This regulatory impact assessment (RIA) has been prepared to accompany the Commonhold and Leasehold Reform Bill
Purpose and intended effect of Part I of the Bill
Part I of the Bill honours the Government's manifesto commitment to introduce commonhold. Commonhold is the name given in this jurisdiction to a scheme widely used throughout the rest of the world with greater or lesser degrees of variation. It provides for multiple occupation of developments, such as blocks of flats, or mixed flats and shops, or business parks in which unit owners have an interest in their unit of occupation, whatever that may be, which is closely analogous to a freehold interest. A body corporate, the commonhold association (CA), made up exclusively of unit owners, owns and manages the common parts of the development, which may be no more than hallways and stairs, but might run to parks, sports halls, lakes, etc. Regulations will govern the relations between unit owners and between unit owners and the commonhold association.
The draft Bill contains those provisions which are thought essential to the setting up, operation and eventual termination of a commonhold. It is intended that matters of detail should be contained in regulations, both to facilitate reading the Bill and packaging the rules by which commonholds will be run, and to facilitate amendment to the detailed rules for running the commonhold.
It is hoped that there will be no more regulation of the operation of commonhold than at present exists for the operation of enfranchised leasehold developments. The aim is to procure consistency and transparency in an area which has been bedevilled for years by the inconsistencies inherent in the leasehold system, in which it is perfectly normal for different terms to exist in leases for units in the same development.
Regulatory objective
So far as possible, it is intended to ensure that regulation relating to commonhold should be based on well understood existing regimes. For instance, to establish a commonhold, it will be necessary to set up a private company limited by guarantee and to register the land with HM Land Registry. Subject to the outcome of consultation, our intention is to leave the regulatory regimes governing the registration of land and the setting up of companies as little altered as possible. We expect this to have two advantages. First, it will impose no or minimal extra regulatory burdens on those who wish to take advantage of the scheme. Second, buyers, sellers and officers in commonhold schemes will be able to rely on a pool of pre-existent knowledge amongst the professionals who advise them.
Expected benefits
Commonhold is expected to be a desirable alternative to leasehold. There will be nobody with a superior interest in a unit in the way that a landlord stands in relation to a leaseholder. Leaseholders often complain of the behaviour of landlords who exercise their rights to collect service charges and to expend them with little or no consultation with the leaseholders. By comparison with the leaseholders, the landlord has very little financial investment in the property. Commonhold will give the unit owners, and only the unit owners as members of the CA, power to set budgets and to raise commonhold assessments to meet the requirements of the budget. Unit owners will own the whole development both directly through their interest in their unit and indirectly through their membership of the CA.
Leasehold interests are wasting assets. The essential characteristic of a lease is a term of years, at the end of which the lease must be surrendered, with nothing to show for the investment of the original premium or, often, a significant proportion of the annual service charge. A commonhold unit will be held without such a term and subject only to charges levied by the CA.
A significant benefit of commonhold is expected to be the uniformity of the documentation. Leases are subject to the vagaries of drafting practices of solicitors. It will be possible to buy into a commonhold in Liverpool, Limehouse or Lichfield and to be sure that the basic regime will be the same. The company structure and the commonhold community statement (CCS), governing the operation of the commonhold will be sufficiently similar both to give a degree of security to those buying and selling and to keep down the cost of conveyancing.
Disbenefits
There are no expected disbenefits.
Quantifying and valuing the benefits
It will be extremely difficult to quantify any benefit likely to arise from the introduction of commonhold. Standardisation of documentation should result in a fall in the cost of conveyancing for commonhold units, but that will only become significant if commonhold replaces a large part of the leasehold estate.
The likely much increased sense of security arising from the knowledge that the unit is owned without limit of time is not quantifiable.
Business sectors affected
It is unlikely that any business sector will be significantly affected by the introduction of commonhold. Property developers will have a choice between leasehold and commonhold as a basis for developments, conveyancers will benefit in due course from the standardisation of documentation. Estate agents and managing agents will need to inform themselves about the new form of tenure.
Identifying the costs
There is no expectation that the introduction of commonhold will give rise to increased costs in any sector. By comparison with enfranchised leasehold arrangements, there will be very little difference in cost. The cost to the developer of a commonhold scheme of setting up the company vehicle for the CA and registering the commonhold with the Land Registry would be the same, as would the subsequent costs of operation of the scheme and enforcement of the regulations.
Consultation
During the policy development process, landlord and leaseholder interests, together with representatives of the various professional bodies with an interest in the development of commonhold have been regularly consulted. A number of independent academics have also been involved in the development process. A report on the result of the public consultation process will be made in due course.
