in his Counter-Notice his indication of his likely costs; the existing requirements for reasonableness to be determined by the LVT to remain.

Whilst this procedure will not, necessarily, reduce costs it has three attractions. It would place the tenants on notice of the costs aspect of their action, would limit the ability of landlords to increase costs, due to lengthy and abortive negotiation or dispute, beyond the original estimate and could allow the reasonableness of the costs to be determined by the LVT at the same hearing for the determination of the purchase price or premium.

12. Valuation Date - The present procedure of the 1993 Act requiring the valuation date to be agreed or fixed by the LVT is generally considered unsatisfactory and can result in the price altering significantly in a rapidly moving market. It is strongly recommended that a specific date be established for the valuation date and that this should apply to all enfranchisement actions under both the 1967 and 1993 Acts. The 1967 Act specifies the date of the Tenant=s Notice as the valuation date but this can equally prejudice the landlord if the tenant delays. The Working Party therefore recommends that a common valuation date be specified, to be the date of the landlord=s Counter-Notice or, in the case of a failure to serve Counter-Notice, the final day on which the Counter-Notice should have been served (or a fixed period of two months after the date of the initial or Tenant=s Notice).

13. Intermediate Leases - Although not referred to in the Consultation Paper the present rules relating to the valuation of intermediate interest in Schedules 6 and 13 are considered to be in need of revision.

14. Right to Vary Service Charges Proportions - It would be useful if the procedures for collective enfranchisement were to include a statutory provision for amendment of service charge percentages in cases where the enfranchisement related to part of a building or one block on an estate. Where, at present, such purchasers occur, this throws out the service charge percentages payable to the landlord by the remaining tenants in that, without the enfranchised building, the percentages no longer add up to 100%. The only remedy is the variation of all the leases, by consent of the tenant or application to the court under S37 Landlord and Tenant Act 1987.

A statutory provision could provide an automatic reallocation of percentages.

The Dispute Resolution Process

15. The Working Party has based its responses in this paper on the assumption that the present difficulties in structure and operation of the Leasehold Valuation Tribunals will be resolved and that they will be capable of providing a robust, speedy and efficient mechanism for dispute resolution. The 1993 and 1996 legislation greatly expanded the role and workloads of the LVTs without any radical restructuring or major addition to their administrative back up; we recognise in the consultation paper further moves in this direction. It is imperative that the Government appreciates that unless the LVTs are able to discharge their functions properly, and are seen to be able to so do, there is a risk that any reformed leasehold structure will not work.

The present procedures for obtaining determinations from Leasehold Valuation Tribunals are causing problems through both the very long periods for the decision and the associated professional costs. Whilst the quality of decisions from the LVTs are not criticised it must be considered a denial of justice for a twelve month wait for a hearing from date of application plus a further two to three months for the issue of the determination. It seems clear that, with the enormous extra workload and responsibilities visited upon the LVTs by the provisions of the Housing Act 1996, the system is creaking and in urgent need of major overhaul. The Working Party is aware that DETR is presently examining the functioning of the Tribunals in the quinquennial review and has commissioned research into their operations; however, we strongly recommend a more radical review of the machinery for settlement of residential leasehold issues with a willingness by Government to consider alternatives.

For the purposes of this response the Working Party simply makes proposals for the improvement of present procedures and for the introduction of a supplementary fast-track alternative, but will consider the issues and make further recommendations.

16. Much of the delay, and professional expense arises from the difficulties of assembly and exchange of evidence between the parties; adjournments are frequently requested to deal with late submission of papers and there are no formal requirements for exchange of submissions. Whilst some Tribunals, with the London LVT taking the lead, have issued guidance notes to the parties this is by way of request rather than direction. The Working Party proposes that existing procedures be strengthened by statutory requirements for submission and exchange of evidence, (with late submission considered an abuse of process), with Tribunals given powers to set time limits on such submissions.

17. In the majority of cases of LVT determined disputes under the 1993 Act the issue is primarily technical, argued between valuers with little requirement for legal argument or input from the parties. It is proposed that an alternative procedure be instituted for determinations without hearings on written evidence only. This will reduce difficulties in getting parties together for the public hearing and there is little reason why such determinations should not be made by individual members of the Tribunal panel, acting alone or by individual consideration of the issues and joint decision. Again this will drastically reduce timescales in organising panels, venues etc as well as significantly reducing professional appearance fees for the parties.

The fast-track procedure could be used at the choice of the parties, as a faster, cheaper alternative to the public hearing; it would be supplementary to the standard systems and is not proposed as a replacement process.

18. The Working Party strongly supports the Governments proposal that appeal from the LVT to the Lands Tribunal on 1967/1993 Act determinations be subject to leave to appeal from the LVT, or the Lands Tribunal, in line with 1996 Housing Act provisions.

Leaseholders Right to Participate

19. However desirable in practice, the Working Party acknowledges the difficulty of legislating for an individual right to participate in an action for collective enfranchisement. It does seem desirable to at least require that all qualifying tenants in a building be made aware of proposals for enfranchisement when they can then make their own approach for inclusion. The Working Part feels that such notice will encourage transparency and, to an extent, substitute for the need for an enforceable right to participate.

It is proposed that, prior to the service of an initial Notice, the Nominee Purchaser should serve a notice on all qualifying tenants, including non-residents, simply informing them of a proposal to serve an Initial Notice, the identity of the Nominee Purchaser, and the current participating tenants; the Initial Notice should not be served until the expiry of a set period, say one month, from service of the notices on the non-participants. Information on the non-participants will be available through the existing discovery procedures of S11, 1993 Act.

In that the notice is simply information no penalties or responses are proposed but the date of service of the notice should be noted in the Initial Notice.

Model Ownership Structure

20. Many attempts at collective enfranchisement have run into difficulties due to inadequate advice or commercial experience in setting up the ownership structure by which the acquired freehold is owned and managed. Unsuitable company models, bought off the shelf with only generalistic memorandum and articles, provide little guidance to practical management and seldom any workable dispute resolution procedure within the company; confusion over distribution of voting rights also causes difficulties.

The Working Party acknowledges the Governments wish to simplify the enfranchisement process and not to introduce new restrictive procedures; nonetheless, we strongly recommend the formulation of a model ownership structure, to be applied in cases of collective enfranchisement. This will not prove restrictive but will considerably assist tenants and their legal advisers during the process and contribute to satisfactory management in the future.

This issue is addressed later with proposals for a statutory structure arising from the proposed Right to Manage. There would be considerable merit in common models for all tenant-management companies; this, of course, could provide a precursor to Commonhold ownership.

