Chapter 5: Other provisions about leases

34.     This Chapter makes a number of changes to provisions relating to leasehold management under the 1985 Act. It extends the definition of 'service charge' for the purposes of the 1985 Act to include any charge which is required to be paid under the terms of the lease to cover the costs of improvements. The effect of this change is that leaseholders' existing rights in relation to service charges under the 1985 Act (e.g. a requirement of reasonableness and the right to challenge reasonableness at a LVT) are extended to cover improvements. It also includes a power further to extend the definition by secondary legislation.

35.     This Chapter extends the jurisdiction of LVTs so that they can determine whether or not leaseholders are liable to pay service charges as well as the reasonableness of such charges.

36.     This Chapter makes a number of changes to the existing requirements in the 1985 and 1987 Acts covering the accounting and safeguarding of service charge monies. Revised statements of account will make it easier for leaseholders to see where their money has gone. Service charge funds will have to be held in a separate designated trust account for each property or group of service charge payers. Leaseholders will have a new right to withhold payment of further service charges if key requirements are not met.

37.     This Chapter introduces a new concept of 'administration charge' covering charges which are required to be paid under leases for approvals, for the provision of information, as a result of a failure to pay rent or other charges on time, or as a result of a breach of a covenant or condition of a lease. It sets out a requirement that administration charges must be reasonable. It enables leaseholders to challenge the liability to pay such charges, or their reasonableness, at a LVT. It also provides that charges levied by landlords under estate management schemes are to be subject to a test of reasonableness to be determined by the LVT.

38.     This Chapter replaces the existing section 20 of the 1985 Act (which provides that landlords must consult leaseholders before carrying out works costing more than a prescribed sum which are recoverable through service charges) with a revised section. It requires landlords to consult before entering into agreements for the provision of works or services where the agreement will last for more than 12 months if the amount payable by any tenant through service charges exceeds an amount prescribed by regulations. If they fail to do so, they will be unable to recover any excess above that amount from leaseholders in relation to such a contract. It provides a power to make regulations exempting agreements of a prescribed description or in prescribed circumstances from this requirement. It also requires landlords to consult before carrying out works if the amount payable by any tenant through service charges exceeds an amount prescribed by regulations. If they fail to do so, they will be unable to recover any amount payable by a leaseholder which exceeded the prescribed amount. It provides a power to make regulations specifying detailed consultation requirements. It also provides that a LVT may dispense with any of the requirements, if the tribunal is satisfied that the landlord acted reasonably. The landlord may also apply to a LVT for a dispensation of the requirement to consult before the works are carried out.

39.     This Chapter extends the right to apply to a LVT for the appointment of a new manager under Part 2 of the 1987 Act to leaseholders where the lease provides that management is carried out by a third party rather than the landlord. It also restricts the scope of the exemption for resident landlords.

40.     This Chapter extends and clarifies the grounds on which applications may be made to vary a lease under Part 4 of the 1987 Act. It also transfers jurisdiction for handling such applications from the county courts to LVTs.

41.     This Chapter provides new rights for leaseholders of houses who are required to insure their property through an insurer nominated or approved by the landlord.

42.     This Chapter introduces a new requirement that ground rent is not payable unless it has been demanded by giving the tenant a prescribed notice, and prevents the application of any provisions of a lease relating to late or non-payment (e.g. additional charges) if the rent is paid within 30 days of the demand being issued. It also introduces additional restrictions on the commencement of forfeiture proceedings for breaches of covenants or conditions of a lease. It modifies section 81 of the Housing Act 1996 to prohibit the commencement of forfeiture proceedings, including the issue of a notice under section 146 of the Law of Property Act 1925, in respect of non-payment of service charges or administration charges unless the charge has been agreed or admitted by the tenant, or a court or LVT has determined that it is reasonable and due. It also prohibits the commencement of forfeiture proceedings for other breaches unless a court or LVT has determined that a breach has occurred. There is also a new provision which would prohibit forfeiture proceedings unless the amount outstanding exceeded a prescribed sum or the amount, or any part of it, had been outstanding for more than a prescribed period. There is a power to prescribe the content of a notice which must accompany service and administration charge demands. Furthermore, there is a new power to prescribe additional or different requirements which must be met before the right of re-entry or forfeiture may be exercised.