Summary
The introduction of commonhold was a manifesto commitment. The scheme is designed to provide a preferable alternative to leasehold in circumstances where units are inter-dependant. It is expected to give rise to no increase in costs or regulation. The regulatory regime supporting it will be based almost entirely on existing, well understood regimes.
Monitoring and review
The Department would receive feedback through public correspondence, articles in various trade and professional journals and direct input from professional organisations and pressure groups. The purpose of keeping as much as possible of the detail of the scheme in regulations is to allow relatively rapid response to changing circumstances.
A: Corporate Structure for Enfranchisement and Exercising Right to Manage
Title:
Residential Leasehold Reform - Use of a Corporate Structure for Enfranchisement and Exercising the Right to Manage.
Purpose and Intended Effect
The issue and objective
Issue: Leaseholders are currently free to choose whether to use a company to purchase their freehold and, if so, what type of company should be used. For example, leaseholders in small properties may choose joint ownership, rather than use a company. Unfortunately, this can lead to problems later on. It could also conflict with the right to participate in enfranchisement and prevent the right to manage from operating in a fair and democratic way. Therefore, this Bill will require leaseholders to set up a company limited by guarantee if they wish to exercise the right to enfranchise or the right to manage.
Objective: To ensure that the body set up to manage a block of flats and, in the case of enfranchisement, to own the freehold is well suited to the current and future needs of the leaseholders.
Risk assessment
If an inappropriate body is used to manage the building, various problems may arise. Most importantly, the constitution of the body may not allow for proper democratic control, allowing a minority group to manage the building in a way that does not conform to the wishes of the majority. This conflicts with the main aim of giving leaseholders those rights.
Against that, use of a company structure brings the risk that it may be struck off for failing to make returns to Companies House. (Although an independent review of company law has proposed changes to the law that would reduce the risks of inadvertent striking-off and simplify the process for restoring dissolved companies to the register, these remain subject to consultation and do not yet form part of Government policy).
Options
Options identified:
Option 1: Allow leaseholders complete freedom of choice.
Option 2: Allow leaseholders in blocks of up to four units complete freedom of choice.
Option 3: Require a suitably constituted company limited by guarantee to be used in all cases. We will use secondary legislation to define the Memorandum and Articles which should apply to such a company. These will include rules on how voting rights should be allocated.
Option 4: Invent a special corporate form.
Issues of equity or fairness
The right to manage (RTM) will involve interfering with existing contractual arrangements by transferring management responsibility from landlords to RTM bodies where the right is exercised. The justification for this is that it is only fair to give those with a significant financial investment in the building a say in its management. However, given that landlords would continue to have an interest in the property, we consider that they should also have some say in the management of the building under RTM even though they would not have overall control. Options 1 and 2 would not provide a mechanism to achieve this.
Benefits
Benefits identified:
Options 1 and 2: These options would allow leaseholders (or some leaseholders, in the case of option 2) to decide what would work best in their own particular circumstances. They could use this freedom to avoid certain costs associated with a corporate structure.
Option 3: This option will ensure a democratic and open structure for management, with clear lines of responsibility. It will make it relatively easy for a RTM company to convert to a freehold-owning company and/or to a Commonhold company (assuming full participation). In the latter case, this would be achieved by changing the constitution of the company so that it ceased to be a RTM/RTE company and became a Commonhold Association instead.
Option 4: This would provide a means to avoid some of the costs and burdens of complying with company law (see 5, below) whilst still achieving the advantages of option 3. In particular, there would be no possibility that a company would be struck off for failing to make returns.
Costs
Business sectors affected
The reforms will affect future residential management companies (RMCs).
Typical costs
Options 1 and 2: If leaseholders continued to have freedom of choice, the costs that they would incur would vary depending on the choice that they made. Direct ownership of the freehold would involve additional registration fees. Every time an owner's flat was sold, the Land Registry would have to be notified (costing £40, in most cases). In addition, the lack of a defined corporate structure could lead to problems in the event of a dispute between leaseholders. The leaseholders would also be personally liable (without limit) for any liabilities arising out of the management of the property.
If leaseholders instead chose an unsuitable (undemocratic) company structure, they would risk losing control of the management to a minority group. Such a group may act to the detriment of the others, causing them financial and/or other losses. They would also still be subject to the normal costs associated with running a company, as listed under option 3.
Applying either of these options to the right to manage would also raise a fundamental question of fairness (see section 3(ii) above).