Chapter 3 - Leaseholders Right to Manage

1. The Working Party strongly supports the principle of a leaseholders right to manage and welcomes the Government=s initiative in the proposal. There is little doubt that this will, in itself, resolve many of the present landlord-tenant conflicts and will effectively provide rights for the tenants in proportion to their greater equity in the building without the need for the capital outlay required in enfranchisement. It should be available to all leasehold tenants including tenants of local authorities and registered social landlords.

The Right

2. It is envisaged and recommended that the right be a no-default right, exercisable by the appropriate proportion of tenants without the requirement for proof of any shortcomings by the landlord; it should be a right available to tenants without question.

3. The tenants, through a company, would step into the landlords shoes in all matters save for receipt of the ground rents and the ability to vary leases (subject to special circumstances below). The tenants= company must be in a position to enforce service charges through possession proceedings, to set and levy service charges and to manage, repair and maintain the building. In fact the tenants will require greater rights than the landlord if they are to be able to manage the building effectively in that they must be in a position to remain solvent through ensured collection of charges and to be able to raise money through borrowing for major repairs and improvements. It is proposed that this can only be achieved through statutory provision for amending leases to remove obstructions to sound management and procedures for agreeing service charges without individual rights of challenge. These two issues are examined later.

It is proposed that the right be a statutory right to take over the entire management role of the landlord and the Working Party strongly disagrees with any prospect of variation, the tenants choosing to take on some of the landlord=s duties but not others.

4. It is considered crucial to the operation of the right that the duties, rights and obligations to be assumed by the tenants be unequivocal and not open to subsequent dispute; both sides must be absolutely clear as to what is being given up by the landlord and taken on by tenants. The Working Party strongly recommends that this can only be achieved through imposition by regulation; the regulations, to be subject to periodic revision, will contain a schedule of what is comprised in the right, the specific duties, rights and obligations to be transferred. This will not only aid clarity but will also give statutory authority to the transfer of, for example, the landlord=s statutory duties relating to health and safety. (The Working Party will draft proposals for the schedule, in line with proposals for regulation of management, to follow this paper).

5. In principle, pending further detail, the right will provide the tenants authority for:

1. all day-to-day management decisions, responsibility for general maintenance works, major works of repair and improvement to all residential parts of the building and all common parts
2. all of the landlords statutory responsibilities for health and safety, and all other obligations under the Housing and Landlord and Tenant Acts, including notifications and consultation
3. the pursuit and remedy of breaches under the leases; including arrears of service charges and rents, up to and including proceedings (or such other remedy as is introduced) for payment or specific performance.
4. the recovery of legal and other charges from the tenants, the collection of service charge monies and of ground rent (on behalf of the landlord).
5. entering into, managing and terminating contracts relative to the management of the building
6. arranging and maintaining the insurance for the building.

Other than proposals below for amendment of detective leases, it is not proposed that the tenants should assume responsibility for approval of general variations to leases.

Qualifying Rules

6. Whilst the right to manage is analogous to collective enfranchisement in some areas the two rights are different and it is not considered appropriate to provide common criteria for qualification in entirety, although some points will be similar.

7. Qualifying buildings - we concur with the Governments proposals that the right be limited to long leaseholders who comprise two-thirds of the tenancies in the building. With this majority of leasehold tenants there seems no objective justification for the exemption of local authorities or of registered social landlord controlled properties; if the building is substantially let on leases it should qualify irrespective of the status of the landlord. Similarly, the Working Party can see no justification for exemption for resident landlords; why should the landlord=s residence on the premises provide lesser rights for his tenants than those of an absentee?

We can find no compelling arguments to justify the exemption of local authorities, registered social landlords, or resident landlords from the proposals for a tenants= right to manage.

It is proposed that the right-to-manage should relate to residential parts and common parts of the building only and therefore will not extend to the management of any commercial or otherwise non-residential parts; it is therefore our proposal that there be no limit to the non-residential part of the building in terms of qualification. All buildings will qualify, where there are the requisite two-thirds qualifying tenants, irrespective of the proportion of non-residential area, with the right-to-manage to exclude the non-residential parts.

8. Qualification for the right - we concur that the collective enfranchisement rules excluding tenants owning three or more flats on a business lease should apply here. We can find no justification for any form of residence test. The long-term management of the building is better addressed through an imposed and regulated company and management structure. There is no compelling reason to assume a lesser interest in the management of the building by those with a substantial investment in it but who choose, or are required, to only live there on a partial basis or to let the flat.

It is proposed that the right be available to a simple majority of the qualifying tenants (subject to also representing a majority of flats in the building), so long as no more than 25% of the remaining qualifying tenants are in opposition.

Whilst we would wish to see a simple procedure, with the right available to only a simple majority, we acknowledge the practical impossibility of tenant-management in the teeth of a concerted opposition within the building. This could be dealt with in requiring a two-thirds or three quarters participation but this could militate against tenants who were unable to obtain such a high level of support from a generally apathetic, or non-resident, residue of tenants

The Nominee Manager

9. As with the duties of management, the Working Party strongly recommends that the vehicle for the nominee manager should be prescribed by regulations, to be a specified form of company limited by guarantee with the regulations setting down rights, duties accounting procedures voting rights, etc (again, the Working Party will produce a draft standard format). The eventual structure of the management company will also provide the model for collective enfranchisement (see above). It is important that the company should have a prescribed format so as to ensure that it can fully and legally perform the management function and has the authority and ability to raise loans. From the experience of collective enfranchisement since 1993 it is felt by the Working Party that this is too critical to the practicability of the right to manage that it cannot be left to the relative knowledge and ability of the tenants= professional advisers. The tenants entering into management, and the displaced landlord, must have confidence that the structure is operable and a common statutory structure will provide the best assurance to lenders.

10. It is absolutely crucial to the management for the company to have a means of assuring the income stream; the company will have no assets or collateral and for the purposes of general expenditure and loan and interest repayments it must be in a position to enforce collection of all service charges monies. The Working Party has proposals whereby this may be achieved which it acknowledges may, at first consideration, prove unpalatable. It is considered that the acquisition of the right to manage must be subject to an acceptance of overall responsibility by the tenants with a concomitant reduction in personal rights. Defective leases give rise to great problems in management and, in may cases, will provide insurmountable obstacles to self-management and the financial stability of the management company; provision must be made in legislation to address this issue.

The Working Party considered two possible solutions, statutorily deemed inclusions in leases and a more streamlined route for obtaining amendments through judicial procedures. We were initially attracted to requiring that the right to manage be subject to the acceptance of certain clauses regarded as essential for sound management being deemed to be included in individual leases, (for example, the establishment and maintenance of a sinking fund, the ability to collect service charges in advance where the lease otherwise provides and to change interest on late payments). Such an approach would be simple, automatic and provide a degree of standardisation of leases, and may merit further consideration.

