Housing: Leaseholders

Lord Keen of Elie Excerpts

Thursday 25th June 2015 Lords Chamber

[The Advocate-General for Scotland (Lord Keen of Elie) (Con) (Maiden Speech)]

My Lords, it was a singular honour to be introduced to your Lordships’ House. I am obliged for the consideration and courtesy extended to me by Members and staff, and more immediately by my noble friend Lord Trefgarne and the noble Lord, Lord Kennedy of Southwark. My first week in this House was one of lost and found: I got lost and was found by the doorkeepers. Matters deteriorated slightly when I attempted my first Division on Wednesday of this week. I moved with alacrity to the not-content corridor. I passed through that corridor, turned right and right again. I became slightly confused but joined a group of Members standing in the vicinity of the Chamber. After a minute or so chatting away, I noticed that we were shuffling in a particular direction. It occurred to me that I was re-entering the not-content corridor. I rather thought at this moment that not even the Chief Whip would welcome my attempts to vote twice in a single Division, and I slipped away quietly to reconsider the geography of your Lordships’ House.

I thank my noble friend Lady Gardner for raising this Question and for the contribution from the noble Lord, Lord Kennedy. Two particular issues are touched upon: commonhold and the right to manage. Although they appear to converge and to be related, they are of course materially very different. They are quite distinct concepts. The right to manage is, as it says, about the right of leaseholders to take over the management of a multi-unit block. Commonhold, on the other hand, is a matter concerned with the law of property—a more fundamental issue of rights and obligations.

The Government welcome suggestions to improve the working of the law of property for property owners who live in multi-occupation buildings and will of course consider all proposals carefully. However, the Government are also mindful of the need to strike a balance between the interests of all those who would be affected by any change, whether as freeholders, leaseholders or commonholders. We are also mindful of the need to avoid putting unnecessary regulatory burdens on property owners, whether they are freeholders or leaseholders.

On the matter of right to manage, that specific statutory right was conferred on long residential leaseholders in 2003. The right to manage can be assumed by an administrative process. There is no legal process required and in that way expense is kept to a minimum. It can be achieved effectively by a majority of the leaseholders in a multi-unit building. It has clearly been, in relative terms, a success. We know that because we have seen the registration of at least 4,000 right-to-manage companies at Companies House. The process is straightforward and fair. It does not involve the long leaseholders in the expense of having to acquire by enfranchisement the freeholder interest in any property.

However, one has to remember that the right to manage brings with it very material obligations and, in that context, it is important that there should so far as possible be a consensus between leaseholders as to whether they wish to assume those rights and obligations. There can be difficulties in tracing some leaseholders, but there are means by which this can be achieved if a right-to-manage company is incorporated with the intention of taking over the management of a block.

Pursuant to Section 93 of the Commonhold and Leasehold Reform Act 2002, the RTM can require the landlord to provide information with regard to the whereabouts of leaseholders. There are similar rights under Section 82 of the same Act. Our perception at this time is that the right to manage is a welcome addition to the armoury of leaseholder rights and is proving effective in the protection of those rights.

I turn now to the matter of commonhold. My noble friend Lady Gardner observed that we could trace matters back to the Wilberforce committee of 1965—that is true. The coining of the term “commonhold” dates back to 1984 and a report from the Law Commission. Thereafter, I think it would have to be accepted that matters moved slowly until we had the 2002 Act, which came into force in 2004. Part of the difficulty, which I intend to address in a moment, can be discerned from the title of that Act—the Commonhold and Leasehold Reform Act 2002. Hand in hand with the introduction of commonhold came very material improvements in leasehold. In a sense, that carried the seeds of the difficulty encountered by commonhold as a form of land or property holding.

It was anticipated by the then Lord Chancellor in 2004 that some 6,500 commonholds would be created in each year after the Act came into force. In the event, there were not 6,500 a year; there were not 650 a year; there were not 65 a year; and there were not six a year. There have in fact been a total of 17 commonholds created since 2004. A great deal of effort, intelligence, research and work went into the creation of commonhold. It sailed under the fair wind of good intentions into a legislative Bermuda Triangle and nothing—nothing—came out.

Why should that have been? As I say, at the same time as commonhold was created, leasehold reform appeared. With those improvements, it became apparent that market forces would move in favour of continued use of leasehold rather than the adoption of commonhold. That carried with it a multitude of potential difficulties, we see now with the benefit of hindsight, including: the need to incorporate a company limited by guarantee; the need for there to be directors of that company; and the need for the directors of that company to accept the obligations of directors, including their fiduciary duties and the obligations now contained within Section 174 of the Companies Act. So we had a concept unfamiliar to property lawyers involving a further concept—corporations subject to guarantee—that was not particularly familiar to company lawyers. In these circumstances, the market has simply moved away from the idea of adopting commonhold. That is something we have to accept.

Reference was made by my noble friend Lady Gardner and the noble Lord, Lord Kennedy, to the employment of something other than the 100% rule for commonhold. But that is not an answer to the problem; that is a means of creating a further layer of complexity and difficulty. I say that in this context: if you were to allow commonhold by virtue of the votes of a majority of those in a unit, would you, first of all, be excluding the rights of the freeholder, whose rights would be extinguished? If so, that is a deprivation of property, contrary to Article 1 of the first protocol of the European Convention on Human Rights.

Secondly, will you deprive those non-consenting leaseholders of their rights as leaseholders, which are substantial because of the statutory protections now available to them? If so, that is a potential deprivation of property contrary to Article 1 of the first protocol.

Alternatively, will you allow those non-consenting leaseholders to remain as leaseholders of the commonhold, in which case you create not the intended community that commonhold was intended to bring about but something quite different: a division or pepperpot. There will be on the one hand commonholders of units and on the other long leaseholders who wish to remain long leaseholders within the same unit. Yet the commonholders may find that they then have a responsibility to the leaseholders because the leaseholders continue to have statutory rights about the level of service charge quite different from those of commonholders.

The commonholders’ rights and obligations in respect of the service charge are determined by contract and agreement. They do not have to be reasonable; they simply have to be agreed. However, the leaseholders who remain are entitled to the statutory protections already conferred on them. You could have a situation in which the commonholders decide on a service charge at one level—let us say, £10,000—and the consequence is that the leaseholders then have theirs reduced to £5,000. Who will pay the difference? As I say, introducing the idea of commonhold is an attractive way forward for property law—but only up to a point.

I am reminded that I have only one minute and have traversed but little territory. I apologise, but let me say this: despite being a Scot I cannot embrace the idea that Scotland has a better system. It has a different system, which traces its roots to the introduction of the feudal system by David I in the 14th century. There were proposals to abolish the feudal system in the 16th century but it took a further 500 years of consideration before that came about. However, the distinction is that real burdens could always be carried by property in Scotland—that is, perishable property title—because of the superiority. Even when that was abolished in 2003, real burdens could continue. It is not easy to compare the two systems because of the fundamental differences in property law and property title, so we can gain only little assistance from what happened there.

On consolidation, while the law is still in a state of flux, consolidation is not the way forward and therefore there are no proposals for it at present. On a review of the right to management, there seems no pressing reason for review. On commonholding, it is a voluntary scheme. It is open for the market to embrace it and perhaps there are steps that can be taken to encourage the market to do so. But as we have seen, the market finds it an unattractive offering despite all the efforts that were made to bring it to the market. It remains and will remain a voluntary scheme for those undertaking multi-unit development but we can see that it has not taken off at present. I apologise if I have overstayed my welcome and thank noble Lords for their attention.

House adjourned at 6.03 pm.