Option 3: We understand that an "off the shelf" company can cost from £100 - £300 to set up (we expect that, following our reforms, "off the shelf" companies will become available to meet the requirements of the right to manage and to enfranchise). There will then be certain running costs as a result of the need to comply with various aspects of company law and leaseholders will need to spend some time each year ensuring that they meet those requirements. Companies limited by guarantee are, however, subject to fewer requirements than companies limited by shares (the form of incorporation adopted by most commercial companies). In addition, the effect of the current review should be to simplify the law and reduce the cost of compliance for all companies, and particularly private companies.
Nonetheless, such companies will still be required, for instance, to maintain accounting records and file relevant information with Companies House. Failure to comply with such filing requirements can lead to a company being struck off and its assets declared bona vacantia. In such circumstances, expensive court proceedings are necessary to restore a company. Although proposals for reducing the risks of inadvertent strike-offs and for simplifying the process of restoration have emerged from the review they do not yet form part of the law (see section 2(ii) above).
Option 4: Company law requirements exist for a good reason. Contractors, for example, may be reluctant to accept contracts from a corporate body without an equivalent to the publicly registered company accounts held by Companies House. In addition, property management companies would still need to be registered and policed. Therefore, this option would probably involve similar costs to those listed under option 3.
Consultation with Small Business
The vast majority of the companies that will be set up under the right to manage and the right to enfranchise will be extremely small. We therefore consulted the Small Business Service on our proposals. They made some general points concerning the need to protect leaseholders from exploitation and stated that residential leasehold reform was a worthwhile initiative. They also made some interesting suggestions as to how enfranchising bodies could best be equipped with the relevant expertise, which we will discuss with them further. They raised no objections relating to the regulatory impact of our reforms on small commercial businesses.
The draft Bill and consultation paper has also been widely circulated. In response, we received over 1,000 responses, 76% of which were from leaseholders or their representatives. Their views and, in particular, the views of leaseholders in small blocks are discussed in section 8 below.
We are satisfied that these reforms will not have a disproportionate effect on small businesses.
Other Costs
The options would, where relevant, be enforced through either leasehold valuation tribunals or the county courts. There would be certain additional costs as a result of the cases thus generated. However, we anticipate that these would be de minimis. The Government would also have to bear the cost of preparing the necessary secondary legislation to prescribe the memorandum and articles (estimated as a one off cost of £30, 000). The Department for Transport, Local Government and the Regions would absorb these additional costs from within existing provision.
Under option 4, the Government would also incur additional costs in setting up the new corporate vehicle for property ownership.
Results of consultations
The majority of freeholders and professionals who responded to the consultation exercise agreed that we should use a company limited by guarantee for both the right to manage and the right to enfranchise.
Overall, the majority of leaseholders did not favour the use of a company limited by guarantee for the right to manage though they were in favour of the use of such a company for the right to enfranchise. Ninety per cent of leaseholders in small blocks (i.e. containing up to four units) favoured the use of an existing corporate structure for both the right to manage and the right to enfranchise.
Some concerns were raised that a requirement to use a company limited by guarantee would be unduly expensive and time consuming, though verifiable estimates of the likely cost were not put forward in support of those concerns.
Summary
We have considered the views of those who have stated that administering a company would be too onerous. We do not consider those views to be justified. Companies limited by guarantee are subject to fewer requirements than the companies limited by shares. Moreover, such requirements as there are exist for the benefit of those businesses that might enter into contracts with the residential management company. It is also notable that leaseholders in the smallest blocks - for whom it would be possible to own the freehold directly rather than using a company - nevertheless favoured the use of an existing corporate structure for that purpose and for the right to manage.
The main aim of both the right to enfranchise and the right to manage is to provide a mechanism for the effective and democratic management of leasehold blocks. We consider that this is best achieved through a requirement to use a suitably constituted body. Failure to do so can lead to considerable difficulties following enfranchisement and, in the case of the right to manage, would not adequately safeguard the landlord's legitimate interests.
Whilst we could also achieve this end by creating a new corporate form just for property management, this would be quite a major undertaking for very little gain in real terms. We do not consider separate arrangements to be justified, particularly in view of the fact that the current review of company law should, in the medium term, ensure that the corporate form is simpler and easier to adopt for private companies.
Monitoring and Review
The Department would receive feedback on these arrangements through public correspondence. If appropriate, the Department would also commission research in due course. The arrangements would be kept under review and changes made if necessary.
B Consultation on Major Works and Long-term Contracts
Title:
Residential Leasehold Reform - Consultation on Major Works and Long-term Contracts.
Purpose and Intended Effect
The issue and objective
Issue: Leaseholders must be consulted on works where the cost exceeds £1,000, or £50 multiplied by the number of dwellings let to leaseholders who pay the variable service charge, whichever is the higher. This formula means that some leaseholders must be consulted on works for which their personal liability is very small. In small buildings, however, leaseholders may have to pay bills for hundreds of pounds without being consulted first.
