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13 April 2018
Response to Call for Evidence on Commonhold Law
This response to your consultation is on behalf of The Federation of Private Residents’ Associations (FPRA), which as far as we know, is the only national body that represents the voice of leaseholders in England and Wales.
We have over 500 member associations representing tens of thousands of individual leaseholders. We have drafted this response on the basis of our regular daily contact with our members who inform us of the problems they encounter in the leasehold sector.
About half of our member Associations are leaseholder-owned companies which own the freehold of and manage their blocks. Our comments reflect the viewpoint of such companies for whom commonhold could represent an improvement to their present arrangements. For those blocks where the freeholder is separate from and independent of the leaseholders of the individual flats, an enfranchisement would seem to be an essential preliminary step to a conversion to Commonhold, since there seems to be no role in the Commonhold system for a separate freehold interest.
Commonhold Associations would be eligible for FPRA membership, but there are very few existing Commonholds and none have joined FPRA.
We believe that very few of our members have considered conversion to Commonhold in detail, because of the notorious defect in the present legislation requiring every single leaseholder in the block to agree. Those running the present self-managed blocks will often have had first hand experience of the time and effort required to persuade the necessary majority of their fellow leaseholders to “sign up” to the purchase of the freehold from the original leaseholder, and will invariably have found that a small percentage will not quite get around to completing the paperwork for a very long time – perhaps not until they are proposing to sell their flats. The existence of this problem has inevitably discouraged our members from exploring the possibilities offered by Commonhold in more detail.
We consider that there are a number of types of development for which Commonhold may not be suitable such as Retirement Developments, and other developments where the freeholder would be expected to offer a high level of services over and above the maintenance and management of the building itself. Leasehold may also be appropriate in the case of mixed use developments, especially where there is a high proportion of non-residential use. It may also be the case smaller self-managed blocks will prefer to remain under the leasehold system until Commonhold has become familiar to professional advisers and simple (hopefully inexpensive) conversion procedures have been developed.
We attach answers to your detailed questions where we can assist below.
We cannot offer comments on behalf of developers or lenders. However, perhaps we can offer the suggestion that developers would find it easier to continue with the present system, with which the market is familiar, until Commonhold is successfully established and accepted by the market.
We note that you have asked for comments on Company Law problems, which we comment on in more detail in our replies to your detailed questions. No doubt you will be involving the department of Business Energy and Industrial Strategy in the development of solutions to possible problems in this area. May we also express the hope that HM Revenue and Customs will also be involved in identifying any tax problems that may arise, especially in the conversion of established leaseholder-owned blocks from leasehold to Commonhold. It seems likely that the process will involve the existing company owned by the leaseholders disposing of the freehold of the block, and the leasehold interests, and interests in the company being disposed of by the leaseholders, potentially giving rise to taxable gains.
We would welcome the opportunity or working further with yourselves to develop these proposals and look forward to hearing further from you.
Deputy Chairman on behalf of FPRA
FPRA REPLIES TO GENERAL QUESTIONS ON COMMONHOLD
Chapter 2, Section A: Difficulties creating or converting to commonhold
(a) If you have previously tried to convert to commonhold: Did the requirement to obtain everyone’s consent prevent you from converting to commonhold? What was your experience and what difficulties did you come across?
(b) If you have never tried to convert to commonhold: Do you think the requirement to obtain everyone’s consent would prevent you from converting to commonhold in your building or development? If so, why and what difficulties could you foresee?
Please provide details about your particular building or development, for instance the size and number of units (such as flats) within each building.
FPRA believes that the requirement to obtain everyone’s consent has prevented potential attempts to convert existing leaseholder owned blocks to commonhold. Whilst this problem might be surmounted by small blocks with few leaseholders, they would probably see no reason to go to the expense of conversion. These costs would be bound to reflect the costs, for professional advisers, of familiarising themselves with a new and unfamiliar area of law. For this reason, it is suggested that if Government wishes Commonhold to be adopted widely, adoption by the larger leaseholder-owned blocks should be encouraged. They are more likely to have the resources professional and personal to make a success of it.
Are you aware of any difficulties in the process of creating a commonhold as a new development or any other difficulties in the process of converting to commonhold (other than the consent requirement)?
Please give as much detail as you can.
As explained in the answer to Question 1, FPRA believes the consent requirement has prevented existing blocks exploring commonhold in detail so as to identify possible problems. We have no experience of new commonhold developments. Surely, developers would prefer to use the established leasehold system, which they are experienced in selling to customers. Moreover, until commonhold is established, new commonhold developments will require commonholders who are likely to be complete strangers to each other and their new commonhold neighbours, to manage a building which they do not know under what will initially be a new and untried legal system.
Chapter 2, Section B: Making commonhold work for homeowners – Question 3.
There are a number of issues which may need to be addressed to make commonhold work for homeowners. These include issues relating to: • Application of company law. Stakeholders tell us that company law is too complex and that the commonhold association may require a different corporate structure. • Consumer protection in new developments. Stakeholders tell us that the right balance has not been struck between providing flexibility to the developer and protecting consumers. • Degree of flexibility in the commonhold community statement. Stakeholders tell us that the right balance has not been struck between the terms which must apply to all commonholds and those which can be changed. • Commonhold costs. Stakeholders tell us that there should be more flexibility in the way costs of managing and maintaining the commonhold can be shared. • Dispute resolution. Stakeholders tell us that the dispute resolution procedure is ineffective and that a body other than the county court should assist with resolving disputes. • Termination and insolvency. Stakeholders tell us that the law surrounding termination is unclear and that homeowners may not be adequately protected if the commonhold association becomes insolvent.