Chapter 6: Leasehold valuation tribunals

43.     This Chapter consolidates existing provisions covering the procedures and jurisdiction of LVTs and makes a number of changes. It provides that in all cases permission to appeal to the Lands Tribunal against a decision of a LVT must be sought; from the LVT in the first instance and, if they refuse, from the Lands Tribunal. It removes the requirement that at least one member of the tribunal shall be a qualified valuer. It provides a power to make regulations which would enable LVTs to exclude the whole or parts of cases of parties who fail to comply with directions and to award costs up to £500, or any higher amount which may be prescribed, against a party who has acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably. It further provides that where a case involves an appeal against a decision made by a LVT the Lands Tribunal cannot make an award of costs against a party to proceedings unless that party has acted frivolously, vexatiously, abusively, disruptively or otherwise unreasonably in relation to the appeal. The costs will be limited to £500 or such other amount as may be specified in regulations.

Chapter 7: General

44.     This Chapter makes general provisions relating to application to Wales, procedures for making orders and regulations, and interpretation.

COMMENTARY ON THE SECTIONS: PART 1

Nature of commonhold

Section 1: Commonhold land

45.     Section 1 defines commonhold land in terms of certain key elements necessary for its creation and existence rather than in terms of lists of attributes which might make up particular commonhold developments. Thus, first there must be a registered freehold estate in the land which is further registered as a freehold estate in commonhold land at HM Land Registry (subsection (1)(a), and see also sections 2-5). Second, there must be in existence a commonhold association, which is a private company limited by guarantee and registered at Companies House with standard memorandum and articles of association whose business it will be to own and manage the common parts of the development (subsection (1)(b) and see also sections 34 and 35 and Schedule 3). Third, there must be a commonhold community statement, in effect the rules and regulations for the operation and management of the particular commonhold. This will also be required to be in a standard format (subsection (1)(c) and see also sections 31-33). Subsection (3) defines terms used in subsection (1) by reference to other sections in the Act.

Registration

46.     Commonhold can only be created out of registered freehold land. The essence of its creation is a further registration process to be carried out by HM Land Registry. When the commonhold is fully effective, the Registry will have entries on the appropriate register which will show the individual ownership of units within the development and the ownership of the common parts by the commonhold association, with necessary cross references. Sections 2-5 set out the commonhold registration process.

Section 2: Application

47.     Section 2(1) requires the Chief Land Registrar to register a freehold estate as an estate in commonhold land provided that the applicant is the registered freeholder of the land which is to become commonhold land and that no part of the land which is the subject of the application is already registered as commonhold. The first requirement is to ensure that the applicant has the necessary authority to make the significant change to the nature of the land holding that commonhold represents. The second requirement is to ensure that the land is not already part of a commonhold regime. If it were so, it would be or be about to become either a unit or common parts, and as appears later in the Act, there are rules governing adding to or subtracting from a commonhold which would be inconsistent with a freeholder purporting to create a new commonhold out of existing commonhold land. Subsection (2) specifies the documents which must accompany the application by reference to Schedule 1, which is covered later in these notes. Subsection (3) defines a registered freeholder for these purposes as either the person appearing on the Land Register as the freehold owner or as someone entitled to be so registered, having made an application, for instance an owner of unregistered land applying for first registration.

Section 3: Consent

48.     As part of the essence of commonhold is that all those involved as unit-holders should have an equality of interest, it is important to ensure that there is full participation by all those who may be involved in a conversion from leasehold. Also, because of the distinct difference between commonhold and other forms of tenure, certain specified classes of persons with a registered interest in any land which it is intended to register as commonhold should consent to the change. Subsection (1) specifies four classes of person from whom it will be necessary to obtain consent. Paragraph (a) refers to freeholders of all or part of the land; (b) refers to the proprietor of a lease which was originally granted for a period of more than 21 years on a property which is converting to commonhold from leasehold; paragraph (c) will include mortgagees; paragraph (d) allows for other classes of person to be included in the list of those whose consent must be obtained.

