Commonhold – a panel discussion

Below is a note if some of the key points from the panel debate at the ARMA Conference 2017

The panel comprised 5 industry experts and looked at a number of issues. Appearing on the panel were; Philip Rainey QC, Professor James Driscoll, Jennifer Bourne of U.K.Finance (formerly the CML), Martin Boyd of the Leasehold Knowledge Partnership (LKP), David Clark of the Mainstay Group and Alison McDiarmid of the Property Managers Association Scotland.

The broad conclusion was that Commonhold was a good thing and that its introduction couldn't come soon enough! (I know that this is not a view that everyone will share).

Some of the key points are picked out below:

The lenders' concern – redevelopment

Under Commonhold if 75% of the unit owners vote in favour, then the building can be re-developed. This would mean that the property interests would come to an end. The position of a secured lender with a mortgage over a unit is not clear.

If they aren't in favour of the same and / or fear a shortfall for instance, how will they be protected?

Jennifer Bourne of U.K. Finance expressed concern on this.

Valuation issues – a two-tier market?

Another concern – which would be more of an issue perhaps for existing leaseholders, would be what if suddenly Commonhold units have more value (or conversely less) than leaseholds?

Why or how would this happen? – I have commented before that if there were to be a sunset clause on leasehold then at some point investors in ground rent might well 'pile in' to the remaining freehold reversions – and the price of these would be driven up. This would have a knock on effect on leaseholders who would have to pay more to enfranchise and as a result might if matters became extreme, have less valuable properties.

Not a problem for Commonhold itself, but something of the law of unintended consequences.

The Scottish position

Freehold in Scotland works for shared units like flats because there are no restrictions on passing on positive covenants with a transfer of the land.

Would that be a solution here? Well, perhaps up to a point, but the Scottish take on this is that the system is far from ideal, because in order to get major works etc. progressed, everyone has to agree and, we all know how difficult that can be.

This was the view of Alison Mc Diarmid of Property Managers Scotland who says that she would prefer Commonhold.

What about the position of investors? Is ground rent sometimes a good thing?

David Clark of the Mainstay Group commented that we need to keep ground rents reasonable but what about the needs of pension funds etc. depending on this income.

Whilst not immediately popular, ground rents at an acceptable level do provide a valuable source of fixed income. The impact of losing this should be assessed and there are numerous large funds that have invested in the sector.

How to make it happen?

What about changing the requirement for unanimity to get conversion to Commonhold?

This has been mooted before. As matters stand 100% of the flats would have to agree to be able to convert. That means only one person can block a conversion of they want to.

The threshold could be reduced, but this would also require lender consent.

James Driscoll commented that the threshold should be reduced. His view was that says long term it would be far better if we offered Commonhold as an alternative.

There are after all, 4m leaseholders – possibly 8m voters if the flats are co-owned. They will all have something to say about these issues.

All in all there is lots to discuss if Commonhold is to become a reality and a key question will have to be how this issue can and will compete for the available parliamentary time.

Mark Chick
18.10.2017

Philip Rainey's suggestions to help Commonhold take hold

• Get rid of ground rent
• Make leases very long
• Provide an SDLT incentive for Commonholds

Add it to the PHSE lessons at school?!

From the ARMA conference 18.10.2017

So what is the answer to the leasehold scandal? Is it commonhold? Or is it going to take a bit more for commonhold to take hold?

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/632108/Tackling_unfair_practices_in_the_leasehold_market.pdf

https://www.gov.uk/government/news/crackdown-on-unfair-leasehold-practices

The recent government consultation on 'tacking unfair practices and abuses in the leasehold system has just closed.

Apparently government has received over 6,500 responses and clearly reform in this area is an emotive issue.

Recently, I mentioned the topic of commonhold in passing – looking at some of the responses it is clear that this is something of an emotive topic!

I only said 'maybe' – but that seems to be the problem ! For half the audience commonhold is a dead duck – a large waste of space on the statute book and for the other half it represents a failed attempt to bring in something better.

Commonhold is not without its issues – there are a number of reasons that it has never taken off. The fact that it was never made compulsory is just one of them.

More significant issues revolve around 'service charges' and disputes. There is also the restriction on creating any kind of lease of a commonhold unit which will cause issues for some types of shared ownership structures.

It will be interesting to see how the consultation pans out. My personal bet is on there being some kind of restriction on rents for new build houses and/ or prohibition on creating these as leasehold save where absolutely necessary.

Here is a quick reminder of what the consultation is looking at:

We will have to wait for the answers which will no doubt be published later in the year. For the moment it is very much 'watch this space.'

Mark Chick

Mark Chick is a solicitor specialising in leasehold matters.

To to find out more visit www.bishopandsewell.co.uk or email leasehold@bishopandsewell.co.uk
 

‘Elim Court’ – How wrong is right?

Serving notices has always been a tricky business. The emphasis on getting it right is ultimately a balancing act between what ‘black letter’ compliance might demand and that which the reasonable layperson might expect common sense commerciality to dictate.

