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Commonhold and wide-ranging changes in leasehold law
have been
introduced in England and Wales following the Commonhold and
Leasehold Reform Act 2002.
Although mainly concerned with residential properties, it also
applies to commercial properties. Under a new form of tenure known
as commonhold contained in Part I of the Act, individual flats and
commercial properties will be owned individually with the common
areas to be controlled collectively. The far-reaching changes in
leasehold law are contained in Part II of the Act. The Act will come
into force in stages from July 2002 through a series of commencement
orders and further regulations.
Commonhold Part I
Each separate property in a
commonhold development will be called a unit and the owner will be
known as unit holders. The Commonhold Association will be a private
company owned by guarantee and will manage the common parts.
Commonhold Associations will be registered at Companies House with a
standard set of memorandum and articles of associations.
HM Land Registry will register the
associations on presentation of their memoranda and articles of
association and commonhold community statement containing rules of
the commonhold. Commonhold applies to residential and commercial
developments.
The memorandum and articles of
association will govern the management of commonholds setting out
voting rights of individual unit holders and procedure for dealing
with disputes using alterative dispute resolution methods where
possible.
Leasehold
Reform Part II
Provides leaseholders with new rights and enhances existing ones.
Key points include:
Chapter I gives leaseholders of flats the right to manage their
block setting out the qualifying conditions for exercising the right
and provides that eligible leaseholders must set up a qualifying
company known as a RTM.
Chapter II amends provisions of the 1993 Act dealing with the right
of leaseholders to buy collectively the freehold by simplifying the
eligibility criteria. Abolishes the requirement that two thirds of
the leaseholders must participate and the low rent test. Amends the
marriage valuation principles contained in the 1993 Act.
Chapter III concerns new leases for tenants of flats. Changes
include the abolition of the low rent test and divides marriage
value between landlord and leaseholder.
Chapter IV amends the provisions contained in the Leasehold Reform
Act 1967 dealing with the rights of leaseholders of houses to buy
freehold or extend lease reflecting the changes introduced in
Chapters II and III.
Chapter V refers to changes in leasehold management contained in the
Landlord and Tenant Act 1985. Key issues include:
-
Extends definition of service
charge, the jurisdiction of leasehold valuation tribunals, changes
in accounting of service charges, introduces the concept of
'administration charge' and the requirement that they must be
reasonable and allowing leaseholders the right to challenge their
liability to pay such charges and their reasonableness at a
leasehold valuation tribunal. Amends Landlord and Tenant Act 1985
s20 extending the landlord's responsibility for consulting
leaseholders before carrying out proposed works
-
Extends the right to apply to a
LVT for the appointment of a new manager under the Landlord and
Tenant Act 1987 Part 2
-
Extends and clarifies the grounds
on which application may be made to vary a lease under the
Landlord and Tenant Act 1987 Part 4 transferring jurisdiction for
handling such applications from the county courts to the leasehold
valuation tribunal
-
All demands for ground rent must
be made by prescribed notice and introduces additional
restrictions on the commencement of forfeiture proceedings.
Further information
Commonhold
What is
Commonhold?
This is a new form of tenure which will enables flats to be
owned on a virtual freehold basis. It will also deal with the
provision of services and upkeep of common areas.
Will
Commonhold only apply to flats?
No. Whilst it is particularly suitable for flats and the measures
introduced were for this sector, it will also apply to all
interdependent units. In this context interdependent units can be an
office building where it is desired to sell office units, a factory
estate or an estate of houses where services are provided and some
measure of control is required. Units can be on different floors of
the same building, single storey and attached or detached units. The
system should be flexible and cater for most physical layouts.
What is the
background to Commonhold?
The driving force for the introduction of commonhold is the view
that the Long Leasehold System is unsatisfactory. Whilst in
opposition, the Labour Party called for changes to the leasehold
system, the Commonhold and Leasehold Reform legislation is their
answer to the problems.
What are the
problems being experienced?
The Long Leasehold System caused problems due to the diminishing
value as leases grew shorter. Mortgage difficulties arose leading to
problems in selling. Where leasehold flats were concerned the
service charge became a further problem.
Will
Commonhold be compulsory and will it apply to all residential long
leases?
Commonhold will be a voluntary system and can apply to new
developments or existing buildings. A developer will be able to
create a commonhold before any units are sold and it will be the
choice of the developer on what basis the units are sold. It will be
a relatively straightforward procedure to create a commonhold.
What about
existing buildings already subject to long leases?
This is where perhaps there will be the greatest demand for
commonhold. Unfortunately, the conversion for leasehold requires
agreement of all interests. In any sizeable block of flats this will
be virtually impossible. The Government have opposed measures that
would have permitted a significant majority to decide even with
safeguards. Not only is this a lost opportunity but it will mean the
growth of commonhold will be stunted and will perhaps prejudice its
acceptability in the market place.
How will
Commonhold commence?