49.     Subsection (2) provides for the making of regulations governing consents, including forms, duration etc. In particular they may make provision for a court to dispense with consents in circumstances which the regulations would specify, and subsection (3) provides that such an order may either be an absolute dispensation or may, alternatively, be conditional on some specified action or circumstance prescribed by the court. The court may also make any other provisions which seem appropriate, which might include, for instance, in the right circumstances, an order for compensation.

Section 4: Land which may not be commonhold

50.     Section 4 introduces Schedule 2, which lists types of land which may not, for a variety of reasons, be registered as commonhold. The three broad categories are:

(i)     developments in which it is intended to create a commonhold in land above ground level where the 'grounded' part of the structure is not part of the same commonhold application, the most obvious example of which would be flats developed over shops, where the shops continue to be let on standard commercial leases;

(ii)     specified sorts of agricultural land; and

(iii)     land the freehold title to which is contingent on some specified future circumstance (see Schedule 2).

Section 5: Registered details

51.     Section 5(1) prescribes the documents which must be submitted to the Registrar and be kept in his custody and be mentioned in the register, and which will form an integral part of the information held by him for the use of those who wish to search for information in relation to a commonhold. Of particular importance are the commonhold community statement (see sections 31-33) and the memorandum and articles of association of the commonhold association (see section 34 and Schedule 3). Subsection (2) permits the Registrar to keep in his custody and to mention in the register any other document which is submitted to him if he sees fit to. This might include, but not be restricted to, such things as consents and certificates required at the application stage (see section 3 and Schedule 1 paragraph 7). Subsection (3) provides that, during the transitional period between the registration of the commonhold by the applicant and the sale of the first unit, the Schedule of unit-holders need not be filed with the Register. This is because, at that stage the applicant/developer would still be the registered owner of the whole freehold and so there would be no unit-holders.

Section 6: Registration in error

52.     Section 6 provides that, where registration of a commonhold has been carried out but the application was not in accordance with or was in contravention of Part 1 of the Act, the Registrar may not deal with it by alteration under the terms of the Land Registration Act 2002 but the court may make a declaration that the registration ought not to have been carried out. It may then go on to make provision either to require the land to cease to be commonhold land or to put right the defects. So far as possible, it is expected that the courts will strive to maintain the commonhold in existence by directing appropriate people to do or refrain from doing the things which have resulted in the declaration.

Effect of registration

53.     Sections 7, 8, 9 and 10 make provision for the effect of registration in different development circumstances, distinguishing broadly between developments without occupiers, whether built afresh or re-developed whilst vacant, and those with existing occupiers.

Section 7: Registration without unit-holders

54.     Section 7 makes provision for the registration of a development without unit-holders in occupation. Subsection (1) applies the section when the land is registered as commonhold following an application under section 2 and there is no statement under section 9(1)(b) (see note to section 9). Subsection (2) provides that, in these circumstances, the applicant shall continue to be registered as the owner of the whole freehold and that the provisions of the commonhold community statement should not yet have any effect except where modifications of the document are specifically provided for under the terms of regulations made under section 8(2)(b). Subsection (3) provides that, when a person buys the first unit, the Registrar must register the commonhold association as the owner of the common parts without the need for an application for that registration to be made, and will also bring the commonhold community statement into effect, thus beginning the management of the commonhold as such. Subsection (3) also provides that all leases of all or any part of the land being registered shall cease to exist (shall be extinguished). Subsection (4) defines the types of lease to which the section applies.

Section 8: Transitional period

55.     Section 8 recognises that there will inevitably be a period during which it will be necessary to make decisions in relation to the land and the management of the development, between the time that the land is registered as commonhold and the time that commonhold is, so to speak, perfected by the sale of the first unit to a unit-holder under section 7(3). Subsections (2) and (3) together make provision for regulations to disapply or modify the effect of any provision of Part 1 of the Act, or any subordinate legislation made under it, or any provision of a commonhold community statement or memorandum and articles of a commonhold association. As pointed out in the introduction, part of the essence of commonhold will be standardisation of documents and rules and regulations, but whilst the transitional period has effect, it would be unworkable to insist that the applicant operate under the full panoply of commonhold regulation. Subsection (4) allows the applicant to apply for the registration of the land as commonhold to be undone, and subsection (5) ensures that all those from whom it was necessary to obtain consents in order to register also consent to the de-registration. Subsections (4) and (5) are chiefly to allow developers to respond to commercial circumstances. Subsection (6) provides for references in the Act to a commonhold association exercising functions in relation to commonhold land to apply also to land which is in a transitional period as defined by the earlier subsections of this section.

