RTE companies should be up and running, but doubt has been cast on whether the system can work. James Driscoll considers the issues
Part 2 of the Commonhold and Leasehold Reform Act 2002 introduced many reforms to enfranchisement rights. Among them was a requirement that leaseholders of flats who want to acquire the freehold to their block must set up a right to enfranchise (RTE) company to act as their nominee purchaser.
Under that reform, the company would serve the enfranchisement notice under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993, act as the nominee purchaser under the claim and, on acquiring the freehold, become the landlord under the leases. All qualifying leaseholders would have a statutory right to become a member of the company and so join in the claim. Since the enfranchisement notice would be given by the RTE company, the participating leaseholders would not have to sign the notice, thereby avoiding the practical problems (for larger blocks) caused by the requirement that participants must all personally sign: see Cascades & Quayside Ltd v Cascades Freehold Ltd [2007] EWCA Civ 1555; [2008] L&TR 23, where the block contained 174 flats.
Lost benefits
A year after the 2002 Act was enacted, a stamp duty land tax (SDLT) concession was made whereby the duty payable would be divided between the participants should an RTE company acquire the freehold: see section 74 of the Finance Act 2003. Since RTE has not commenced, this concession could not come into force. It will be replaced with a different SDLT concession for enfranchisement in the current Finance Bill.
At present, participating leaseholders usually form a company to act as the nominee purchaser. They are best advised also to enter into a participation agreement in respect of their contributions to the costs of the acquisition, the appointment of professional advisers and other matters.
Turning these steps into a statutory requirement would not, in practical terms, represent a significant change. RTE would also have the advantage of using a company whose constitution is specially designed to enable it to act as a landlord of residential premises. Moreover, every leaseholder in the block would have the right to join in the purchase, which has added importance since the 2002 Act reduced the required minimum proportion of participating leaseholders from not less than two-thirds, to not less than one-half. As noted above, it also offers SDLT advantages.
The 2002 Act also introduced commonhold associations (CAs), where land is to be registered as commonhold, and right to manage (RTM) companies, where leaseholders exercise the right to manage their block. As with
Consultation paper
Seven years after the statutory changes received royal assent, RTE has not yet been brought into effect. Doubts have emerged as to whether, as drafted, it can work this has delayed its commencement. The Department of Communities and Local Government has recently published a consultation paper, The right to enfranchise (RTE) provisions: Consultation, seeking comments on the proposal that RTE, far from being introduced, should be repealed.
So what has gone wrong? According to the paper, the main difficulty is that the RTE provisions (which would be inserted into Part I of the 1993 Act) do not deal with the apportionment of costs between the participating leaseholders comprising the members of the RTE company.
The assumption seems to have been that the participants would deal with such matters as members of the RTE company. However, the consultation paper maintains that it subsequently became apparent that the terms on which leaseholders could join the claim and become members of the company could not be solved by company law mechanisms alone.
Further, the paper argues what would stop some leaseholders from proposing terms that would discriminate against others? The right to participate, argues the paper, would be of little value unless all leaseholders were offered fair and reasonable terms. Moreover, leaseholders should have access to adjudication if they felt that they were being unfairly treated.
As drafted, leaseholders have the right to join in up to the date of purchase. This would cause obvious problems in valuation terms since late participation would affect marriage value, which is payable only by participating leaseholders. Thus, the valuation would have to be recalculated at a late stage in the application.
The paper states that introducing RTE would first require statutory amendments to the RTE provisions in the 1993 Act. The principal problems, it is argued, lie in the lack of provisions on the apportionment of costs. The paper rejects, as unrealistic, the possibility of defining this apportionment in general terms through a specific formula. Instead, it examines the introduction of a dispute settlement the possibility of using the leasehold valuation tribunal for this was briefly considered but rejected on the grounds that it would introduce additional costs that could hamper enfranchisement claims. The paper concludes that the RTE provisions should be repealed.
A disappointing conclusion
Many will find this a disappointing and pessimistic conclusion. True, RTE would benefit from some changes, such as reducing the period during which non-RTE member leaseholders can join to before the RTE company serves the enfranchisement notice (the same as that for RTM). However, repeal of RTE would mean the loss of a standard type of company suitable for owning and managing leasehold premises as well as a simplified process for serving notice.
Perhaps the greatest loss would be the statutory right to participate when the required number of participants has been reduced from two-thirds to one-half. There is no need for a form of dispute settlement if one or more leaseholders consider that they are being treated unfairly. Such a mechanism does not exist at present and the paper notes that, in practice, maximum participation is encouraged in order to spread the costs. What is wrong in giving all leaseholders of flats the statutory right to participate when their neighbours are to acquire the freehold?
The consultation closes on 3 August.
Professor James Driscoll is a consultant solicitor at Trowers & Hamlins