Another problem is that the existing requirements do not extend to contracts. Certain activities (e.g. insurance) do not count as "works". Other contracts may involve various items of work which may not individually exceed the consultation limits.
Objective: We wish to ensure that, before significant sums of leaseholders' money are committed to works or services, leaseholders are informed and given the opportunity to comment on the nature of the works, their cost and the choice of provider.
Risk assessment
Without change, landlords would sometimes be required to consult where it makes little sense to do so, or else face the possibility that they would be unable to recover the full costs of the works concerned.
Leaseholders, on the other hand, might find that their landlords had entered into large contracts without their knowledge. Whilst they could still dispute the reasonableness of the charges, they will be in a better position to challenge the landlord's decision, if flawed, where they have been consulted at the outset. Where the issue is not cost but quality or the need to carry out work at all, this may be particularly important. It can be very difficult, after the event, to establish precisely what has or has not been done. In the most serious cases, defective works may even cause damage to the building which may only become apparent years later.
Options
Options identified:
Option 1: Do nothing.
Option 2: Change the threshold so that consultation only has to take place where the amount payable by any service charge payer exceeds a certain amount. As now, landlords will have to consult on the basis of having obtained at least two quotations, at least one of which will have to be from an independent contractor.
Option 3: Require the manager to give a written explanation of the reasons for the choice of contractor.
Option 4: Require managers to consult on any contract - including those for services rather than works - that was let for a period of more than a year. As with major works, they will have to obtain two quotations, at least one of which will have to be from an independent contractor. Managers will also be required to consult on the need for individual items of work under the contract where these exceed the individual limit. However, they will not need to obtain two quotations where the work is part of a long term contract.
Issues of equity or fairness
These changes should increase fairness, by providing a more consistent and sensible set of rules to govern when leaseholders should or should not be consulted.
Benefits
Benefits identified:
Option 1: None.
Option 2: This will provide a more logical basis for deciding whether or not consultation is necessary. Managers will be spared the need to consult where individual liability is very small. Leaseholders will always be consulted where their personal liability exceeds a certain sum. In addition, effective consultation should make it less likely that mangers will be challenged over the cost of work later in proceedings.
One of the key benefits of consultation for leaseholders is that it notifies them of the landlords intentions at an early stage. If necessary, they can challenge the reasonableness of the proposed works or seek an injunction. It also makes it easier for them to monitor works and, where appropriate, to gather evidence of any shortcomings in the contractors' performance.
Option 3: Landlords will not be able to dismiss leaseholders' comments out of hand. Where an explanation is not given, or where the explanation is inadequate, leaseholders would be alerted at an early stage and will then have to consider the best course of action, as above. This will increase pressure on landlords to provide good value for money.
Option 4: Landlords will not be able to evade the existing requirements by separating large jobs into a series of smaller items of work, all let under a single contract. At the same time, it will enable them to gain the benefits of a long term contract, without needing to later seek alternative quotations for individual items despite being contractually bound to a single provider.
This option will also extend the consultation requirements to cover services as well as works. This will place landlords under greater pressure to obtain value for money when contracting for long term services as well as for major works.
Compliance Costs.
Business sectors affected
The controls will potentially affect the landlords of the million or so leasehold flats in England and Wales, a small number of other properties subject to variable service charges, and the agents that are employed to manage certain of those properties. Leaseholder-managers would also be affected.
Compliance costs for a typical business
Option 1: None.
Option 2: Minimal. A sensible landlord will seek at least two quotations whether or not required to do so. Leaseholders may be consulted through a single notice provided in a central location rather than contacted individually. Where there is a recognised tenants' association, a single letter to the association is also required but this costs little. The main cost will be that of preparing the notice itself and this should not be significant. In addition, whilst this option will require consultation in some cases where - currently - it is not needed it will also remove the requirement in other cases. The net effect will depend on precisely where the new threshold is set. This will be done through secondary legislation on which we will consult in due course.
Option 3: Minimal. The landlord will have to spend some time considering how to set out his reasons for accepting the tender. As with the original notice, this explanatory letter could be displayed in a central place or sent to leaseholders individually. A letter to any recognised tenants' association will also be required.
Option 4: Minimal. As noted above under option 2, the consultation process costs very little. There will, of course, be a larger number of additional cases caught by this option than will be caught by option 2.