Section 9: Registration with unit-holders

56.     Section 9 provides that, where an application to register under section 2 has been successful and is accompanied by a request that section 9 should apply, the Registrar will register the commonhold association as owner of the common parts without need for an application, and the commonhold community statement will come into effect. This has the effect of ensuring that, where there are already people living in the development which is converting to commonhold and the Registrar has the necessary consents, the commonhold is set up at once and there is no transitional period.

Section 10: Extinguished lease: liability

57.     Section 10 provides for the case of a leaseholder in an existing development whose property is to become a commonhold unit and whose lease does not fall into the class of lease which entitle the leaseholder to give consent and will therefore be extinguished following the giving of consent to conversion by qualified superior leaseholders or the freeholder. In the event that the inferior leaseholder should suffer loss by the extinguishment of their interest under this Part of the Act the most proximate consenting superior leaseholder, or, in the absence of a superior leaseholder, the freeholder from whom the extinguished lease is held will be liable for the loss.

Commonhold unit

58.     Sections 11 to 24 make provision about the units which will be owned by unit-holders and which form the core of the commonhold development. Amongst others there are provisions covering definition, use, transfer, leasing and other transactions.

Section 11: Definition

59.     Section 11(2) requires the commonhold community statement to define the extent of a commonhold unit and requires also that there must be at least two such units in the development because there can be no commonality or, indeed, common parts requiring the operation of the commonhold scheme unless there are interdependent units. Subsection (3) sets out the matters that the commonhold community statement must deal with for this purpose, including the provision of plans, and in particular allows for the unit to consist of one or more areas of land, whether or not contiguous, and subsection (4) makes it clear that a commonhold unit need not contain any part of a building.

Section 12: Unit-holder

60.     Section 12 provides a definition of the unit-holder designed to ensure that, during the gap between the completion of the sale or other transfer of the unit and the registration of that transfer at HM Land Registry, the person to whom the unit has been transferred is the person who is the unit-holder. This is because, for that time, the person whose name appears on the register will still be the previous unit-holder. However, from the moment of transfer, the new owner is the person entitled to be registered, and this section thus provides a definition which covers the gap.

Section 13: Joint unit holders

61.     Section 13 defines joint unit-holders and distinguishes between circumstances in which rights and responsibilities are joint and those in which they are both joint and individual. Lists of these circumstances are provided in subsections (2) and (3).

Section 14: Use and maintenance

62.     Section 14(1) places a requirement on the commonhold community statement to make the necessary provisions and regulations governing the use of commonhold units. This will be the place in which the statement will specify whether, for instance, the unit is to be residential only (see section 17(5)). Subsection (2) requires the statement to impose obligations to insure, maintain and repair each unit, but subsection (3) gives the flexibility of allowing each of those responsibilities to be imposed on either the unit-holder or on the commonhold association. For instance, the statement could require the unit-holder to take out an insurance policy on the fabric of a flat whilst making the commonhold association responsible for insuring and maintaining a balcony. It could also require a unit-holder to be responsible for the decoration of the inside of window units whilst making the commonhold association responsible for decoration of the outside of the same units.

Section 15: Transfer

63.     Section 15(1) defines the word 'transfer' for the purposes of this Part as a transfer of the unit-holders freehold to someone else, whether or not any payment is made, and regardless of whether there are any terms applied to the transfer or that the transfer takes place as the result of a legal requirement. Subsection (2) provides that the commonhold community statement can neither stop a unit-holder from transferring their unit nor place restrictions on his right to do so. To ensure that the commonhold association always knows who owns a particular unit and thus also who its members are, an incoming unit-holder is required to inform the association of the transfer. The form of the notice required under subsection (3) and any time limit to be applied is to be laid down in regulations, as is provision for dealing with failure to comply with the requirements (subsection (4)).