(a) If you have previous involvement with commonhold: Have you encountered problems in practice relating to any of the above aspects of commonhold? Please provide as much detail as you can about your experience.
(b) If you do not have previous involvement with commonhold: Have any of the issues above deterred you from using commonhold? If so, why?
(c) Are you aware of any issues not referred to above which might make commonhold undesirable for homeowners? Please provide as much detail as possible.
It is interesting that paragraph 2.13 suggests that the complexity of company law is a problem. In fact, as suggested by paragraphs 2.12 and 2.14 of the Law Commission document, the problems are with the compliance procedures and the increasingly severe penalties for non-compliance with formal procedures. However, it is likely to be difficult to devise an alternative outside the Companies Acts that would serve the purposes of a commonhold association. The reason for this is that Limited Liability is an essential protection for the leaseholder of a flat and will be similarly necessary to the owner of a commonhold flat. FPRA understand that the present policy of the Department for Department for Business Energy and Industrial Strategy, like the policy of it’s variously named predecessors, is that the formal and filing requirements are a price that must be paid for limited liability.
Question 4. There are similarities between commonhold associations and leaseholder-owned companies which own and/or manage their building. If you have experience of a leaseholder-owned company: (a) Has the application of general company law to leaseholder-owned companies caused any issues in practice? (b) Do you have any experience of a leaseholder-owned company becoming insolvent? What was the situation, and to what extent (if at all) were the leaseholders responsible for paying the debts of the company? Please give as much detail as possible.
FPRA is not aware of any leaseholder-owned company having become insolvent. It is difficult to see how this could happen, so long as the leases provide for services charges to be paid in advance, so that cash is available to pay contractors and management fees, and the appropriate insurance cover is maintained. If a leaseholder-owned company, or presumably a commonhold association were to become insolvent there would be financial consequences for the members, essential especially if money paid to the company or association for work to be carried out in future ceases to be available before the work is carried out. The Leaseholders will have to pay again or accept that the work will not be carried out, with consequential effects on the value of their flats.
However, if the work is done, so that the leaseholder owned company or commonhold association is liable to contractors, but the service charges have been paid in advance but are no longer held by the company it is hard to see how the leaseholders can be required to pay again to keep the company solvent, and the same principle should apply to a commonhold association.
Of course, leaseholders, and commonholders who guarantee their company’s liabilities, or are directors of the company may be in a different position, but apart from this limited liability should protect the members of a leaseholder owned company, or commonhold association constituted as a company limited by guarantee.
Directors of leaseholder-owned companies are usually unpaid, but nevertheless subject to heavy responsibilities. There are two particular problems for directors of leaseholder-owned companies which suitably drawn commonhold legislation may solve:
(a) The service charge provisions in the lease of a flat will provide for meeting the expenses of managing the property, i.e. the block of flats. Service charge funds cannot be used to meet the expenses of managing the company e.g. holding meetings, maintaining registers of members, filing returns with Companies House.
Under the leasehold system, this problem may be mitigated by ground rents (something which FPRA have pointed out to Government in relation to the present discussion of Ground Rents). It is to be hoped that commonhold rules will provide for commonholders to be liable for meeting the costs of managing the Commonhold Association in the same way as they will be liable for the costs of managing the property itself
(b) The terms of a lease will define and limit the types of expenditure which may be paid for out service charges.
If the directors of a leaseholder owned company commit the company to paying for work or incur other expenses not authorised by the terms of the lease, the costs cannot be paid out of the service charge funds and except to the extent that the leaseholders voluntarily agree to pay the directors may be personally liable for those costs by refunding them to the service charge fund, or possibly directly to the contractors. Even if the majority of leaseholders agree that the payments are beneficial, and they are willing to pay proportions of the costs according to their share of service charges, a dissident minority who insist that the terms of the lease be strictly applied cannot be compelled to contribute.
Perhaps Commonhold rules could allow for actions taken by the managers of the association to be validated by a majority of the members, even if outside the strict terms of the Commonhold community statement.
Question 12. If you only have experience of leasehold:
What advantages do you think commonhold could offer?
One advantage of commonhold is that, like a freehold, the commonhold interest is capable of lasting indefinitely. Every leasehold has a term date, which may admittedly be hundreds of years in the future.
More generally, Commonhold seems to offer the possibility of making a fresh start with a system designed to enable blocks of flat to be managed by the flat owners for their own benefit. For want of any alternative the landlord and tenant system has had to be used and adapted, but it was never designed or intended for this purpose. No doubt much existing Landlord and Tenant law will necessarily be transferred into Commonhold, either under specific legislation (whether primary or secondary) or by the terms of Commonhold Community Statements. However, the body of Landlord and Tenant law, as it has developed over centuries is intended and designed to protect the financial interests of the landlord rather than the tenant, especially the residential tenant. For example, in relation to making alterations or even changes of use, section 19 of the Landlord and Tenant Act 1927 effectively compels the Landlord to agree to allow alterations or changes of use by the tenant, subject only to payment of compensation for loss to the value of the landlord’s interest. In the case of self-managed blocks of flats, the “landlord” will be the leaseholder-owned company whose proprietary interest will be a freehold reversion with only a very low value. The company cannot protect the interests of the other leaseholders, either collectively or individually.