Consultation with Small Business
The majority of landlords of leasehold property would be considered small businesses. Indeed, many would be considered extremely small businesses. We therefore consulted the Small Business Service on our proposals. They raised no objections, though they asked us to ensure that the consultation requirements were clear. They also stated that there was an opinion that the threshold above which consultation was required was currently too low. We will, of course, consider their views when we set the new limit.
The draft Bill and consultation paper has also been widely circulated. We received over a thousand responses in all, 44 of which came from landlords, managing agents or management companies responsible for 20 or fewer leasehold units (i.e. flats or houses). Their views are discussed in section 8 below.
We are satisfied that these reforms will not have a disproportionate effect on small businesses.
Other Costs
We would ordinarily expect any additional costs to managers to be passed onto leaseholders through higher fees and service charges.
Landlords will be unable to enforce full payment of service charges where the consultation requirements are not met - except in cases where the landlord has good reason to ignore them (e.g. in the event of an emergency, where there is no time to consult). Leasehold valuation tribunals will have jurisdiction over such matters as they relate to liability. LVTs are designed to be a cheaper equivalent to the Courts, so the cost to the parties will be lower than under the existing arrangements.
As the Government funds the LVTs, it will face increased costs as a result of additional cases involving failure to consult on long term contracts. We estimate, however, that this should amount to no more than £20,000 per annum. The Government will also have to bear the cost of preparing the necessary secondary legislation before implementing these measures (estimated as a one off cost of £15,000). The Department for Transport, Local Government and the Regions will absorb these additional costs from within existing provision.
Results of consultations
The responses to our consultation paper indicate general support for all these reforms. Nearly all respondents (99%) agreed that we should change the threshold for consultation on major works so that consultation only has to take place where the amount payable by any service charge payer exceeds a certain amount. This included 92% of landlords, agents and management companies responsible for 20 or less units.
There was also widespread support (95%) for the proposal that landlords should be required to give a written explanation of the reasons for their choice of contractor. This included 72% of landlords, agents and management companies responsible for 20 or less units.
Finally, 91% of respondents agreed that we should extend the consultation requirements to cover contracts, including 72% of landlords and agents who owned and/or managed 20 or less units. However, some concern was expressed regarding any requirement to consult on low value contracts or on contracts of employment. Certain local authorities were also concerned that the proposals for dealing with long term contracts might not be adequate to deal with Private Finance Initiatives. We will consider these concerns and, if necessary, deal with them through secondary legislation.
Summary
Four options are under consideration. Option 2 could produce net savings for landlords, options 3 and 4 would result in additional costs. However, we do not expect the overall cost to be significant and leaseholders are entitled to information about - and a say in - the way that their money is spent. The reforms have widespread support, and will increase the pressure on managers of leasehold property to provide good value for money. We therefore intend to implement options 2, 3 and 4.
Enforcement, Sanctions, Monitoring and Review
Enforcement and sanctions would be as above (see paragraph 6). The Department would be able to monitor the new system by examination of LVT decisions and by using the feedback provided in correspondence from the public. If appropriate, the Department would also commission research to establish the impact of these reforms in due course. It is proposed that the Government should have the power to make any necessary changes through secondary legislation.
C Accounting for Leaseholders' Monies
Title:
Residential leasehold reform - Accounting for Leaseholders' Monies.
Purpose and Intended Effect
The issue and objective
Issue: Leaseholders may be asked to hand over large sums of money to the manager of their property to pay for works and services. Existing law does not guarantee that leaseholders can easily establish whether that money has been used wisely and for legitimate purposes. There have been cases where leasehold managers have engaged in fraud and it seems reasonable to assume that not all of these have been both detected and successfully prosecuted.
Objective: We wish to make it more difficult for managers to conceal any failure on their part to obtain good value for money or any fraudulent activities. This should discourage such behaviour and help to ensure that, in any event, such failures are discovered more quickly and the damage limited.
Risk assessment
Without further safeguards, some leaseholders will continue to be exploited. In particular, there is a risk that large sums of money could be siphoned away from a service charge account over a period of years without it ever being detected.
Options
Options identified:
Option 1: Do nothing.
Option 2: Require separate service charge accounts and, where they exist, reserve funds to be maintained for each property or group of properties for which there are common service charges.
Option 3: Require Managers to alert the relevant bank or building society to the special nature of the funds held in the account.
Option 4: Require statements to be provided that contain information about both income and expenditure, with certain items separately identified; give leaseholders access to relevant documentation within 21 days of request and the right to be provided with photocopies.
Option 5: Require leaseholders to be notified of their most important rights and responsibilities
Option 6: Require statements to be sent out annually rather than on request
Options 2, 3, 4, 5 and 6 are independent and it would be possible to implement any one of them by itself. Alternatively, we could implement all of them, or any combination of them.