However, we were conscious that the Government may be unwilling to breach the principle of statutorily over-writing contracts, particularly in the case of any minority of tenants in the building who were not actively supporting the move to self-management. Also, we were sensitive to the inequity of enabling right-to-manage blocks to overcome the defects in their leases without similar opportunities being provided to leaseholders in freeholder-managed blocks. To avoid this, the Working Party considered a procedure, through amendment of S35-40, Landlord and Tenant Act 1987, to enable a nominee manager, or the necessary majority of qualifying tenants prior to appointment of the nominee manager, or any other landlord or freehold manager, to make application to the LVT for the amendment of individual leases within a building for the purpose of improving, or enabling, its management. The applicant would be expected to make the case for the changes sought and to defend them as necessary against any opposition.

Such an approach, while providing greater protection of the non-participating tenants= rights would not be as simple or clear-cut as the deemed inclusion route and would, inevitably, incur costs.

The Working Party therefore recommends:-

1. in the case of an application for right-to-manage, the automatic statutory amendment of all leases in the building by the deemed inclusions, to be subject to a right to appeal by any tenant to the LVT
2. an ability, at any time, for any manager of residential leasehold property, or two thirds of the qualifying tenants, to apply to the LVT for amendments to the leases sufficient to facilitate good management.

11. The Right-to-Manage should also be subject to acceptance of the requirement that the annual budgets be approved all service charge payers in the building; this should be coupled with the removal of the individual tenant=s right to challenge the service charge on the grounds of reasonableness. This may appear draconian and a direct reversal of the additional powers granted to tenants in relation to their service charges by the 1996 Housing Act. However, the subjugation of the individual=s right in favour of the welfare of the whole must be a prerequisite of responsible self-management. In the USA condominium and co-op management there is no concept of a reasonableness defence; what is agreed by the group of tenants in the management of their own building is deemed to be reasonable in itself; this provides a model for self-management by the right-to-manage in that the management company cannot find itself in a position of financial deficit arising from the reluctance of one or one or more tenants to pay. In the commitment to provide services, to effect works or to repay a loan the company must be able to guarantee payment, subject to an agreed budget without the delay and uncertainty arising from LVT actions for determination of reasonableness. This concept of democratic, majority rule is a key part of the strata title/Co-operative system of ownership.

It is proposed that the right includes a requirement for the agreement of annual (or special) budgets by a AGM (or EGM) of tenants with prescribed voting procedures. Consideration will need to be given as to the requisite majority for the agreement of the budget, bearing in mind that the original decision to self-manage may not have been unanimous, in order to protect the rights of the minority.

The right-to-manage should not be regarded as an easy option but the assumption of power with responsibility; that responsibility may be at the cost of individual rights and that will be a choice to be exercised by tenants contemplating self-management. However similar systems function perfectly efficiently elsewhere in the world and there seems little justification for anything different here.

12. It is considered to be in the interests of both the tenants and the displaced landlord that the building should be subject to professional management. There would be merit in the right being subject to an obligation to manage in accordance with an approved Code of Management (RICS, ARHM). However, we acknowledge the burden of management costs on smaller buildings and suggest there should be a cut-off point below which professional management is not obligatory, perhaps buildings comprising less than ten flats. For all other buildings the right shall be conditional upon the appointment of a professional managing agent (suitably qualified and registered as to be required by legislation). This will make a major difference to the enthusiasm of lenders for self-management.

In cases of buildings of ten flats or more where the tenants wish to manage themselves, we propose this should be subject to their satisfying a Leasehold Valuation Tribunal (or such other vehicle as to be established) of their competence to so do, on submission of management plans, financial sureties, evidence of professional indemnity insurance etc.

Therefore, all buildings of ten or more flats will either be professionally managed or the tenants will have satisfied the LVT of their ability to manage.

13. It is considered advisable that the tenants= management company be statutorily required to arrange Directors and Officers= liability insurance for the Board together with Professional Indemnity insurance to provide protection to the individual tenants against their Directors= defaults.

Exercising the Right

14. The Working Party agrees with the proposal that there be an ability for the tenants to serve a discovery notice on a landlord; this will be necessary prerequisite both to application and future management. Procedures and enforcement can be by analogy to those provided by Sections 11, 42 and 92 of the 1993 Leasehold Reform etc Act.

15. It is strongly recommended that the right be deemed to be provided upon due compliance with the procedures by the tenants and not subject to any form of vetting or approval by the LVT. In view of the proposals above for loss of individual rights, it is considered necessary for statutory provision for the initial decision of the tenants to proceed. This should be through the calling of a meeting, with due notice, at which the implications of management are provided, in prescribed terms; a draft notice for the calling of the meeting is included as Appendix 1.

The tenants should not enter into self-management unaware of the responsibilities this entails, including the statutory obligations to the landlord for right-to-manage to be signed by each participating tenant on a prescribed form to acknowledge those responsibilities (a Ahealth warning@ prior to commitment); a draft for this is provided at Appendix 2.

16. The Working Party concurs with the proposals in the Consultation Paper for service and counter-notice by the landlord. However, procedures must be devised for enforcement in event of the landlord=s failure to hand over documents or service charge monies or to properly account for monies alleged to have been dispensed prior to the transfer of management. It is suggested that the landlord be given a period of one month from the date of his counter-notice (or favourable LVT ruling) to provide all contracts and other documentation, monies, keys, any plant in the ownership of the tenants etc, failing which the tenants may seek enforcement from the courts by procedures analogous to Section 92 1993 Leasehold Reform Act.

Contracts

17. We find it unarguable that some statutory provision is necessary relating to transfer of contracts, to provide protection to both parties, including issues of compensation for severance. We are concerned that the tenants must assume responsibility for all bona-fide contracts relating to the management of the building but that opportunities not be provided for unscrupulous landlords to set up bogus long-term contracts to frustrate future management. It is proposed that:

1. the landlord, at discovery, to specify all contracts presently in force, with full details of term, termination, consideration etc, including any capital invested by and considered repayable to the landlord
2. all existing contracts to be assigned to the tenant management company and to be so accepted, but, to be deemed to expire nine months after date of handover unless subject to valuable consideration (eg, a discount for a three-year insurance contract, installation of plant and machinery such as lifts, boilers etc)
3. any disputes to be determined by the LVT (or single expert) or arbitration after handover; the landlord must not be given opportunity to delay handover by protracted disputes on contract arrangements, for example on separation of bulk contracts.

