Commonhold and Leasehold Reform Act 2002
The Commonhold and Leasehold Reform Act 2002 was the jewel in the (then) Governments crown and the fifth of the five Acts relating to leasehold management. Although it took the provisions already contained in the Leasehold Reform Housing and Urban Development Act 1993 and extended them, it was a landmark Act in two major areas. The first phase of the Act commenced on the 26th July 2002 and introduced a new way of purchasing residential property, that of Commonhold. This combined elements of freehold and leasehold and was set to not only give consumers a third choice of housing tenure but a change of the management of blocks of flats. Sadly, although it was placed on the statute books, it never took off.
The second major right granted to leaseholders under the Act was that of the Right to Manage, introduced in s71 (Part 2 Chapter 1) of the Act in September 2003 and hailed as a great right as it was the most radical attempt at addressing the problems caused by negligent and incompetent managing agents. It’s a ‘no-fault’ process allowing leaseholders to either replace their own managing agent with one of their own choosing with no premium payable and without needing to go to court to prove ‘fault’ on the part of the freeholder. Smaller developments can choose to self-manage.
The Act also created administration charges (which are neither ground rent or service charges).
Key elements of the Act are:
s126 now fixes the valuation date for collective enfranchisement of flats at the date the initial notice is served;
s131 (qualifying leases) extends the rules in terms of the lease requirements to include the following:
a) A lease of a term of years absolute in excess of 21 years – the present unexpired term is irrelevant because qualification is governed by the original term of the lease when it was first granted;
b) A shorter lease containing a clause providing a right of perpetual renewal
c) A lease terminable on death or marriage or an unknown date (including the so-called ‘Prince of Wales’ clauses);
d) The continuation of a long lease under the Local Government Housing Act 1989 following the expiry of the original term;
e) A shared ownership lease where the leaseholder’s share is 100%.
s134 (valuation date) for collective enfranchisement of flats is now set at the date that the initial notice is served;
s135 (landlord’s share of marriage value) is now split 50/50 because the potential ‘profit’ only arose from the freeholder’s obligation to sell, the legislation now requires that it be shared equally between the parties.
s136 (disregard of marriage value in the case of very long leases) i.e. leases with over 80 years remaining.
s139 – Reduces the qualifying period as a tenant;
s140 – Exclusion of certain business tenancies;
s141 – Tenancies not at a low rent;
s142 – Personal representatives;
s143 – Abolition of limits on rights after lease extension;
s144 – Exclusion of shared ownership leases;
s145 – Tenants share of marriage value;
s147 – Purchase price for enfranchisement during lease extension
The following sections of 150 to 157 make important amendments to the Landlord and Tenant Act 1985 related to service charges although note that two of those sections are not yet enacted.
s150 (extending the meaning of service charge and management);
s151 (consultation about service charges) replacing s20 of the Landlord and Tenant Act 1985 and splitting it into two parts: qualifying works for works to the building and qualifying long term agreements. s20ZA (consultation requirements; supplementary) was also introduced in this Act but the existing sections of 20A, 20B and 20C of the 1985 Act were not affected.
s153 (notice to accompany demands for service charges) amends that of s21a of the Landlord and Tenant Act 1985 (withholding service charge payments) with a new section, s21b (notice to accompany demands for service charges) and requires that every demand made for service charges must be accompanied with a notice of leaseholders rights in relation to those charges (and those of administration charges). If a demand for service charge or administration charges is not accompanied by this summary then leaseholders have the right to withhold payment, and any provisions in the lease relating to non-payment (or late payment) do not have effect as long as the landlord remains in breach of these obligations.
s154 (inspection etc of documents) replaces the request to inspect documents supporting the summary of relevant costs under s22 of the Landlord and Tenant Act 1985. Leaseholders of a recognised tenants association (not individual leaseholders) have the right to inspect documents relating to the service charge as a follow-up to provide more detail on the summary. Within a period of six months from receipt of the summary, the service charge payer (or the secretary) may write to the landlord requiring him to allow access to and inspection of the accounts, receipts and any other documents relevant to the service charge information in the summary and to provide facilities for them to be copied. Facilities for inspection must be provided within one month of the request, and must be available for a period of two months.
