The Commonhold and Leasehold Reform Act 2002

Commencement:

The Act received the Royal Assent on 1 May 2002 and will be brought into force by commencement orders laid before Parliament by the Deputy Prime Minister's Office. It is likely that this will occur on a gradual basis (see below). It is currently intended that it will be fully in force in December 2003, following the implementation of the Land Registration Act 2002 in October 2003.

Scope of the Act:

The Commonhold and Leasehold Reform Act has two main aims. The first is to create a new type of property ownership, the commonhold. It is intended that this would combine the security of freehold ownership with the management potential of positive covenants which could be made to apply to each owner of an interdependent property. The second is to reform residential leasehold law, giving leaseholders new rights and enhancing existing ones. This will help those leaseholders who are not able, or do not wish, to convert to commonhold.

The Act has important implications for landlords and property managers both directly (for firms involved in block management) and indirectly (for administration of issues such as service charges and lease renewals). This factsheet explains some of the significant improvements in leaseholder rights introduced by the Act.

Legislation references:

The statutory references used in the text are as follows:-

• "the 1967 Act" - the Leasehold Reform Act 1967;
• "the 1987 Act" - the Landlord and Tenant Act 1987;
• "the 1993 Act" - the Leasehold Reform, Housing and Urban Development Act 1993

Part 1 - Commonhold:

The Act sets out the following in respect of the new concept of a commonhold:-

• to define the nature of commonhold;
• to specify the registration process of the commonhold;
• to define the commonhold unit and the transactions which may take place, such as transfer and leasing;
• to define the common parts of a development and to regulate their use, maintenance and transactions such as charging;
• to define the form and content of a commonhold community statement (CCS);
• to define the constitution and operation of the commonhold association;
• to deal with the winding up of a commonhold association;
• to make other miscellaneous and general provisions.

Commonhold is a type of freehold estate and the title to the land will be registered as a freehold estate. Each individual flat or unit will be a separate freehold and the remaining elements of a building will be a ‘common part'. The ‘common parts' will be owned by the Commonhold Association, which will be a private company limited by guarantee, and each flat or unit owner will be a member of the Commonhold Association. The form and content of the memorandum and articles of association for the company will be in a prescribed format. Enforcement of positive and negative covenants is provided for by both the Act and under the Commonhold Community Statement.

This Commonhold Community Statement, again in a prescribed form, will set out the rights and duties of both the flat/unit holders and the Commonhold Association. This Statement may limit the use of ‘common parts' to only some of the flat/unit holders. So, for example, in a mixed flat and shop development access to the flats might be limited to the flat owners and rear access to the shops might be limited to the owners/tenants of the shops. Commonhold flats could be leased, but there will be restrictions on the length of the residential lettings for periods up to 7 years. There would be no such limit on commercial lettings.

It will be possible to convert existing leasehold titles into commonhold but only if all of the parties involved consent to the registration of the commonhold.

Part 2 - Leasehold Reform:

Background

It has long been recognised that the leasehold system of tenure has many drawbacks for the nearly two million long-term residential occupiers of flats and houses. Many experience severe difficulties with their landlords which, in the Government's words, range "from neglect of their obligations under the lease to outright exploitation". Government has been attempting to improve the position since 1967. As not all leaseholders will be able to convert to the new Commonhold, these reforms are intended to improve their position. The Act contains a number of new rights.

Right to manage

Whilst the Act gives the qualifying leaseholders the right to manage their block through a ‘Right to manage' company it also includes safeguards to protect the legitimate interests of the landlord and any other occupiers of the building, such as tenants on short residential leases and commercial occupiers.

The Act will substantially affect the present management of many properties and the changes include:-

• giving leaseholders a new no-fault right to manage their block of flats without the need for compensation;
• defining the corporate body which will take over management (this will be a private company limited by guarantee) and will be known as a RTM company;
• defining the eligibility criteria which will be similar to the revised criteria for collective enfranchisement;
• setting out the procedures for exercising the right to manage;
• setting out the functions and responsibilities of the managing body when the right is exercised;
• providing for safeguards for the landlord's continuing interest;
• providing for pre-existing management contracts when the right to manage has been exercised;
• providing dispute resolution procedures; and
• providing for the termination of the right to manage where the body fails to manage the property properly, or no longer wishes to exercise the right or becomes insolvent.

Collective enfranchisement by tenants of flats

Since 1993, flat owners have been given the right to buy the freehold of their block as a group - a process known as ‘collective enfranchisement'. The present Act removes the requirements that at least two thirds of the leaseholders of the block must participate and that at least half the participating group must have lived in their flats for the previous 12 months or for a period of three years in the last ten. The new two years as a ‘qualifying tenant' will mean that landlords who have purchased a leasehold property as an investment and are letting rather than occupying the property will be able to participate in this enfranchisement.

The Act also abolishes the low rent test in the relatively small number of situations where it applies and, more importantly, increases the proportion of the building that can be occupied for non-residential purposes from 10% to 25%. This will mean that a property of a shop and three flats can benefit from this change. It also reduces the scope of the exemption for certain resident landlords.