Consideration will need to be given to the position of staff employed in connection with the management of the building, including resident staff. It may be that special statutory provision need to made in variation of T.U.P.E regulations to provide some freedom of action by the nominee manager in relation to the posts.

Rights of the Landlord after hand-over

18. The landlord, as owner of the building, will retain his rights of access to the common parts and it is not suggested that any special provision is required for this; it is reasonable that the landlord should retain some rights to further inspection of premises and documentation in the protection of this interests.

It is proposed that:

1. the landlord has rights to information including insurance information, analogous to existing tenants= rights under sections 21, 22 1985 Act
2. the landlord be consulted on major works by analogy to Section 20, 1985 Landlord and Tenant Act, with the tenant management company to have the same obligation to have regard to the landlord=s comments
3. the landlord to have the right to enter and inspect such parts of the premises as he considers necessary to determine standards of management and repair on one week=s notice, such inspections not to be more frequent than quarterly
4. the landlord to have the right to attend, to speak, but not to vote at any AGM, EGM or any other meeting where budgets are agreed, except where he is a service charge payer.
5. the landlord to be able to submit proposals for the management, maintenance or long-term consideration of the building. The company will not be required to act on these proposals but their failure to do so may provide a case for appeal by the landlord for termination.

Termination

19. The Working Party concurs with the proposals for termination, either by the landlord by analogy to the procedures under the Landlord and Tenant Act 1987, or by the tenants= company itself. We consider that an application for termination by the landlord should be the appropriate course of action in the event of the landlord questioning the standard of repair or management sufficient to damage his long-term interest in the property.

In furtherance of a landlord=s proposed action for termination there may be some merit in the provision to him of further rights of information and inspection, after due service of notice, analogous to the procedures of S84, 1996 Housing Act (tenants= association appointment of a surveyor).

Chapter 4 - Controlling Managers and Managing Agents

1. The Working Party strongly supports the principles of regulation of management, to ensure proper and consistent management standards for all leasehold tenants irrespective of the landlord or the present management arrangements. This can be achieved partly through the improvement of tenants= rights and partly by a form of registration and regulation of all managers of leasehold property, whether managing agents, landlords, tenant management companies, local authorities or registered social landlords. Proposals should develop a consistency of management standard applicable to all leasehold property, without exception.

2. In the consideration of existing safeguards for tenants, the Working Party can find no justification for the continued exemption of local authorities and registered social landlords from the right of first refusal or the appointment of a manager under 1987 Act legislation. It is accepted that such rights would be inappropriate in cases of a minority of lessees in a building but there are substantial numbers of buildings of local authorities or registered social landlords which are wholly or substantially leasehold, where the rights should be applicable.

It is proposed that the exemptions be amended to provide rights of first refusal and the right to seek the appointment of a manager to leasehold tenants of local authorities and registered social landlords following similar eligibility rules to collective enfranchisement, that is in cases where the qualifying tenants (1993 Act definition) occupy two-thirds of the flats in the building.

3. The Working Party is supportive of the proposals for further protection of leaseholders= monies, particularly in the requirements for greater transparency on service charges accounts through separation and identification of accounts. If such proposals are enacted we would recommend facilities for tenants to have rights to inspection of the relevant accounting records which have been reconciled to the bank statements.

There is considerable merit in the arrangements for accounting imposed on managers in New South Wales by the provisions of the Managing Agents etc Act 1941, the maintenance of statutory ledgers and the lodgement of yearly audits; details of those regulations are set out in Appendix 3. These may provide a useful framework for regulation although further consideration will need to be given to the cost and workability of these provisions

4. There are strong arguments for the application of approved Codes of Management Conduct (S87, Leasehold Reform Act 1993) on a mandatory basis, rather than as support for tenants= actions in challenging management. The two presently approved codes are widely accepted as relevant to both general leasehold property and the more specialised retirement housing and could be the required standard for future regulated management, contravention on any substantive basis to be subject to summary prosecution.

5. The issue of insurance costs for tenants has proved difficult to address. Problems identified with excess cost to tenants appear to arise from non-competitive quotes, over-insurance and commissions both to the landlord and the broker (who are often the same). Additional problems have also been highlighted of under-insurance, poor or inadequate policy cover and the size and collection of excesses.

Our earlier approach to the problem centred on providing tenants with the right to seek competitive quotes and, where they were 10% less than that quoted by the landlord, to oblige the landlord to place the insurance with the tenant=s choice of insurer. After further consideration we have concerns with this approach for two reasons, the virtual impossibility of obtaining absolute Alike-for-like@ policies and, secondly, the nature of the insurance industry where substantial discounts are routinely offered for new business. This would lead to the insurance being placed with a new insurer each year and we have doubts as to the desirability of this in terms of the eventual settlement of claims.

The Working Party considers the best approach is one of transparency, requiring sufficient information to be provided to the tenant so as to enable a challenge of reasonableness. This could be achieved in two ways:

1. Ensuring adequate insurance - discussions on this issue with the Association of British Insurers was not productive in that the ABI considered, from claims histories, that over-insurance was not a problem. This is not the experience of members of the Working Party. Equally, freeholders are concerned that leaseholders may seek a false economy of under-insurance in order to reduce the cost of premiums. It is proposed that all insurance of leasehold property should be subject to an initial insurance valuation, to be index-linked and revalued on a 5 year basis. The cost of the valuation would be borne by the tenants as a service charge subject to requirements for reasonableness. The valuation itself , and appropriate index-linked increase would be declared to the tenant with the demand for the service charges.
2. Controlling commissions - It is fully accepted that many landlords use insurance commission to off-set administrative costs to the eventual benefit of tenants and that bulk-buying power can confer similar benefits . However abuses from excessive commission are rife and it is proposed that further approaches be made to the ABI with a view to their agreeing for commissions and other remunerations to be declared on policy documents. Meanwhile we propose a statutory requirement for a statement by the landlord showing the net premium, the landlord=s commission in placing the insurance and, where separate, the broker=s commission; and any other renumeration; it would also be helpful to require a statement showing any business connection between the landlord and the broker, including profit -sharing agreements.

It is proposed that the declaration (insurance valuation and details of remunerations) be provided to the tenant, as of right, in support of the service charge demand, not something only to be provided on request. This transparency will, in case of apparently unreasonable demands, provide the tenant with all necessary evidence for an appeal to the LVT and should, therefore, curtail further abuses.

Good Management Practice and Quality Assurance

6. The Working Party fully recognises the uneven standards of professional property management and the lack of appropriate training and qualification; we fully subscribe to and support the concerns expressed in the Consultation Paper on these issues.

Whilst we applaud the major efforts of the Association of Residential Managing Agents toward the institution of training and qualification to NVQ standard for the industry, we acknowledge a wide support for a statutory system of registration, regulation and quality control for the proper and professional management of leasehold residential property.

