A change for the better?
Residential property ownership could look very different in the future if the Law Commission’s package of reforms to enfranchisement, right to manage (RTM) and commonhold become reality. The government set the Law Commission the task of reshaping the residential landscape to provide a ‘better deal’ for homeowners, and the result is 324 recommendations for change. Clearly, a weighty legislative task lies ahead if these plans are to be implemented with significant consequences for all stakeholders in the residential arena. The proposals are based on the premise that moving away from leasehold will lead to a better form of homeownership, but there are areas of contention which are bound to arise.
Do good neighbours become good friends?
One of the themes underpinning the Law Commission’s recommendations is the aim to reduce disputes between different leaseholders and between leaseholders and landlords. There are many examples across the three reports, such as the proposals to simplify the qualification criteria for lease extensions by removing the requirement to have owned the property for two years and to create the new single concept of a ‘residential unit’ rather than houses and flats for enfranchisement and RTM.
But if implemented, will the recommendations reduce disputes or in fact lead to more litigation?
The Law Commission’s report on commonhold states that:
…..the mechanism for setting costs and resolving disputes within the commonhold reflect the fact that there is a community of owners in the building who share control of the building, rather than a landlord who dictates the costs to be paid, and enforces the rules against the owners, which is the starting point in leasehold……
The ideology is that the unit holders will share a common interest reducing disputes (see the Law Commission’s Reinvigorating commonhold: the alternative to leasehold ownership (Law Com No 394, HC 586)).
The commonhold system enables budgets to be approved by the majority of unit holders, which rarely happens in the leasehold sector. However, it is already very common in the leasehold sector for a company in which all of the leaseholders are shareholders to own or manage the freehold collectively, and those involved in the leasehold arena frequently encounter disputes even though that shared common interest is present.
It is also worth noting that under the commonhold framework, even if the unit holder approves the budget, this does not remove the possibility of disputes about the standard of service provided or works carried out.
The Law Commission’s signalled move towards commonhold as the preferred model of home ownership is accompanied by recommendations for simplified dispute resolution processes with prescribed forms, encouraging alternative dispute resolution and a new pre-action protocol. Arguably, however, this proposal merely adds an extra layer of pre-dispute procedure and increases costs for all concerned, bearing in mind that if a dispute remains unresolved, it is likely to be referred to the First-Tier Tribunal (Property Chamber) (‘Tribunal’ hereafter) or the Leasehold Valuation Tribunal in Wales - the jurisdiction for many current leasehold disputes.
Concerns were raised by consultees about the Law Commission’s recommendation that, where a unit holder breaches the Commonhold Community Statement (CCS) (which sets out the rights and obligations of unit owners and the commonhold association), they should provide an indemnity to other unit holders, tenants and the commonhold association for any losses suffered as a result of a breach of the CCS. This is arguably more onerous than the leasehold regime where a leaseholder may be responsible for the landlord’s professional costs of enforcement action if it breaches the terms of a long residential lease.
Even for decisions within the commonhold association being taken on a majority basis, there remains huge scope for disputes given the Law Commission’s recommendations to protect those outvoted. This minority protection takes the form of a right to make an application to the Tribunal on certain grounds to challenge the vote of the commmonhold association. The Tribunal can then uphold or annul the commonhold association’s decision based on certain criteria.
The conversion conundrum
Commonhold, introduced in 2004, has failed to take off in England. The Law Commission aims to remove some of the current impediments to conversion by reducing the threshold to 50% leaseholder consent and removing the need for mortgagee consent but freeholder consent remains a requirement and a hurdle to overcome. Significant financial incentives are likely to be needed to increase the sale of new flats on a commonhold basis. However, the biggest conundrum is what happens to non-participating leaseholders on any conversion to commonhold. The Law Commission’s preferred option is for all flats to be converted to commonhold at the same time and have the government provide equity loans to non-consenting leaseholders. Its alternative proposal is for a hybrid commonhold/leasehold building, with non-participating leaseholders having the right to purchase the commonhold interest at a later date with a menu of finance options. Neither option appears to be a complete solution and one wonders if a hybrid building would be a harmonious marriage.
