House of Commons - Explanatory Note
Commonhold and Leasehold Reform Bill [HL] - continued          House of Commons

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Exercising the right

Clause 93: Introductory

169.     Clause 93 states that clauses 94 to 101 apply while the RTM company is responsible for the management of the premises.

Clause 94: Management functions under leases

170.     Clause 94 sets out the functions, duties and responsibilities taken on by the RTM company by virtue of acquiring the right to manage.

171.     Subsections (2) to (4) provide that where a landlord, or a third party, is obliged to carry out any of the management functions under any lease of the premises, those functions become functions of the company.

172.     Subsections (5) and (6) define the management functions to be taken on by the company. They include matters for which the company is to be responsible and matters for which the company is not to be responsible. In particular, the company is not to be responsible for the management of any unit which is not held by a qualifying tenant (e.g. a commercial unit or a flat of a renting tenant). The company will, however, be responsible to all parties for the management of the common parts and the fabric of the building. The company is also not to be entitled to take any forfeiture action.

173.     Subsection (7) provides a power to further specify by order what is or is not to be a management function of the RTM company.

Clause 95: Management functions: supplementary

174.     Clause 95 makes further provision in respect of the management functions of the RTM company.

175.     Subsection (1) provides that any obligation owed by the company to any tenant by virtue of taking on the management functions is also an obligation to any landlord.

176.     Subsections (2) and (3) provide that any landlord of any part of the premises, any third party to a lease or anyone appointed manager under the 1987 Act is not entitled to carry out any of the management functions taken on by the RTM company without the company's agreement. That does not, however, prevent any party insuring the premises at his own expense.

177.     Subsections (4) and (5) provide that any function or obligation owed by a tenant to a landlord or to a third party under a lease will instead be owed to the RTM company if it relates to any of the management functions taken on by the company. (For example, where a tenant is obliged under a lease to meet the management costs incurred by the landlord, he or she will instead be required to meet the costs incurred by the RTM company.) This does not, however, prevent the tenant still having to pay any management costs incurred prior to the company taking on the management functions.

Clause 96: Functions relating to approvals

178.     Clause 96 specifies the procedure to be followed under the right to manage where an approval (including a consent or a licence) is required under a lease.

179.     Subsections (2) and (3) provide that where a tenant is required to seek approval under a lease, the functions of the landlord, or of a third party, in granting approvals become functions of the company.

180.     Subsection (4) provides that the company must not grant approval without having given 30 days' written notice to the landlord in respect of approvals for specified matters, and 14 days' written notice in all other cases.

181.     Subsection (5) provides for regulations to specify other matters for which the landlord is to be given longer than 14 days' notice, and what period should apply.

182.     Subsection (6) provides that any obligation placed on a tenant under a lease to obtain the approval of a landlord or a third party for any matter will instead be an obligation to obtain the approval of the RTM company.

Clause 97: Approvals: supplementary

183.     Clause 97 specifies the procedures which apply where a landlord objects to the granting of an approval under clause 96.

184.     Subsection (1) provides that where the landlord objects to the granting of approval within the period allowed, the company may not grant approval except in accordance with the agreement of the landlord or in accordance with a determination of (or on an appeal from) a LVT.

185.     Subsections (2) and (3) provides that a landlord may not object to the granting of an approval (including an objection which has effect if the tenant fails to comply with a condition imposed by the landlord) unless he would have been able to do so were he the person responsible for granting the approval. That would include the landlord being bound not to unreasonably object to the granting of the approval in circumstances where he would be bound not to unreasonably withhold consent under section 19 of the Landlord and Tenant Act 1927 (such as, for example, in dealing with a request for consent for the assignment of the lease). (The RTM company is also bound not to unreasonably withhold such consents by virtue of paragraph 1 of Schedule 7.)

186.     Subsection (4) provides that a landlord who objects to the granting of an approval under clause 96 must give notice of that objection to both the RTM company and the tenant seeking the approval.

187.     Subsection (5) provides that application made be made to a LVT for its adjudication on the matter by either the landlord, the company, or the tenant who applied for the approval.

Clause 98: Enforcement of tenant covenants

188.     Clause 98 provides that a RTM company may take action to enforce any obligation entered into by any tenant of the premises under a lease. The company may exercise any power granted under a lease to enter the premises to check compliance with the terms of that lease, but may not exercise any powers of re-entry or forfeiture.