Raising the Standard - The Way Forward

7. There is clear political and public demand for effective regulation, either through full regulation by an independent body or self regulation within the industry; the present lack of regulation/standardisation is demonstrated in Appendix 4 - >Controlling Managers and Managing Agents= - Figure 1. In that EU legislation does not permit any requirement for independent/unattached managers to be forced to join a trade body in order to prove adequate qualification and quality control, it is the view and recommendation of the Working Party that proposals should be developed for a statutory blanket regulatory system.

8. Any new legislation is unlikely before the summer of 2000 so, if Regulation in whatever form is to work, details need to be agreed in 1999 so that managers have as much time as possible to prepare for implementation. It is envisaged that a transition period will be needed of one or possibly two years, after which there would be penalties for failure to register. In order not to preclude new businesses from becoming registered a provisional registration could be considered for the first two years of trading.

To avoid duplication of effort, and to ensure that representative bodies are fully involved in creating and raising standards, any regulatory framework will need to encompass the existing requirements of the relevant professional and trade bodies and their agreement sought in the details of the scheme.

9. The Working Party has drafted a fully working framework for regulation to which the Government may wish to have regard to in any further round of consultation on this subject. This is set out as Appendix 4.

Chapter 5 - Other Proposals

Rationalising Leaseholders Rights

1. The Working Party welcomes the recognition of inconsistences in leasehold law which place some tenants at a disadvantage compared with others and welcomes the Government=s commitment to address this through rationalisation. However, the most serious, and blatant, inconsistency has been set aside throughout the Consultation Paper, namely the lesser rights of the public sector tenant.

As has been previously noted above, the leasehold tenant of an RSL is denied the right of first refusal, the right to seek the appointment of a manager and it is now proposed that they shall be debarred from the right to manage. There are other lesser inconsistencies but equally galling to the public sector tenant, the immunity from prosecution of local authorities for offences under Section 18-20 of the landlord Tenant Act 1985 and the lack of any obligation to consult leasehold tenants in stock transfers.

The Government is urged to recognise that a leaseholder is a leaseholder, there are no special factors which justify any lesser rights for some leaseholders, conditional upon the identify of their landlord. The Government=s response to the issue has focused on the public accountability of the local authority and the policing role of the Housing Corporation in relation to tenants of housing associations. This denies the reality that the public sector landlord is, generally, no more competent in management than the private sector landlord; public sector tenants require the same rights of self-protection without the paternalism of Apublic accountability@ or waiting for the Housing Corporation to take action on their behalf.

The public sector manager currently has a privileged status which is entirely unjustified in the management of residential leasehold property. It is estimated that up to 50% of present local authority leaseholders are second and third generation purchasers who did not profit from RTB discounts and therefore do not merit inferior status. In the housing association retirement leasehold sector, properties were, in the main, constructed with privately raised finance and sold on the open market with no aspirations toward social provision; those leaseholders should not be denied the right to seek their own management simply on the justification of the uncertain benefits of the Housing Corporation and the independent Housing Ombudsman as watchdogs.

The Working Party strongly recommends the implementation of a level playing field for the private and public sector tenant.

Leaseholders of houses following lease extension.

2. The Working Party concurs with the proposal to provide enfranchisement rights and security of tenure in these cases. In that the lease extension was provided at no premium, it seems equitable that enfranchisement should follow the valuation procedures of Section 9(1A), 1967 Leasehold Reform Act.

Enfranchisement of Houses.

3. We fully support the proposed transfer of jurisdiction relating to enfranchisement applications in cases of absent landlords from the High Court and Lands Tribunal to the County Court and LVT.

Right of First Refusal

4. We concur with the proposal for the extension of the right of first refusal to leasehold houses and will contribute to the further consultation proposed. It is considered this will do much to remove the abuses presently occurring in the unscrupulous management of long leasehold houses.

Time Limit for Prosecution (Right of First Refusal)

5. There seems a clear case that the period for prosecution should run from the date of the offence becoming known to the tenants, not the date of the offence itself. In this situation the present six month limit would be sufficient.

Abuse of the Forfeiture Procedure

6. The Working Party welcomes the proposals to deal with these abuses. Forfeiture is regarded by most people as excessive, a feudal device no longer appropriate to modern home ownership and too open to abuse by unscrupulous landlords. Its impact is frequently disproportionate to the offence, but the Working Party recognises that it nevertheless remains the only effective means whereby a landlord may pursue breaches by the tenant. Managers must have the ability to enforce covenants, particularly against non-resident leaseholders. The Law Commission has spent a great deal of time considering replacement for forfeiture, but has yet to put forward a generally acceptable proposal. Its efforts are of course complicated by the fact that it must take account of the implications for commercial property as well as residential.

In the light of these difficulties the Working Party does not put forward proposals for the abolition of forfeiture but for the provision of a less punitive but more effective alternative process, together with other means to curtail present abuses.

7. We are strongly supportive of the proposal that ground rent should not be recoverable unless properly demanded, with the demand carrying a statutory wording on the penalties of non-payment; similarly we concur with proposals that charges for variations and also the administrative and legal changes arising from enforcement action against the tenant by the landlord be subject to determination of reasonableness by the LVT. This appears perfectly clear-cut and not a matter likely to be opposed by a reasonable landlord.

We also find considerable merit in the proposal of the British Property Federation for a minimum level of rent arrears or a minimum period of arrears before forfeiture proceedings are permissible. We concur with their proposal of two years= outstanding arrears or a minimum total of arrears of ,100 (,250 in Greater London). The contribution of these minima and the requirement for prior demand will effectively curtail the present ground rent abuses prevalent in the Midlands, the North-East and the Bristol areas.

8. The present forfeiture procedure is misused by the unscrupulous landlord for its fear effect; it is a comparatively rare procedure in law which allows the landlord to commence the procedure prior to establishing the default and, if successful, removes the leasehold interest in entirety irrespective of the amount of arrears or financial value of the default.

It is fully accepted that some form of procedure akin to forfeiture is necessary to provide a right of redress to the reasonable landlord and it is proposed that a better alternative procedure be established to sideline forfeiture which offers property managers a graduated series of actions which can be taken quickly and effectively in order to enforce the covenants in a lease. What is needed is a procedure comparable to the county court accelerated possession procedure for assured shorthold tenancies, backed by mandatory injunctions, which can be obtained and operated quickly and cheaply, but would require a positive demonstration that a breach had occurred. The mechanism should ensure that the breach of covenant was remedied in such a way as to cover the costs to the freeholder, while returning the remaining equity of the leaseholder.

