by Phillip Kenny
One of your recent leading articles, “Wider choice of tenure” (Estates Gazette December 5 1987, p 1309) delineated clearly the opportunity presented for root and branch reforms of leasehold tenure. The Law Commission has recently produced proposals(*) for freehold ownership of flats, and indeed of other properties presently developed as leaseholds: these proposals have been subject to some criticism in the Law Society’s Gazette(+). There are three important questions arising from this debate which are of great concern for the practising surveyor. Is the law of leasehold tenure so decrepit and muddled as to require radical reform? If so, what is the most suitable form for this radical reform to take? And, finally, if it does occur, what implications are there for those who play a central role in the property professions?
Radical reform?
The proposals made by the Law Commission’s Working Group,(*) to be examined shortly, are equally fitting for flat and office developments. In my view, however, the case for reform is quite different in each area. The leasehold office system has undoubted shortcomings, but in so far as these are concerned with the legal framework they are concerned mainly with the cost and tardiness of the court proceedings. The basic system of leasehold ownership of offices works well, and is responsive and adaptable to changing market forces — the length of terms and the frequency of rent reviews, for example, clearly reflect the economic scene. It may be doubted whether in this area any informed commentator would think it essential to replace leasehold with another form of ownership — though each of us could doubtless list half a dozen urgent reforms of the existing rules and system.
The picture is different for the owner of a leasehold flat. The problem of the wasting asset and its assignability and mortgageability are well known: equally well documented are the endemic problems with service charges. Failures in maintenance, failures to provide for large capital requirements and overcharging by the freeholder are continual consumer problems. Also present are the difficulties faced by ordinary householders in understanding the applicable law or finding the resources to enforce their legal rights effectively. From the point of view of the leaseholder of a flat the law applicable to him is incomprehensible, the financial position extremely hazardous, and the difficulties of management quite often insurmountable. It seems to me that the need for radical reform in this area is well proven, and this opinion is reinforced by the general support given to the Law Commission’s proposals by the bodies it consulted, notably in this respect the Building Societies Association and the National Consumer Councils.
The proposed reform
The reform proposed by the Law Commission is elegantly simple — a new form of land ownership will be created by Act of Parliament and this will be called “Commonhold Ownership”. The title to the commonhold will be registered at the Land Registry and its registered owner will be a Commonhold Association consisting of each person who owns a unit on that development. Each unit has a separate registered title but the property as a whole will be managed by the association, which will operate democratically. Covenants between the Commonhold Association and individual unitholders will be enforceable without the horrendous problems associated with the present law as to the enforceability of covenants. The individual units will be more readily mortgageable than are leasehold flats with the very real problems of the “wasting asset”.
Finally, commonholds will be established using standard prescribed forms and the regulations under which they are managed will be laid down by the legislation. Conveyancing will be simpler and cheaper, and the rights of individual unitholders more certainly protected.
The scheme proposed by the Law Commission is thus astonishingly simple — indeed it is no surprise that they have produced such a lucid scheme. For while in this country we have patched and repatched the threadbare garments of landlord and tenant law, other countries with our basic legal system — once copied from ours — have long since produced radical solutions. And in such a solution there are enormous benefits to the consumer. But the major question is this: “Is the Law Commission’s solution an adequate answer, and what major problems might it leave unsolved?”
Shortcomings of the commission’s proposals
The major weaknesses of the proposals are that they have avoided all the really difficult policy issues or, where these are addressed at all, they have opted for the solution which gives greatest obeisance to the traditions of English property law and the laissez-faire prejudice of English lawyers. The major questions to be considered are the regulation of commonhold schemes and the resolution of disputes between owners of commonhold units. Before addressing this the position of the Law Commission should be clarified. Its purpose is only to add a new form of title to English property law, not to compel its use. The eventual Commonhold Act is seen as a facilitating measure, a framework which, at their discretion, may or may not be used by property developers for the eventual benefit of their customers. It is this underlying discretionary approach which has prevented the Law Commission proposing a solution to the leasehold problem which will go beyond a technically sound new form of title and produce in addition a new administrative system under which the use of this new form of title will prosper.
A Commonhold Commission
The Law Commission recommends a form of registered freehold title for flats and commercial properties and has produced convincing documentation to be used if legislation should result. The commissioners do not think that a regulatory body needs to be established to monitor and regulate commonhold development. Two reasons are given: first, that on the day the legislation is passed it will not have sufficient work and, second, that such a body will cost money. However, if the scheme is attractive the first of these objections will rapidly be overcome, and the second begs the question completely — there is no reason whatsoever why the regulating body or Commonhold Commission should not be self-financing.