s155 (liability to pay service charges: jurisdiction)
s157 (Service Charges; minor and consequential amendments) now means that ‘improvements’ are now classed as a service charge for the first time and therefore subject to the same rules and regulations as works of ‘repair’ and ‘maintenance’. Landlords also are legally obliged to consult when entering into long term agreements with companies that provide services for which a service charge is payable.
s158 (administration charges) which are neither service charges or ground rent. This section makes variable Administration Charges under a lease subject to the provisions of Schedule 11 of the 2002 Act which provides a definition of which types of charges are covered, states that they must be ‘reasonable’, and gives leaseholders and landlords the right to apply to a First Tier Tribunal for a decision on whether they are payable. More on administration charges can be read here.
s159 (charges under Estate Management Schemes) gives anyone who pays variable Service Charges under an ‘Estate Management Scheme’ the right to apply to a First Tier Tribunal for a decision on whether the charges are payable and the right to apply for Order varying the charges which are made under such a Scheme.
s164 (insurance otherwise than with landlord’s insurer) prevents freeholders of houses from insisting that leaseholders use a particular insurance company nominated or approved by them to insure their house. Instead leaseholders of houses can choose their own insurance, subject to certain conditions.
s165 – (extension of leaseholders right to challenge insurance) means that landlords no longer have the right to insist that leaseholders of houses use a particular insurance company nominated or approved by them. Leaseholders of houses can place their insurance with an insurer of their choice providing they give notice in a pre-determined time and the new policy meets certain stipulations and is set out in a certain way. Leases for houses are usually of a common type but an agent is within his rights in rejecting an insurance policy he considers does not qualify according to the terms of the lease. The agent will also be allowed to charge for the time taken to inspect an alternative policy. However the leaseholder is entitled to contest the decision and to receive a detailed breakdown of cover and costs, including the inspection fee. If the leaseholder believes that he has identified a similar but cheaper policy he can then take his case, based on reasonableness, to an LVT for a ruling that both sides have to abide by. There are charges for this, for both the application and the hearing but these can be reduced or waived for those on low incomes.
s167 (failure to pay small amount for short period) means the freeholder cannot cannot use the forfeiture procedure under the lease unless the amount owed for ground rent, service charge or administration charges (or a combination of them) is more than £350. However, the forfeiture procedure can be used (even if the amount is less than £350), providing it has been outstanding for more than 3 years. The section also states that freeholders may only apply for forfeiture in respect of non-payment of a service charge.
s168 (no forfeiture notice until determination of breach) requires landlords to satisfy a leasehold valuation tribunal, court or arbitral tribunal that a disputed breach of covenant or clause in the lease has occurred before they are able to take any forfeiture action.
s170 (forfeiture for failure to pay service charge etc). This amends s81 of the Housing Act 1996), and once it is finally determined that the amount of the service charge or administration charge is payable by the leaseholder by a) the FTT at the time, b) on appeal, or c) by an arbitral tribunal (in proceedings pursuant to a post-dispute arbitration agreement), or c) the leaseholder agrees it is payable only then can the forfeiture notice be served.
s172 (Service Charges and Crown Land) makes leases to Crown Land subject to the same laws as other leases. It means leaseholders of Crown Land have protection under s18 to 30B of the Landlord and Tenant Act 1985, as well as other important parts of many other Acts of Parliament.
The two sections relating to accounting for, and reporting on, variable service charges and the holding of service charge contributions in a designated bank account have not yet been implemented. This is because 29th July 2005 the former ODPM (Office of the Deputy Prime Minister) announced that it would not be possible to introduce some of the new proposed accounting measures contained within this section without imposing considerable extra costs on social landlords and their leaseholders. Subsequently it would not be commenced pending further consultation which might include new primary legislation. It was accepted that the provision, as drafted, was not fully workable although the Government remained committed to the principle of the annual statement. Commencement was not anticipated before 2007 and the proposals that were being developed to amend the legislation were to ensure that both private and public sector leaseholders received appropriate information that did not incur a disproportionate cost to them.
The two sections are:
- s152 (statement of account) are still covered by the original provision of s21 of the Landlord and Tenant Act 1985 (request for summary of relevant costs by a lessee).
- s156 (service charges to be held in a separate designated account) which remains as per s42 of the Landlord and Tenant Act 1987 (service charge contributions to be held in trust).