Section 16: Transfer: effect

64.     Section 16 sets out how the transfer of a unit will affect 'new unit-holder' and 'former unit-holder' (as defined in subsection (4)) in certain respects. Subsection (1) provides that transfer will not affect the existence of certain impositions or benefits related to the land created either by the commonhold community statement or by any action of the former unit-holder which was in accordance with section 20. The new unit-holder will have the same rights and responsibilities after transfer as the former unit-holder had before that date. Subsection (2) provides that a former unit-holder cannot be held responsible for any obligation arising after the date of transfer arising either out of the commonhold community statement or out of any action of his in conformity with section 20, and by the same token will not be entitled to any benefit accruing from the same sources after the same date. Subsection (3) provides that the rule in subsection (2) cannot be displaced by agreement, but has no effect on rights and obligations arising before the date of transfer. This means, in effect, that no contract for sale or other transfer document can contain a provision purporting to tie a former unit-holder to the unit beyond the transfer date. This aims to ensure that the current unit-holder is always the person with the full range of benefits and obligations relating to their unit, and that no-one has a greater interest in the unit than he does.

Section 17: Leasing: residential

65.     Section 17 places one of the few restrictions that the commonhold scheme requires on the ability of a unit-holder to treat his unit as though freehold. It is Government policy that residential commonhold units should not be let for long unbroken periods. This is to avoid the possibility of repeating the difficulties which exist in leasehold blocks now. The intention is that regulations made under subsection (1) should set down both that no premium should be payable for a lease, which should be at a rack rent, and also that the maximum period for a single term lease should be restricted to seven years. Subsection (1) announces the restriction on granting leases unless the terms satisfy certain conditions, and subsection (2) sets out the matters which would form the basis of those conditions. Subsection (3) provides that, if a lease is granted which contravenes the prescribed terms, it shall be of no effect, and subsection (4) allows recourse to the courts by any party to such an ineffective lease, giving the court powers to order that the ineffective lease should take effect, to order the return or payment of money by way of compensation, and to make any other provision which it thinks fit. Subsection (5) requires that a residential unit should be so described in the commonhold community statement.

Section 18: Leasing: non-residential

66.     Section 18 provides that commercial leases for appropriate units are subject to the terms of the commonhold community statement.

Section 19: Leasing: supplementary

67.     Subsection 19(1) provides that either or both of the regulations and the commonhold community statement should be able to impose obligations on the tenant of a unit and subsection (2) says specifically that a tenant might be required under the regulations to pay to the commonhold association or another unit-holder sums which are due to be paid by the tenant's landlord unit-holder, or by another tenant of the unit under the terms of the commonhold community statement. The regulations may provide (subsection (3)) that sums to be paid by a tenant under subsection (2) can be set off against amounts owed by him to his landlord unit-holder or some other person and for amounts paid under subsection (2) to be recovered from the unit-holder or another tenant of the unit. Subsection (4) gives power to vary rules of law, whether common law or statute law, about leases in order to bring them into line with the requirements of commonhold. Subsection (5) is a general regulation-making power.

Section 20: Other transactions

68.     Section 20(1) forbids any provision of a commonhold community statement from preventing or restricting a unit-holder's exercise of his right to create, transfer or grant an interest or charge over his unit, for instance, in appropriate circumstances, granting a right of way, or borrowing on a mortgage and so charging the unit as security. Subsection (3) however requires that no interest, other than a lease, can be created unless the commonhold association is either a party to it or consents in writing. By subsection (6), the subsection (3) requirement does not apply to the creation of charges, so the unit-holder's rights to charge the unit are restricted only so far as provided in the Act itself or in any subordinate legislation made under it. Subsection (4) provides that, where a commonhold association is to act under subsection (3) it must only act following approval by a 75% majority of the members voting. Subsection (5) renders void any agreement, however made, which is in contravention of subsection (3), so a unit-holder who purports to act where in fact there is no unanimous consent of the association members is unable to make an instrument or agreement that will have effect. Subsection (2) makes subsection (1) subject to the provisions of sections 17 and 19 about leasing. Section 20 only deals with matters that would appear on the register.