It has already been noted that commonholds themselves will be run by corporate bodies whose members will be the owners of each unit in the development. No mechanism is proposed in the Law Commission’s paper for overseeing the work of these corporations, though experience of the operation of companies registered under the Companies Act leads to the conclusion that some supervision of their operation and financial management is essential. The Law Commission sensibly proposes that these bodies should not be registered under the Companies Act, and a simpler form of documentation and accounting is proposed. A Commonhold Commission would assist in ensuring that these new corporate bodies develop in a way that is generally beneficial to their members especially and, as the volume of commonhold developments increases, develop an expertise that would reinforce this regulatory work.
The next important area of work for the commission is in the establishment of associations and new commonhold developments. The only check proposed by the Law Commission on the way new developments are established is called the “built rule”. This lays down that before transfer of units can take place a statutory requirement as to the building of a certain proportion of units and common facilities must be satisfied. Evidence of compliance with the “built rule” must be produced to the Land Registry before transfer of a unit can take place. There is no controlling body which must see that the commonhold is properly constituted and that its plans are appropriate to carrying out the purpose of the developer — that is unless the work of planning control is seen as an adequate substitute for the work that would be performed by a Commonhold Commission.
A very similar point is the approval of the rules under which each commonhold is managed. The Law Commission envisages that these rules should be contained in subordinate legislation, and it is quite clear that as use of commonholds becomes widespread there will be many very different types of development which, quite properly, may well require different rules. Legislation cannot possibly provide for all the possibilities, and a sensible solution is to have a standing regulatory body charged with approving rules. As a particular commonhold develops changes in rules might well be necessary, and again the useful role of a commission is quite obvious. It will develop, through its approach to developments and their rules, a body of caselaw which will make commonhold developments better serve the needs of their occupiers.
Adjudication of disputes
It is in the area of dispute adjudication that the Law Commission’s proposals are at their weakest. The Law Commission envisages disputes involving commonholds being resolved in the existing High Court and County Courts, a view which surely can give satisfaction only to lawyers. The faults of the present landlord and tenant law are magnified by the existing ossified court system. Only the most myopic could see in these courts the possibility of speedy and cheap solutions to disputes involving this radical new area of property law. Lawyers and the courts they operate have simply not proved adaptable to new legislation of this kind — and a small microcosm of this well known to me has been the enormously expensive and time-wasting disputes under the Mobile Homes Act 1983. I would propose withdrawing this new opportunity for housing development as far from the existing court machinery as possible.
At the beginning of this article the different circumstances of commercial office developments was commented upon. But to the ordinary householder purchasing his unit on a commonhold development the ideal forum for resolving dispute he has with neighbouring owners or the management association is not the remote and creaking processes of the county court. Introduction of this novel form of home ownership poses an equally novel opportunity for Commonhold Tribunals to be established under the aegis of the Commonhold Commission. Justice which is cheap and speedy need not be inferior in quality to that which is dear and slow.
Opportunities for the professions
In other jurisdictions where similar schemes have been established there has been found to be a need for professional management of commonhold developments. The establishment of commonhold is intended to ensure democratic management by the unitholders on their own behalf yet it can only be in the simplest of developments that the flat owners collectively will be able to deal with all the problems of management. On this issue the Law Commission report speaks clearly and sensibly: “The duties of commonhold associations will be carried out much more effectively if managing agents are employed. In the case of large developments it will clearly be worthwhile to have managing agents and we hope that they will also be employed in smaller developments.” The report continues to say that the employment of managing agents should not be compulsory — and it is hard to quarrel with this conclusion. Considerable expertise and a wide range of skills are required from the professional manager of a large condominium — there would clearly be much to be done in the way of continuing professional education if the surveying profession were to grasp wholly the opportunity offered.
Conclusion
The Law Commission’s proposals for commonhold are an important contribution to the constant debate on the reform of landlord and tenant law. The solution proposed, so far as it goes, is a highly desirable one, yet more radical aspects of the solution should property be considered. The question of whether the legislation should deal differently with offices and flats, for example, deserves deeper examination. Though there are obvious problems in legislating, these can be overcome so far as mixed developments are concerned — and it must be borne in mind that in reform of this area the easiest thing to the lawyer is to discover pitfalls and problems of definition. Many of these problems can be resolved by a growing body of practice produced under the guidance of a regulatory body such as a Commonhold Commission. It is to be hoped that these proposals of the Law Commission do not follow so many other government reports into an ill-deserved oblivion but that the quest for new legal vehicles to encourage property development is pursued not only with vigour but with full attention to the policy issues involved.
(*) The Law Commission: Commonhold (HMSO £7.90) prepared in fact by a Law Commission Working Party in order to generate further discussion.
(+) “Freehold Flats — The Law Commission Approach” Law Society’s Gazette December 16 p 3642 (by the author).