This case is interesting, as it really does seem to push the envelope of how wrong you can get it, but still get it right.

That is not to say that it is proposition for the suggestion that all and any faults in a notice can be forgiven, but it does show that the approach that the courts will take when something had gone wrong has shifted over recent years.

The case concerns RTM and so you might argue that different policy considerations apply – this is a ‘no fault’ right to take over the management after all – any failure in the process can be corrected by serving another notice and here are no economic consequences for the landlord as unlike Enfranchisement no property interests are changing hands.

However, I do think that this case will be seized upon as a ‘get out of jail free’ card by those next affected by issues of validity in their notices.

So let’s have a look at the case – the facts are fairly involved but revolve around several issues of non-compliance with statutory obligations under the Commonhold and Leasehold Reform Act 2002 relating to the RTM process. The full version of the case can be found here http://www.bailii.org/ew/cases/EWCA/Civ/2017/89.html

The Issues

These were as follows:

During the RTM process a notice of invitation to participate must be given to all of the potential participants. In addition, notice must be given to the tenants as to where a copy of the articles of association of the company may be inspected. Three days for inspection must be nominated of which at least one must be a Saturday or Sunday. In Elim Court three days were specified but none of them was a Saturday or Sunday.

The court held that the non-compliance with the requirements of the legislation was a trivial failure and would not of itself invalidate the RTM process.

The notice of claim in an RTM case must be signed on behalf of the company. An issue arose as to whether it had been signed by an authorised member or officer. An individual whose status was unclear in fact signed the notice. The person signing (a Mr. Joiner from the Right to Manage Federation), was a member of the RTM company, but his signature bore an identity stamp of ‘RTMF Secretarial.’ The signature requirements of the RTM legislation are strictly that the notice be ‘signed by authority of the company [signature of authorised member or officer].

Mr. Joiner was a member of the RTM Company. However, the stamp implied that the RTMF (a company whose business it is facilitate the RTM process) had signed the notice.

If so, it was the company secretary of Elim Court. However, for it to sign another signature would be required if it were to execute the notice as a deed. Mr. Joiner appears not to have held office within the RTMF. However, if Mr. Joiner was signing on behalf of the RTMF then it was not clear that the notice had in fact been signed by or on behalf of the RTM Company.

The court held, nonetheless that despite the confusion the notice had been validly signed – ‘ where a notice is capable of two interpretations, one of which will lead to the conclusion that it is valid, and the other to the conclusion that it is invalid, the former interpretation should be preferred.’ (Para 48).

The other issue was that the notice had not been served on an intermediate landlord – a strict requirement of the RTM legislation. However, the intermediate landlord in question was the owner of a single reversionary leasehold interest over a flat as part of an equity release scheme. Accordingly, because the intermediate landlord had no direct management responsibilities the court held that service on this entity could be dispensed with.

 The Law

It is worth considering the legal background to the court’s approach in this case.

The law concerning the service of notices has shifted over recent years. For a long time when looking at what had gone wrong with a notice the courts adopted an approach that looked at the distinction between requirements of statute that were ‘mandatory’ and those which were ‘directory’ – failing to comply with a mandatory requirement rendered the notice invalid. This was the position following the case known as Mannai[1]. See http://www.bailii.org/cgi-bin/format.cgi?doc=/uk/cases/UKHL/1997/19.html&query=(mannai)

The law has since moved on and the emphasis now is more on what parliament would have intended the consequences of non-compliance to be. In particular, the case of Natt v Osman [2014] EWCA 1520 Civ http://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWCA/Civ/2014/1520.html&query=(natt)+AND+(v)+AND+(osman) provides very useful guidance for leasehold reform cases.

Natt v Osman tells us clearly that in cases such as leasehold reform cases ‘the intention of the legislature as to the consequences of non-compliance with the statutory procedures (where not expressly stated in the statute) is to be ascertained in the light of the statutory scheme as a whole.’ (Para. 33)

Perhaps most telling in the conclusion of the Court of Appeal in Elim are the concluding paragraphs – ‘I have drawn attention to the Government’s policy that the procedures should be as simple as possible to reduce the potential for challenge by an obstructive landlord’ (para.77). There is also the observation that this is the third attempt by the RTM company to take over the management of Elim Court. Lord Justice Lewinson goes on to say that the government may wish to consider simplifying the procedure further.

Elim may well be confined to its facts – as an RTM case, but it is certainly true that RTM ‘just got easier’- has it made a difference in Enfranchisement? – We will have to wait to see.

Mark Chick

23 May 2017

Mark Chick is a specialist leasehold property solicitor and head of the Landlord and Tenant Team at Bishop & Sewell LLP, a firm of solicitors based in Central London.

This note is not designed to be a complete summary of the law in this area and should not be relied upon as such. If you require assistance with legal issues then please take legal advice. For further details, or to speak to one of the Landlord and Tenant Team at Bishop & Sewell LLP visit www.bishopandsewell.co.uk or email: leasehold@bishopandsewell.co.uk

 

[1] Mannai Investment Co Ltd v. Eagle Star Assurance [1997] UKHL 19