To safeguard and improve the rights of existing leaseholders the Act will:-

• amend the rules for collective enfranchisement under the 1993 Act;
• require that a company limited by guarantee be used to own the building;
• simplify the eligibility criteria, particularly the abolition of the residence test and the requirement for at least two thirds of the leaseholders to participate;
• amend the procedures for exercising the right;
• give every qualifying leaseholder the right to join the company and participate in the enfranchisement and
• clarify and simplify the details of the valuation arrangements.

New leases for tenants of flats

To apply to purchase a new lease the previous rule that the leaseholder must have lived in the flat for the last three years, or for periods totalling three years in the last ten, is replaced by a requirement that they must have held a lease for at least two years. Where a leaseholder dies but would have been eligible to buy a new lease when they died their rights are transferred to their personal representatives for a period of one year after the grant of probate or letters of administration.

For existing tenants the Act will:-

• make consequential changes to the rules for the right to a new lease of a flat under the 1993 Act reflecting the changes to the rules for collective enfranchisement and
• give leaseholders who have extended their leases under the 1967 Act the right to buy their freehold and to security of tenure at the end of the lease.

Leasehold house

The changes previously mentioned regarding collective enfranchisement and new leases are applied to leasehold houses. This is by way of amendments to the 1967 Act.

For those in leasehold houses the Act will:-

• make consequential changes to the rules for the right of leaseholders to buy the freehold of their houses or to extend their lease under the 1967 Act reflecting the changes to the rules for flats;
• change the procedure for buying the freehold of houses where the landlord cannot be found into line with the law in relation to flats; and
• provide a right for those who do not buy the freehold to become entitled to an assured tenancy under Part 1 of the Housing Act 1988 when their lease expires.

Other provisions about leases

The other provisions of the Act are principally concerned with charges and leasehold valuation tribunals (LVTs) and there are provisions:-

• to strengthen the protection of leaseholders against the demanding of unfair charges;
• to extend the definition of service charge to include the cost of improvements;
• to simplify and strengthen the existing consultation requirements;
• to simplify and strengthen the existing requirements covering accounting for and safeguarding service charge monies;
• to introduce the right to challenge the reasonableness of one off charges not recovered through the service charge (‘administrative charges');
• to give LVTs jurisdiction to hear any dispute over liability to pay service charges and the reasonableness of the charge or the works or services involved;
• to extend the scope of the right to apply to a LVT for the appointment of a manager under Part 2 of the 1987 Act;
• to extend and clarify the grounds for applying for lease variations under Part 4 of the 1987 Act and to transfer the jurisdiction to LVTs;
• to provide that action cannot be taken to forfeit a long lease for non payment of ground rent unless that sum has been demanded for the landlord; and that forfeiture action cannot be taken on any other ground unless the validity of that ground has first been established;
• to apply existing and new rights in respect of service charges, administration charges and protection against forfeiture to tenants of the Crown;
• to consolidate and rationalise the existing provisions governing the constitution and procedures of LVTs and to amend them;
• to require permission for appeals against determinations of LVTs to the Lands Tribunal and
• to implement the recommendations of the Financial Management and Policy Review covering the work of the LVTs.

Implementation:

The Commonhold and Leasehold Reform Act 2002 (Commencement No. 1, Savings and Transitional Provisions)(England) Order 2002 was made on 26 July 2002 and brings into force sections 114-120,125, 127-147 & 160-162 from that date. These sections include provisions on enfranchisement and lease extensions. The remainder of the provisions of the Act will be brought in over the next two years. Details as to the timing of the implementation process will be published in future issues of the Letting Update Journal, published by the Letting Centre (details below).

Further consultation is ongoing, and is likely to continue, over the implementation period on some of the finer detail of the reforms. For example, over Q4, 2002, Government are seeking views on the content of the draft Memorandum and Articles of Association for both ‘Right to Manage' (RTM) and ‘Right to Enfranchise' (RTE) companies.

Sources for Further Information:

Copies of the Commonhold and Leasehold Reform Act 2002 are available from the Stationery Office (telephone 0870 600 5522 www.tso.co.uk. The text of the statute and the Statutory Instrument are also available on the web at www.opsi.gov.uk

Initial guidance on the provisions of this Act is available from the Department of Communities and Local Government. This can be provided on request or can be obtained from their web site at www.dclg.gov.uk

Further information on Commonhold issues can be obtained from the Department of Constitutional Affairs and their web site is at www.dca.gov.uk

Other sources of information:

Leasehold Advisory Service (LEASE) 8 Maddox Street, London W1R 9PN, Tel: 0207 493 3116 provides free advice and guidance to leaseholders and landlords on all aspects of leasehold law. Their website is available at www.lease-advice.org

The Letting Centre, website: www.letlink.co.uk

Flat Owners Guid, Paul Walentowicz (ISBN 1 870767 829) from Shelter Publications on 020 7505 2180 or www.england-shelter.org.uk

This summary is intended to assist landlords and letting agents to understand the effect of the Act. It is not an authoritative interpretation - this is a matter for the courts. For more detail, you should refer to the text of the Act itself.