The first stage of the process should be requirement to rectify the breach (eg, pay the arrears, undertake works, etc). As a safeguard against abuse, the court should require evidence that the leaseholder had been properly informed of his obligation, and received at least one further formal reminder of his failure to discharge it. Looking first at proceedings to recover debt, whether arrears of ground rent or service charge, we propose that the manager be required to serve a simple, statutorily-prescribed demand form, which we hope could be mass-produced at low cost by legal stationers. The form should contain the basic information needed, namely that a debt is owing and that it must be paid within 14 days of the date of the notice, and should make clear that this is a last chance reminder, and that if there is no response, it represents the beginning of a process which could lead to the leaseholder losing their home. This procedure is relatively straightforward, and should not involve much administration. We therefore believe that the leaseholder should not be liable for any costs if the debt is paid at this point.

There is at present no definition of 'proper service' for these purposes. We suggest following the precedents in the Companies Act, that a notice may be deemed to be served 48 hours after posting. A certificate of posting will obviously be required as proof.

If the debt is not paid, the right to re-enter has already been invoked by this mechanism. A freeholder would be able to serve a section 146 notice at this stage, even though, in the case of service charge arrears, it would not be effective until the reasonableness of the demand had been determined. It is important to maintain the principle that it is for the leaseholder to rectify the situation or to claim relief. If the leaseholder wishes to oppose the demand, he can contest it in the LVT or the county court. If he does not respond, then the freeholder should be able to refer a service charge dispute to the LVT or to issue a summons in the county court. If the LVT determines the service charge to be reasonable, the leaseholder will have a further 14 days to pay before matter is referred to the county court. Once the summons is issued, the leaseholder becomes liable for the freeholder=s costs. The debt could also begin to attract an interest penalty. We presume that, as a housing matter, leaseholders may be able to qualify for legal aid.

The court will be able to register a money judgement as a charge on the property. This charge should, preferably, take priority over any mortgage although this may be opposed by the lenders. The money judgement should include a provision requiring the rectification of the breach of covenant to be performed within six weeks. If the breach remained, the court would make an order for sale, from which it would give automatic relief if the breach was remedied in full within three months. To work, this would require strict compliance with the courts order, and it would need to be absolutely effective after the three months expired. The order would stipulate that if relief was not obtained, the leaseholder would be required to sell the property within, perhaps, six months of the order being made. If the property had not sold within six months, it should be sold by auction without reserve; however the process may not realise the full market value of the property which could raise difficulties in redemption of any mortgage. If insufficient funds were raised, the leaseholder would continue to remain liable for the remainder and for any outstanding debt on the mortgage.

In the case of non-pecuniary breaches of covenant, the same system could be applied, with the court issuing a mandatory injunction, rather than a money judgement. Rectification in such cases will be less straightforward, but the emphasis will be for the leaseholder to seek relief by reaching any agreement with the landlord.

We believe this provides a more effective and flexible system, which will be more easily understood by freeholders, managers and leaseholders. The initial, free stage enables property owners to demand payment where it is owed or compliance with the requirements of the lease, while limiting the present capacity for abuse. The clear graduated stages will emphasise that the only reason to lose one=s home through forfeiture was the persistent refusal to remedy a breach of the lease which the court had agreed was justified.

This should, in the long run, prove preferable to the lender than the current forfeiture arrangements where the entire mortgage security is at risk.

On the general issue of forfeiture, the Working Party suggests a further consideration of the limitation on rights of collective enfranchisement and lease extension in cases where the landlord has recommend possession proceedings. It may be reasonable to revise the restriction of Schedules 3 and 12 Leasehold Reform etc Act 1993 to allow applications to proceed, subject to the eventual outcome of the court proceedings, if any.

Cost Limits for consultation of leaseholders on proposed works.

9. The Working Party acknowledges the present difficulties relating to the statutory consultation process where there are small numbers of leaseholders in a building but is reluctant to see any major increase in the minium amount on which landlords are required to consult. We would consider it reasonable for the cost ceiling to be raised to ,100 per flat and to delete the overall limit for the building. The present minima allow unconsulted costs of up to ,500 per tenant to accrue in a building of only two flats but can relate, as the Consultation Paper illustrates, to costs as low as ,10 per flat in larger buildings. We believe the consultation should be linked only to the estimated cost to the individual tenant, multiplied by the number of leasehold dwellings in the building, that is, consultation is required in cases where the cost to be recharged to the leasehold flats is equivalent to more than ,100 per flat.

The present consultation requirements of S20, Landlord and Tenant Act 1985, exclude costs of works improvements (the definition of Aservice charges@ in S18 refers only to costs of services, repairs, maintenance, insurance or management). This is not a problem with the majority of private sector leases which normally exclude any liability of the tenant for improvements; however, it is common practice in the public sector for leases to include liabilities for improvements and it has become standard procedure by many local authorities and RSLs to class almost all works as Aimprovements@ in order to avoid S20 consultation.

In any event, costs of improvements can be substantial and, where the tenant is liable, there is no reason why tenants should not be consulted on them. It is strongly recommended that costs of works of improvement be included in the requirements for S20 consultation.

Any revision or amendment to the consultation process should seek to clarify the purpose and requirements of the exercise. The present obligation for the landlord to Ahave regard to@ the tenants= views (S20 s.g) is unclear and requires further definition; if the exercise is to be truly one of consultation the legislation should provide some opportunity for dialogue and proper discussion of the proposed works.

Conclusions

The Working Party has welcomed the proposals in the Consultation Paper and the opportunity to comment. We remain most grateful to the officials of the DETR who attended and advised our meetings.

It has proved a useful forum and has allowed the development of consensus proposals not available in a more partisan situation. We will continue to develop and refine those ideas and will provide whatever advice and assistance to DETR as is required.

Appendices

Appendix 1 - The Right to Manage - Draft Notices

Appendix 2 - The Right to Manage - Draft list of responsibilities and liabilities to be signed by participating tenants

Appendix 3 - Managing Agents etc Act 1941 (New South Wales)

Appendix 4 - Draft scheme for regulation of management and managing agents

Appendix 1

Right to Manage - Draft Notices

(i) To: All long leaseholders

A meeting will take place on xxx and xxx to consider the following Resolution:

That a notice be served on Landlord/Freeholder exercising right of self management in accordance with Section XX Landlord and Tenant Act 2000.

If this Resolution is passed by of the flat owners, the following will happen:

• a new company will be incorporated with a constitution as set out in Section XX (shares; guarantee; limited; unlimited)
• the new company will serve notice on the landlord under Section XX of the Landlord and Tenant Act 2000 exercising the right to take over management
• once the right is exercised, the new company will have rights overriding those set out in the leases and as specified in Section XX. A summary of those rights is set out in the attached notes.