Issues of equity or fairness
None have yet been identified.
Benefits
Benefits identified:
Option 1: None.
Option 2: This would allow certain types of fraud to be quickly and easily identified. It should reduce the incidence and the scope of fraudulent activity and give leaseholders increased peace of mind.
Option 3: This should ensure that service charges are not seized by a bank or building society to offset personal debts of the account holder because they are not aware of the special nature of the funds.
Option 4: Managers would benefit from greater certainty as to what was required of them. Leaseholders should receive more meaningful information, allowing them to more easily identify problems associated with poor or dishonest management. They would then be better placed to take appropriate action.
Option 5: This option would help leaseholders to gain the maximum benefit from existing and future protection. Some safeguards are only effective if leaseholders know that they exist.
Option 6: This would ensure regular scrutiny of the leasehold accounts and provide a continuous accounting record. It would make it more difficult for less scrupulous managers to take advantage of any apathy, ignorance or naivety on the part of the leaseholders that they manage.
The benefits offered by these various options are not, of course, the sort that lend themselves to quantification. However, we consider that these additional safeguards would provide important gains in terms of additional transparency, security and peace of mind for leaseholders.
Compliance Costs
Business sectors affected
The controls would potentially affect the landlords of the one million leasehold flats in England and Wales, a number of other properties subject to variable service charges, and the agents that are employed to manage certain of those properties. Leaseholder-managers would also be affected. Unless market conditions made it difficult to raise prices, the additional costs would be recouped through higher service charges and fees. Of course, in some cases this might be more than offset by reductions in service charges if these have been inflated by the actions of poor or dishonest managers.
Scotland does not have a leasehold system and, hence, would be unaffected by these proposals.
Compliance costs for a typical business
Option 1: None.
Option 2: Where managers do not already operate separate accounts, there might be one off costs if they need to change their accounting systems. We have not received estimates of the likely one off costs from the affected parties (despite inviting such estimates) and assume, therefore, that such costs will be easily absorbed.
We have received conflicting views on the likely ongoing costs. Managers currently operating separate accounts have stated that the costs are negligible, or even that they have made savings through the use of superior software. Managers who object to this proposal have estimated the cost at £20 - £40 per leaseholder. Having spoken to relevant professionals, we are convinced that these estimates are excessive. Separate accounts will not necessarily attract lower rates of interest. Software exists that would minimise the additional administrative effort involved. We therefore consider that this requirement should cost no more than a few pounds per leaseholder.
Moreover, given that we understand that most managers already operate separate accounts, most leaseholders would be unaffected by this proposal. We estimate the likely global costs at around a million pounds for England and Wales as a whole. However, given the limited data available to us, it should be stressed that this estimate is subject to a high degree of uncertainty.
Option 3: Minimal. This would cost virtually nothing. We imagine that it would usually involve a single round of correspondence between the manager and the bank or building society concerned.
Option 4: Minimal. Most of this information must already be provided under existing law. Moreover, managers need to keep this sort of accounting information for their own purposes. Rights to have photocopies provided will only be exercisable where leaseholders are prepared to meet the reasonable costs.
Option 5: Minimal. Managers may have to print or copy the notification form (the Department may decide to make copies available free of charge, see paragraph 116 below) and post it to each leaseholder with the statement. The additional costs should amount to no more than a few pence for each leaseholder. This would put the global cost at about £30, 000 for England and Wales as a whole.
Option 6: Most managers already send out accounting information on an annual basis either as a matter of good practice or because it is a requirement of the lease. For those who do not do so, there may be some additional costs. Preparation and postage costs should be minimal. The main cost, for those who are not exempt, will be that of having the statement certified. We have been told that this cost may range from £20 - £40 per leaseholder. It should be noted, however, that these costs may already be incurred under existing law where leaseholders choose to exercise their right to a summary which needs to be certified. We will also have the power to exempt managers by regulation from the certification requirement. We intend to use this power to exempt managers of small property.
Again, because most leaseholders already receive annual, certified accounting information most would be unaffected by this proposal. Moreover, we intend that, as now, blocks containing no more than 4 flats should be exempt. This would exclude nearly a third of all flats from the requirement. Therefore, we estimate that the global cost of this proposal would be in the region of £2-3 million across England and Wales as a whole.
Consultation with Small Business
The majority of landlords of leasehold property would be considered small businesses. Indeed, many would be considered extremely small businesses. We therefore consulted the Small Business Service on our proposals. They raised no objections.