Focus on the Tribunal
The Law Commission’s proposals envisage a significantly larger role for the Tribunal, making it the primary forum for disputes regarding residential property – at least if and until the long awaited Housing Court materialises.
One of the key objectives of the Law Commission’s consultations for enfranchisement and RTM is to reduce the number of disputes, particularly in respect of technical, procedural matters. For those disputes that remain, the Tribunal will provide a (mostly) one stop-shop. However, despite the Law Commission’s proposals to simplify procedure in these areas, there will undoubtedly be parts of the new legislation requiring clarification by a judicial body, with the definition of ‘residential unit’ being a hot contender. In addition, as mentioned above, disputes arising in relation to commonhold buildings will be heard by the Tribunal, if the proposed commonhold dispute resolution procedure is unsuccessful.
On the face of it, it is undoubtedly straight-forward for one forum to deal with residential property disputes. However, the efficacy of this solution relies heavily on the Tribunal having the case management capacity to deal with its increased workload. It should also be noted that there are certain remedies which may be sought which cannot be awarded by tribunals, such as injunctions. The proposal is that these cases should be transferred to a county court and it is critical that any such transfers should be as smooth as possible.
Another key element of a claim in the Tribunal is that it is a ‘costs-free’ jurisdiction, where each party bears their own costs, unless one party has behaved particularly unreasonably. While this is intended to increase access to justice and remove concerns about bearing the other side’s potential significant legal costs, there is a risk that this could lead to a significant amount of vexatious and unmeritorious litigation placing further burdens on the Tribunal’s capacity. Further, it removes any chance of litigating parties recouping their costs from the other side which could be considered unfair. The lack of financial penalty for non-compliance can lead some parties to take a laissez-faire attitude to compliance with Tribunal directions. This naturally leads to delays and often to the complying party incurring costs unnecessarily. The Tribunal currently has the power to strike out claims in certain circumstances but the threshold for such remedies is very high. One way to ensure effective case management would be to take a stricter approach to compliance with directions, and to look more critically to identify when cases should be dismissed at an early stage.
The impact on mixed use premises
One of the more dramatic proposals in the enfranchisement and RTM reports is to increase the non-residential floor space threshold for a building to qualify from 25% to 50%. This change is intended to improve access to enfranchisement rights; the natural consequence of which is that many more mixed-use developments have the potential to be taken under leaseholder management, unless the leaseholders require the landlord to take a leaseback of the commercial parts. This may come as a surprise to commercial investors and occupiers - and possibly not a welcome one. The Law Commission has proposed training for leaseholders who take charge of their buildings but it may be quite a departure from a professional management company.
The commonhold proposals also introduce radical changes with mixed-use premises in mind. Currently, every unit holder can vote on all matters affecting the commonhold, which is a serious obstacle to mixed-use developments. The introduction of the use of ‘sections’ so that owners with different interests are limited to decisions affecting their own part of the commonhold goes some way to rectifying this. However, it is not clear how appealing commonhold as a tenure will be to commercial investors and operators. The driving force behind commonhold (whether you subscribe to it or not) is the belief that homeowners want to join together to manage the building in which their homes are located. Whether commercial operators will feel similarly is quite a different matter.
The Law Commission’s reports amount to more than 2,000 pages overhauling enfranchisement, commonhold and RTM. While issues affecting residential property are rarely away from the headlines and clearly of some importance to the government, it will undoubtedly require an enormous amount of parliamentary and governmental time to implement the proposals. Therefore, although the direction of travel appears to be set, no amount of crystal ball gazing can determine precisely what the residential landscape will eventually look like and - crucially, when the changes are likely to take effect.
This article was written by Lauren Fraser and Laura Bushaway and was first published in Property Law Journal (lawjournals.co.uk). Fore more information, please contact Lauren on +44 (0)20 7427 6418 or at firstname.lastname@example.org or Laura on +44 (0)20 7438 2261 or at email@example.com.