Clause 99: Tenant covenants: monitoring and reporting

189.     Clause 99 sets out the responsibilities of the RTM company in respect of the covenants of the tenants under their leases. The company is required to monitor tenants' compliance with the terms of their leases, and to report any breaches of those terms to the landlord which are not put right within three months of the breach coming to the attention of the company (unless the landlord has asked not to be so notified or reasonable compensation has been paid in respect of the failure).

Clause 100: Statutory functions

190.     Clause 100 introduces Schedule 7, which makes consequential amendments to existing rights and duties to make them applicable where the RTM company has acquired the right to manage. Details are set out in the notes on Schedule 7 below. Regulations may specify how any other statutory requirements should apply where the right to manage has been exercised.

Clause 101: Landlord contributions to service charges

191.     Clause 101 places landlords under an obligation to meet any shortfall in the costs recovered by the RTM company caused by the proportions payable by tenants under their leases failing to add up to 100 per cent of the total. Where that obligation applies, a landlord of a unit which is not held on a long lease, is required to pay his proportion of the shortfall. Where there are two or more units, the proportion to be paid by an individual landlord is calculated by reference to the proportion of the total internal floor area of such units which relates to units for which he is the landlord. Where a unit is not subject to a lease, the payment must be made by the freeholder.

Supplementary

Clause 102: Registration

192.     Clause 102 amends the Land Registration Act 1925 to make the right to manage a registrable interest in land.

Clause 103: Cessation of management

193.     Clause 103 specifies the circumstances in which the company ceases to be entitled to exercise the right to manage. This will occur:

  • where the company wishes to cease exercising the right and all landlords agree;

  • because the company is wound up, enters receivership, becomes insolvent or is struck off;

  • where a manager appointed to replace the RTM company begins to act or where an order is made which withdraws the right to manage from the RTM company under Part 2 of the 1987 Act; or

  • where the company ceases to be a RTM company (which may happen, for example, because the company is used to purchase the freehold of the property).

Clause 104: Agreements excluding or modifying right

194.     Clause 104 provides that any agreement which has the effect of either restricting the ability of a tenant to participate in the right to manage or penalising the tenant as a result of an action of RTM company is void.

Clause 105: Enforcement of obligations

195.     Clause 105 provides that any interested party may apply to a county court to enforce any obligation imposed by virtue of this Chapter.

Clause 106: Application to Crown

196.     Clause 106 applies the right to manage to the holdings of the Crown Estate and the Duchies of Cornwall and of Lancaster and to Government properties. Leaseholders in such premises will therefore be eligible to acquire the right. It also enables the Duchies of Lancaster and of Cornwall to make any payments required of it as landlord under this Chapter out of either revenue or capital funds.

Clause 107: Powers of trustees in relation to right

197.     Clause 107 provides that trustees who are the qualifying tenant of a flat may become members of the RTM company, unless the instrument regulating the trust specifically provides otherwise.

Clause 108: Power to prescribe procedure

198.     Clause 108 provides that regulations may make further provisions governing the procedure for giving effect to a claim notice. (Such provisions may be required in the light of experience should it prove that circumstances may arise which it would be difficult to accommodate within the normal procedures for acquiring the right to manage.)

Clause 109: Notices

199.     Clause 109 sets out the procedures to be followed in serving any notice under this Chapter.

Chapter 2: Collective enfranchisement by tenants of flats

Clause 112: Amendments of right to collective enfranchisement

200.     Clause 112 provides that this Chapter amends the right to collective enfranchisement under the 1993 Act.

Qualifying rules

Clause 113: Non-residential premises

201.     Clause 113 amends section 4(1) of the 1993 Act to enable premises where the proportion of the internal floor area used for non-residential purposes is up to 25% to qualify for the right. This replaces the present limit of 10%.

Clause 114: Qualifying leases

202.     Clause 114 amends the definition of qualifying tenant in section 5(1) of the 1993 Act to remove the current requirement that the tenant's long lease should be at a low rent or for a particularly long term (i.e. over 35 years).

Clause 115: Premises with resident landlord

203.     Clause 115 amends section 10 of the 1993 Act which exempts premises converted into four or fewer flats where the landlord or an adult family member has occupied one of the flats as their only or principal home for at least twelve months. This exemption will now apply only if the landlord has owned the freehold since before the conversion. Where the freehold of the premises is held on trust, the exemption will only apply where the person, or at least one of the persons, occupying one of the flats as their only or principal home for at least twelve months, had also been a beneficiary of the trust since before the conversion.