The draft Bill and consultation paper has also been widely circulated. We received over a thousand responses in all, 44 of which came from landlords, managing agents or management companies responsible for 20 or fewer leasehold units (i.e. flats or houses). Their views are discussed as part of the section on the results of consultation, below.
In taking these proposals forward, we have also given ourselves the power to place different requirements on managers of small property than on managers of larger concerns. At a bare minimum, managers might only be required to state the sum standing to leaseholders' credit at the beginning and end of the financial period together with the sums received and costs incurred during that period. Requirements to produce break-downs of costs and income, and to have statements certified, could be reserved for larger concerns.
In the light of those powers, we are satisfied that these reforms will not have a disproportionate effect on small businesses. We will, of course, also consult on the details of our regulations before making them.
Other Costs
As indicated above, we would ordinarily expect any additional costs to managers to be passed onto leaseholders through higher fees and service charges.
The Government would have to bear the cost of preparing the necessary primary and secondary legislation and publicity for the measures. Under Option 5, the Government might also incur costs if it were involved in the distribution of forms.
Enforcement would be primarily through the right to withhold service charges where certain requirements had not been met. In most cases, this should lead to managers rectifying matters without the need to refer to a court or tribunal. However, we would expect some additional cases to be brought before a leasehold valuation tribunal and the Government, which subsidises the LVTs, would face additional costs as a result. We would not expect these increased costs to be significant, however, and would meet them from within existing provision.
Leaseholders, as now, would also be able to prosecute managers if they failed to comply with the new rules. Such prosecutions would be matters for a magistrate's court. We would not expect the new requirements to increase the number of such cases brought before a court. Indeed, the existence of an effective, alternative enforcement mechanism might reduce the need for prosecution.
Results of Consultations
The responses to our consultation paper indicate general support for these reforms.
Option 2: Overall, 93% of leaseholders favoured the use of separate accounts, as did 91% of landlords, agents and management companies responsible for 20 or less units.
Option 3: Majorities of all groups were in favour of ensuring that banks and building societies were informed where accounts contained the funds of service charge payers, including 91% of landlords, agents and management companies responsible for 20 or less units.
Option 4: There was a general consensus in favour of requiring statements to be provided that contain information about both income and expenditure including 67% of landlords, agents and management companies responsible for 20 or less units. Majorities of all groups were also in favour of giving leaseholders the right to inspect relevant documents within 21 days of request and the right to be provided with photocopies including 100% of landlords, agents and management companies responsible for 20 or less units.
Option 5: The majority of professionals, local authorities and registered social landlords were in favour of notifying leaseholders of their rights and responsibilities. The majority of leaseholders were against this proposal though we are not clear why. The result was heavily influenced by the views of "bulk responses" [Endnote 1]. If bulk responses are excluded, the majority of leaseholders were in favour of the proposal, too. Only 29% of landlords, agents and management companies responsible for 20 or less units favoured this option.
Option 6: Finally, 99% of respondents were in favour of statements being sent out annually rather than on request, including 100% of landlords, agents and management companies responsible for 20 or less units.
Summary
Six options are under consideration. Other than Option 1, they would involve placing new obligations on managers of leasehold property and their agents.
Option 2 received widespread support from leaseholders, freeholders and professionals despite claims from some quarters that the costs would be disproportionate. We have examined the limited evidence provided in support of those claims, and concluded that the benefits provided by this option would outweigh the costs. It is important that leaseholders should be able to verify that their funds are being held safely. Many managers already use separate bank or building society accounts as a matter of good practice. They have assured us that the costs are not significant. We are persuaded, therefore, that the benefits of this option outweigh the costs.
Options 3 & 4 are non-controversial, would have minimal costs and provide important benefits to leaseholders. Option 5 is likewise low cost, widely supported and would help address one of the major difficulties encountered under the leasehold system - leaseholders who fail to benefit from the safeguards put in place because they are not aware of their existence. Despite the opposition of the leaseholders who made bulk responses, therefore, we are persuaded that option 5 would be in the best interests of leaseholders.
Option 6 received almost universal support. It reflects common practice and builds on the existing right which allows leaseholders to request certain accounting information at any point in the year. The additional costs will be minimal for most managers of leasehold property and we will have the power to exempt managers from the need to have their accounts certified where we are persuaded that there are good grounds for such an exemption. We are persuaded, therefore, that the benefits of this option outweigh the costs.
As mentioned above, options 2, 3, 4, 5 and 6 are independent and each could be implemented separately. However, we are persuaded that the benefits of each of these options would outweigh the costs. Moreover, options 2-6 will act to reinforce each other, providing far better overall protection than any one option alone. We therefore propose to implement Options 2-6.