The freeholder of land may apply for the land to be registered as
commonhold. This is subject to the consent of holders of a lease of
more than 21 years or of any charge. Regulations will be made
dealing with detailed requirements. The reliance on regulations in
various areas of the legislation will be an advantage in providing
flexibility.
How will
Commonhold be organised?
Once the first unit is sold on a new development or on a conversion
of an existing leasehold property, a Commonhold Association will be
responsible for the structure, common areas and services. It will be
the proprietor of the common areas. The Common Association will be a
company and will have a Memorandum and Articles of Association
prescribed in the Regulations. This body will have the duty to
manage. Each unit owner will be a member of the Commonhold
Association thereby giving a democratic system.
Will there be
special rules to follow?
Each commonhold must have a Commonhold Community Statement. This
will set out the rights and duties of the Commonhold Association and
of the unit-holders. The statement will be in a prescribed form set
out in the regulations. It will be possible to add to the statement
to reflect particular requirements of a specific property.
What are the
advantages of Commonhold?
Many people have compared commonhold to a Residents Management
Company owning the freehold and have seen little difference. This is
a largely true but commonhold does bring advantages. Primarily, it
is that the structure of the commonhold and documentation will be
same for every commonhold property. It will enable in time:
-
purchasers to understand better
the rights and obligations when they are purchasing. This is not
necessarily the position at present
-
it will help practitioners to
give better guidance and overcome the problems caused by leases
which are inadequate
-
there will also be an Ombudsman
system for the commonhold sector
-
there is guidance that the
Commonhold Association should consider before resorting to
litigation.
Is Commonhold
an untried system?
No. Similar systems to commonhold operate in America and Australia.
In both countries there are significant variations on a common theme
- each state having their own legislation. It is apparent that the
system is capable of working, but in all areas there have been
regular changes to the legislation. To succeed, commonhold must be
flexible and capable of easy and speedy changes (the use of
regulations will help this) and should not be regarded as the cure
for all ills affecting the management of interdependent units.
Leasehold reform
RTM
The right to manage (RTM) will enable a group of qualifying
leaseholders (comprising at least 50% of the flats in the building)
to take over the management from the landlord. The qualification of
a long leaseholder is having a lease of originally more than 21
years. To operate this right, at least two thirds of flats must be
subject to long leases and at least 50% of the total number of flats
must vote to take over the management. There is no residence
qualification. There are a number of limited exceptions to these
overall rules.
RTM requires a special company to be
formed as set out in regulations and a claim notice is required.
There are provisions to govern giving information and transfer of
money as well as fixing a timetable.
The RTM company will be responsible
for managing the building and landlord and tenant legislation will
apply to such companies. The Act also amends the right to collective
enfranchisement. The exclusion where there is commercial content
will now operate where it exceeds 25%, previously 10%. The low rent
test is removed, as is the residence requirement. The requirement
that two thirds of the long leaseholders participate has also been
abolished, but there remains the provision that 50%of the flats are
part of the participating group. These provisions are designed to
make the right to enfranchise more accessible.
RTE
The enfranchisement process will in future be operated through a
Right to Enfranchise Company (RTE) rather than a nominee purchaser.
The Act also makes changes to the valuation process. The date of
valuation will be the date the notice to enfranchise is served. The
marriage value will be shared equally between landlord and
leaseholders rather than at least 50% to the landlord. Where the
leases exceeds 80 years unexpired at the date of the notice to
enfranchise, there will be no marriage value.
Right to a new lease
The right to a new lease has also
been amended. Instead of the residence test there will be a
requirement of two years ownership and the low rent provisions are
removed. Similar provisions to the enfranchisement changes apply to
the valuation date, sharing of marriage value and the 80-year cut
off. There are also changes to leasehold houses involving the
abolition of the residence test, now requiring two years ownership.
The restriction on enfranchising during an extended lease is removed
and there are changes to valuation similar to flats.
Management
changes
There are other significant changes to management. The
consultation procedure will be changed and contracts over one year
are included. There will also be changes to the financial limits.
Regulations will be introduced giving the new procedures. The powers
of the Leasehold Valuation Tribunal will be widened in this and
other areas.
Other
provisions
There will be a requirement for a landlord to produce a
statement of account that will extend the information to be provided
and will have to be in a specified form. Other changes include a
summary of rights and obligations to accompany service charge
demands, new rights to inspect documents and keeping of separate
bank accounts for each property/trust fund. The latter provision
will have significant impact on many members. Further provisions
cover restrictions on administration charges and extending the
provisions relating to variations of leases. There are provisions ensuring
notification of ground rent being due to prevent landlords allowing
ground rent to accumulate and then commencing forfeiture
proceedings. There will be further restrictions on forfeiture
whereby the determination of whether there is a breach is required
before forfeiture proceedings can commence. The impact on management
of the Act will be significant and members will need to be vigilant
regarding the implementation of the new provisions as well as the
numerous regulations, some of which will not take place for many
months.
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