Clause 116: Proportion of tenants required to participate

204.     Clause 116 amends section 13(2) of the 1993 Act to remove the current requirement that an initial notice of claim to exercise the right must be given by at least two-thirds of the qualifying tenants of flats in the premises.

Clause 117: Abolition of residence condition

205.     Clause 117 amends section 13(2) of the 1993 Act to remove the current requirement that at least half of the tenants giving the initial notice must satisfy a residence test.

Exercise of right

Clause 118: Right exercisable only by RTE company

206.     Clause 118 amends section 13 of the 1993 Act to require an initial notice to be given by a RTE company whose membership includes the required number of tenants in the block who both qualify to participate in the enfranchisement and have elected to participate (i.e. the participating members must hold long leases on at least half of the flats in the building). This replaces the existing requirement that a qualifying group of tenants themselves give the notice. Where there are two qualifying tenants in the block, both must be participating members of the RTE company.

Clause 119: RTE companies

207.     Clause 119 inserts new sections 4A, 4B and 4C into the 1993 Act.

208.     Section 4A defines a RTE company. To qualify, the company must be a private company limited by guarantee, and its memorandum must include as one of its objects the exercise of the right to collective enfranchisement. But (in order to prevent competing bids for enfranchisement being mounted) it does not qualify if another RTE company is already taking forward an ongoing enfranchisement claim for the same premises. In addition, a company which is also a commonhold association cannot be a RTE company.

209.     Section 4B specifies who may be a member of a RTE company prior to the company acquiring the freehold of the property. Subsection (1)(a) provides that all qualifying tenants are entitled to membership. Subsection (1)(b) provides that where a RTE company is already a RTM company which has acquired the right to manage under Chapter 1 of Part 2 of the Bill, any landlords under leases of the whole or part of the premises may also be members. Subsection (3) provides that once the freehold is conveyed to the RTE company any member who is not a participating member ceases to be a member.

210.     Subsection (4) defines a participating member as a member who is a qualifying tenant and who has given a participation notice (see subsection (7)) before the date when the company gives the initial notice under section 13 of the 1993 Act or during the participation period (see subsection (8)), or is an assignee of a lease held by a participating member in the circumstances set out in subsection (5), or the personal representatives of such a member in the circumstances set out in subsection (6). Subsection (5) provides that, where a qualifying tenant who was a participating member has assigned his lease to another qualifying tenant, that person can become a participating member by giving a participation notice to the RTE company within 28 days starting from the date of the assignment. Subsection (6) provides that if a participating tenant dies, his or her personal representatives (if they are a member) may become a participating member if they give a participation notice to the company at any time.

211.     Subsection (7) defines a participation notice as a notice which states that a member wishes to be a participating member. Subsection (8) defines the participation period as starting at the date of the initial notice and lasting for 6 months afterwards (or any other period which may be specified by order), or, if earlier, until just before contracts are exchanged for the purchase of the freehold.

212.     Section 4C provides a power to make regulations specifying the content of the memorandum and articles of RTE companies. The regulations will over-ride any terms inconsistent with them included in the memorandum and articles. The regulations may also require any compulsory terms to be deemed to be included if the company has failed to include them. Provisions of the Companies Act 1985 which would otherwise conflict with regulations made under this section are disapplied.

Clause 120: Invitation to participate

213.     Clause 120 inserts new section 12A into the 1993 Act. This requires the RTE company, before making a claim to exercise the right, to serve a 'notice of invitation to participate' on any qualifying tenants in the block who have not yet agreed to become participating members. Provision is made as to the content of this notice. The notice will have to either be accompanied by a copy of the Memorandum and Articles of Association for the RTE company or include a statement of where these documents can be inspected and from where copies can be obtained. The company cannot go on to serve an initial notice until fourteen days after service of the invitation to participate. Any inaccuracies in the particulars of the notice will not invalidate the notice.

Clause 121: Consequential amendments

214.     Clause 121 provides that Schedule 8 has effect. This Schedule includes a large number of amendments, principally to the 1993 Act, consequential on clauses 118 to 120. They provide for the collective enfranchisement procedure to be carried forward by the RTE company rather than, as now, initially by a group of qualifying tenants and subsequently by a nominee purchaser appointed by them. Details are set out in the notes on Schedule 8 below.