Enforcement, Sanctions, Monitoring and Review
Enforcement and sanctions would be as above (see paragraph 117 above). The Department would be able to monitor the new system by examination of LVT decisions and by using the feedback provided in correspondence from the public. If appropriate, the Department would also commission research to establish the impact of these reforms in due course. As many of the new rules would be effected through secondary legislation, it should be relatively easy to make any necessary changes.
D Restrictions on Forfeiture
Title:
Residential leasehold reform - Restrictions on Forfeiture.
Purpose and Intended Effect
The issue and objective
Issue: Forfeiture is an extreme measure. Whilst managers need some way to deal with leaseholders who fail to observe the terms of their leases, forfeiture can be a disproportionate penalty. In theory, a home (which may be worth tens or even hundreds of thousands of pounds) can be lost for a debt of a few pounds. Whilst the courts rarely refuse relief, leaseholders may incur substantial legal costs in defending themselves against such actions. Knowing this, some landlords misuse the threat of forfeiture to intimidate leaseholders into paying sums that are far from reasonable.
Objective: We wish to reduce the scope for oppressive behaviour by landlords whilst still providing an effective sanction against leaseholders who fail to honour their commitments.
Risk assessment
Without further safeguards, leaseholders will continue to be exploited.
Options
Options identified:
Option 1: Do nothing.
Option 2: Prevent landlords from taking action for non-payment of ground rent without first issuing a formal demand. No penalties could be imposed for late payment of the ground rent unless it had been properly demanded and unless the leaseholder had been given at least 30 days in which to pay it. By law, certain information will have to be contained in the demand.
Note - the Government's other proposals for preventing abuse of the forfeiture procedure are not listed here as they are not considered to involve any regulatory burden. Indeed, they should reduce costs by providing an opportunity to resolve disputes at an earlier stage, though the overall effect will be marginal.
Issues of equity or fairness
None have yet been identified.
Benefits
Benefits identified:
Option 1: None.
Option 2: This will prevent landlords from making unreasonable demands for payment where there are slight delays in paying ground rent.
Compliance Costs
Business sectors affected
The controls would potentially affect the landlords of around 2 million properties in England and Wales. Leaseholder-managers would also be affected.
Compliance costs for a typical business
Option 1: None.
Option 2: Minor. Standard forms could be used for the rent demand, sent by ordinary, second-class mail and - where service charges are payable - included with the service charge demand. It should also be noted that that no demand will have to be sent where the leaseholder has signed a direct debit mandate or standing order for payment of the rent.
Consultation with Small Business
The majority of landlords of leasehold property would be considered small businesses. Indeed, many would be considered extremely small businesses. We therefore consulted the Small Business Service on our proposals. They stated that option 2 was thought to be fair and that no real objections had been raised.
The draft Bill and consultation paper has also been widely circulated. We received over a thousand responses in all, 44 of which came from landlords, managing agents or management companies responsible for 20 or fewer leasehold units (i.e. flats or houses). Their views are discussed in section 8 below.
We are satisfied that these reforms will not have a disproportionate effect on small businesses.
Other Costs
We do not consider that any other significant costs will be incurred as a result of these reforms.
The reforms will be self-enforcing in that a landlord will not be able to proceed with forfeiture or other enforcement action unless the relevant conditions have been met. It is not anticipated that any additional cases will be generated. Indeed, some may be prevented.
Results of consultations
The requirement to demand ground rents secured widespread support. The vast majority of leaseholders supported this reform, as did the majority of landlords. This option was also supported by 60% of landlords, agents and management companies responsible for 20 or less units.
Summary
Two options are under consideration. Option 2 will involve placing a new obligation on landlords of leasehold property. However, we believe that, given the highly serious nature of forfeiture proceedings, this requirement is appropriate and necessary to avoid any continuing abuse of the system.
Monitoring and Review
We will keep these arrangemnets under review and make changes if necessary.
| Declaration I have read the Regulatory Impact Assessment and I am satisfied that the benefits justify the costs. Signed by the responsible Minister Lord Irvine of Lairg
Lord Chancellor 25 June 2001 Contact points Ann Nixon Commonhold Bill Team Lord Chancellor's Department Tel. No. 020-7210 1987 E-mail: Anixon Matthew Pye Leasehold Reform Branch Department for the Environment, Transport and the Regions. Tel. No. 020-7944 3462 E-mail: Matthew_Pye@detr.gsi.gov.uk |
433 leaseholders signed up to one of four bulk responses. These were received from Brighton and Hove Council Leaseholders Independent Forum, Greenwich Leaseholders & Right to Buy Action Group, Leasehold Enfranchisement Association and Tower Hamlets Leaseholder Association.