In order to exercise right to self management, the Resolution must be passed by a majority. Flat owners can vote either in person or by proxy (see below).

• If the block contains more than xx flats, a managing agent who is a Member of A.R.M.A.. R.I.C.S or I.S.V.A. will have to be appointed. Blocks above the limit not wishing to appoint managing agents can make an application to the Leasehold Valuation Tribunal for an Order dispensing with this obligation. Managing agents will obliged to conform to the R.I.C.S. Code of Management Practice; will certify that the budget present to each A.G.M. is fair and reasonable and will give a realistic assessment to every third A.G.M. of the amounts required to be collected for the Reserve Fund. Appointment of managing agents will be by tender and will take place during the three months following the date of this Notice.
• The Newco is obliged to elect a board comprising chair, secretary and financial officer (in blocks of under ten flats, one person can hold any two offices but not more). The Board will have control of the management and supervision of managing agents. (Voting rights).
• The responsibilities of Newco will be the maintenance, repair and renewal (if necessary) of all common parts of the building. Where the definition in the existing leases are unclear or militate against proper management, then the Newco may vote to amend those definitions. The intention is that all of the structure (save for the inner skin on the wall, ceilings: and floor and the conduits within a flat), window frames, balconies, roof and foundations be maintainable out of service charges.
• However, if the block contains more than commercial use, the right to self management cannot be exercised.
• If the landlord owns more than of the flats in the block, then the right to self management cannot be exercised
• An owner of more than xx flats can only exercise xx votes
• There is no residency qualification and an owner does not have to live in the flat in order to vote.

Notes:

• Once the right to self management has been taken over, the new company will have the following rights which will override whatever is stated in the leases:
  • an obligation to convene an A.G.M. at which the service charge for the ensuing year will be set
  • the right to collect payments on account of service charges in advance by monthly, quarterly or half yearly payments
  • the right to establish a sinking fund for capital expenditure
    
    All tenants will lose the right to challenge service charges on the grounds of reasonableness. Each tenant will have the right to vote and speak at the A.G.M. but once the service charge is passed by majority, then tenants are obliged to pay and the charge will be recoverable by simple debt action plus interest.
  • there may be variations in definitions of demised premises and common parts as specified above

Form of proxy (Note: No one per can exercise proxies for more and of the flats).

(ii)

To: Freeholders/ Head Leaseholders

TAKE NOTICE that at a meeting held on xx by the long leaseholders, a Resolution was passed as follows:

That the long leaseholders agree to serve notice on the freeholder exercising the right to self management

Such Resolution was passed by the majority required by the Act - a certified copy of such Resolution is attached giving details of the voting.

You are therefore required three months from the date of this Notice to relinquish all responsibility for management. This will not affect your right to collect ground rents and to any flats which you own. You will, however be required to pay service charges for these flats. You must hand over all service charge monies held by you and have all accounts audited up to the date of handover.

You are required under Section XX of the Act to supply to Newco within one month of today=s date full details of all contracts entered into by you relating to the administration of the block. You should note that any contracts entered into by you after 30th November 1998 which are for periods of more than one year unless for valuable consideration - are deemed to expire xx months after the date of this Notice. Otherwise all contracts will be deemed to terminate xx months after the date of this Notice.

There is no right to appeal against this Notice. However, if at any time after you are of the opinion that the block is not being managed properly, then you may make application to the Leasehold Valuation Tribunal for the right to self management to be cancelled.

Appendix 2

Right to Manage - draft list of responsibilities and liabilities to be signed by participating tenants

Important - before signing this form you must be aware of the implications of such action.

The company assuming control will be responsible for all common area repairs and services. This will include structural repairs without financial limit.

The company will collect service charges and will if necessary have to take action against defaulters.

Non payment of service charges may prevent the provision of even basic services and prejudice the interests of leaseholders and the company.

The company must consider how it will finance any shortfall in service charge income or unexpected expenditure.

Where the property is less than xxx flats and the company intends to manage the property itself the company will need to have sought advice, and to do so on a regular basis, from a suitably qualified person in order to ascertain the legislation and regulations which affect the management of flats.

You must be aware of the approved codes of practice where service charge is payable and support compliance with the code.

The company or registered group will have a duty of care and liability of individual leaseholders in accordance with the leases.

There will be liability to contractors and others in accordance with any contracts in existence at the current time (subject to any limitation imposed by any regulations) and further contracts the company enters into.

The company or registered group is bound by all existing legislation affecting the relationship between landlords and tenants and in particular must consult with leaseholders when carrying out works covered by Section 20 of the Landlord and Tenant Act 1985.

The company/registered group will be responsible for any staff employed by the landlord and will become their employer.

The landlords covenants in the leases must be undertaken by the company/registered group.

The service charge funds including any reserves must be held in trust in accordance with Section 42 of the Landlord and Tenant Act 1987.

The objective of the right to manage is to ensure the appropriate upkeep of the building and provision of services for leaseholders as a whole rather than meeting the specific requirements of a limited number.

It is also intended that the involvement of leaseholders through their right to manage is to avoid mis-trust and suspicion which sometimes exists where management is undertaken on behalf of the landlord.

To enable these objectives to be met the company or registered group must be run in a democratic manner and the decision making process is clear to all concerned. The company memorandum and articles must include the minimum requirements set out in the regulations.

Where a leaseholder or the landlord is dis-satisfied with the performance of the company or registered group an application can be made to the Leasehold Valuation Tribunal.

Appendix 3

Regulation of Managing Agents

The New South Wales Legislation

Managing Agents and Property, Stock and Business Agents Act 1941

1.0 Summary

1.1 Since 1 October 1981 all managing agents appointed to manage strata title schemes must be the holder of a strata title managing agent=s licence issued under S23 of the Agents Act, otherwise the appointment is invalid and may not be enforced by the agent. The agents must also comply with the Agent=s Regulations (1993).

1.2 Licencing is by the Real Estate Services Council, a statutory body representing the Crown; we do not presently have specific details of eligibility for registration but it is subject to statutory conditions of accounting and financial management. There is a fee for application which contributes toward a statutory compensation fund.

1.3 The licenced agent is subject to a range of obligations governing financial management and accounting arrangements and the agent=s conduct of business set out in the Act and the Regulations and to specific timescales for action; the Regulations make no requirements for professional indemnity insurance. In addition to statutory obligations and penalties for provision of information, accounting etc, there is a strong body of caselaw supporting action for negligence against shortcomings by managing agents.

2.0 Statutory Obligations; business practice

2.1 The general operations of the agent is subject to specific regulation with penalties for contravention upon conviction by a local Magistrates Court. The Court may, in addition to imposing the penalty also revoke the agent=s licence and disqualify the agent for a period of time to the court=s discretion.

Some to the obligations are peculiar to the strata title system but those most relevant to the UK are set out with the prescribed fines shown (converted as ,1 : A$2.7)

1. to maintain a registered office within NSW: Penalty $100 (,37) per day the offence occurs
2. to have a licenced agent in charge of each place of business
3. to notify the Council within 14 days of a change of the registered office: ($100 per day)
4. to display the agent=s name at the registered office and all other places of business
5. to keep written record of all transactions of the registered office for three years
6. to provide to the Real Estate Services Council a statement of trust fund details and other monies held within seven days of request
7. to provide an itemised account to a person involved in a transaction within 14 days of request ($100 per day)
8. not to employ a disqualified person or persons without registration
9. not to publish any false or misleading advertisement
10. not to furnish any incorrect statement in any application made under the Agents Act ($1,000 : ,370)
11. not to fail at account for trust monies or render a false account (10 years imprisonment)
12. observe the Rules of Conduct of the Agents Regulations

Where there is no prescribed penalty the court may impose fines of up to $4000(,1,480).

2.2 In addition to these general obligations the agent is required to adhere to certain established timescales:

1. all monies received to be banked before the end of the next working day after receipt
2. at the end of each month to balance the trust account books and once every three months provide a financial management report of the trust fund to the Abody corporate@ (the strata-title owners= group)
3. provide a yearly statement of the trust account to the Real Estate Services Council
4. notify the R.E.S.C. with five days of any overdrawal of the trust account
5. yearly audit of all accounts within three months of the end of the accounting year
6. renew the agency licence every three years

3.0 Statutory Obligations - Finance and Accounts

3.1 Trust Accounts - Managing agents must maintain trust accounts in prescribed financial institutions within New South Wales; the account must bear the name of the agent and the words Atrust account@.

All monies received for and on behalf of any Abody corporate@ must be held exclusively for that body or disbursed as the body directs. Any accounts in which the agent holds such monies is deemed to be a trust account and the agent must, on opening the account, give notice in writing to the bank that it is to be a trust account.

The agent may operate one general trust account or separate trust accounts specific to certain properties.

According to the Regulations the agent must keep at the registered office four specific books relating to the general or to each separate trust account:

1. trust receipt book - all receipts to be consecutive, machine numbered and in duplicate
2. trust bank deposit book - all deposit forms to be in duplicate
3. trust account cash book - particulars of receipts and disbursements, but be balanced at the end of each month and a reconciliation statement prepared
4. trust account ledger - trial balance to be produced monthly

Each trust account must be audited yearly and the audit lodged with the Real Estate Services Council. (This is separate and distinct from any audit arrangement with the Abody corporate@). The auditor=s fee is paid by the agent since the submission of the audit to the R.E.S.C. is a condition of the retention of his practising licence.

The auditor is statutorily required to set out any information revealed by the audit to be a breach or discrepancy of the Agents Act or the Regulations.

The agent must, each January, furnish a statement to the R.E.S.C, in the approved from, showing details of any monies held in any trust account which were received more than two years previously and still unspent.

The R.E.S.C. may, in pursuit of a complaint against an agent or as a random examination of accounts, appoint an Ainspector@ to examine the agent=s accounts procedures and submit a confidential report to the Council: the Council may, in the event of a revealed irregularity, apply to the Court for the appointment of a receiver to take over the agent=s functions in respect of a property.

3.2 Provision of Financial Information - the agent has obligations arising both from statute and the regulations for provision of information to the body corporate and to individual unit owners:

i)the Strata Title Act provides a right of the body corporate to demand from the agent:

- the name of the trust account, the bank where it is deposited, the credit balance plus details of any cheques drawn but not presented

- particulars of monies received, held or disbursed

- particulars of any transactions where the agent is action of the body corporate

The agent must respond within seven days.

ii) The Regulations provide a right of Acouncillors@ of the body corporate to inspect the agent=s records and books ( the agent may not charge a fee for making the records available).

iii) The Regulations also provide a similar right for unit owners or mortgagees but subject to a fee.

iv) The Act provides that the body corporate or Aany other person directly concerned@ can require any itemised account of any transaction conducted by the agent who must respond within 14 days.

3.3 Appointment and delegation - the Act requires that the appointment of the agent be consequent to a resolution of a general meeting of the Abody corporate@ which shall specifically delegate management functions to the agent. This formal delegation is essential for the transfer of management and is set out of some length in the legislation; the appointment is not valid without it.

The body corporate may delegate Aall of its powers, authorities, duties and functions@ which is a complete delegation to the agent of all the powers the body corporate possesses under the Act; in this situation the agent has full liability for performance of all duties under legislation or byelaws, may invest body corporate monies or make applications to court.

Similarly there can be a delegation of Aany one or more of its powers etc@, a limited delegation, and the agent may only legally perform those duties specifically listed in the instrument of appointment (the Aagency agreement@). Matters formally delegated to the agent may not be further delegated or subcontracted. The agreement must be in writing but is not a prescribed form. It must be kept by the agent and produced on demand by the Real Estate Services Council or a police officer, or the agent is guilty of an offence; penalties for conviction for failure to produce an agency agreement can include disqualification from holding an agent=s licence.

There are strict and involved requirements set out in the legislation for validity of an agency agreement and it is the agent=s responsibility to ensure compliance, an agent in default of any of the requirements for validity is not entitled to any renumeration or reimbursement of expenses incurred.

3.4 No scale of management fees is prescribed in the legislation but, in case of dispute, the Real Estate Services Council has powers to vary the fees, notwithstanding their prior agreement in the instrument of appointment. There is no route of appeal from a decision of the Council on reasonableness of fees.

4.0 Financing of the Scheme

4.1 We have not, to date, been able to find any details of the financing of the regulation of agents and have to assume that it is a function of and a proper expense of the State. Further research will be carried out.

4.2 The scheme is clearly not self-financing in that the application fees paid by the agents for their licence constitute a fund established under the Strata Titles Act called the Real Estate Services Council Compensation Fund. The purpose of the fund is to compensate Aany person who may suffer or incur pecuniary loss by reason of any agent=s failure to account@. This specifically refers to misappropriation of funds by the agent and the fund does not compensate persons sustaining loss through the negligence of the agent (there is a substantial body of caselaw on pursuance of negligence through action for tort). The maximum claim under the fund is A$1M (,370k).

Leasehold Reform Working Party Residential Leasehold Reform in England and Wales Response to the Consultation Paper