Clause 122: Right of access

215.     Clause 122 extends the existing right of access by the landlord for valuation purposes under section 17(1) of the 1993 Act, so that it applies for any purpose in connection with a claim to exercise the right of collective enfranchisement.

Purchase price

Clause 123: Valuation date

216.     Clause 123 amends Schedule 6 to the 1993 Act to provide that the various values included in the price payable by the RTE company shall be determined as at the 'relevant date' - that is, the date of service of the initial notice - instead of as at the 'valuation date' - that is, the date at which it has been agreed or determined what freehold interests will be acquired by the company.

Clause 124: Freeholder's share of marriage value

217.     Clause 124 amends paragraph 4(1) of Schedule 6 to the 1993 Act to provide that the freeholder's share of marriage value should be 50% in all cases, rather than the greater of (a) such proportion as is agreed by the parties or determined by a leasehold valuation tribunal and (b) 50%.

Clause 125: Disregard of marriage value in case of very long leases

218.     Clause 125 amends paragraph 4 of Schedule 6 to the 1993 Act to provide that where the unexpired term of each of the leases held by participating members of the company exceeds 80 years at the relevant date, the marriage value shall be taken to be nil.

Chapter 3: New leases for tenants of flats

Clause 126: Introductory

219.     Clause 126 provides that this Chapter amends the right of tenants to acquire new leases under the 1993 Act.

Qualifying rules

Clause 127: Replacement of residence test

220.     Clause 127 removes the previous requirement that tenants must satisfy a residence test to qualify for this right. Instead, it introduces a new requirement that the tenant must have been a qualifying tenant (i.e. a long leaseholder) for at least two years before they can exercise this right.

Clause 128: Qualifying leases

221.     Clause 128 amends the definition of qualifying tenant. Previously, a qualifying tenant had to either have a lease of more than 35 years (a lease for a particularly long term) or a lease of more than 21 years at a low rent. The amendments remove the 'low rent' and lease for a 'particularly long term' tests. Following these changes, a qualifying tenant is, for the purposes of the right to acquire a new lease, a long leaseholder of a flat.

Clause 129: Personal representatives

222.     Clause 129 makes special provision for the benefit of those who inherit leases. Provided that the deceased had been a qualifying tenant for at least two years (see clause 127), their personal representatives will have the right to a new lease notwithstanding the fact that they have not, themselves, held the lease for at least two years. This right can only be exercised during a period of one year starting from the date of grant of probate or of letters of administration.

Clause 130: Crown leases

223.     Clause 130 inserts a new version of section 94(2) of the 1993 Act. It ensures that any long leaseholder of a flat in a Crown property can obtain a new lease under that Act where their immediate landlord is not the Crown. Where the Crown is the immediate landlord, the long leaseholder can obtain a new lease outside the 1993 Act under the voluntary undertaking given by the Crown to that effect.

Purchase price

Clause 131: Valuation date

224.     Clause 131 provides that the determination of the various values included in the price payable by the tenant under Schedule 13 to the 1993 Act shall be as at the 'relevant date' - that is, the date of service of the initial notice under section 39 of that Act, instead of as at the 'valuation date' - that is, the date at which it has been agreed or determined what freehold interests will be acquired by the company.

Clause 132: Landlord's share of marriage value

225.     Clause 132 provides that the freeholder's share of marriage value shall be 50% in all cases, rather than - as now - at least 50% with a higher share going to the landlord where it is agreed by the parties or where a leasehold valuation tribunal determines that the landlord should have a greater share.

Clause 133: Disregard of marriage value in case of very long leases

226.     Clause 133 provides that where the unexpired term of the existing lease exceeds 80 years at the relevant date, the marriage value shall be taken to be nil.

Chapter 4: Leasehold houses

Clause 134: Introductory

227.     Clause 134 provides that this Chapter amends the 1967 Act.

Qualifying rules

Clause 135: Abolition of residence test

228.     Clause 135 amends section 1 of the 1967 Act. It abolishes the residence test as it applies to leasehold houses. Consequentially, it also provides that where a person has a superior lease to a qualifying tenant, that person does not have the right to enfranchise and the right to extend his lease. It also makes a number of other consequential changes to the 1967 Act.

Clause 136: Reduction of qualifying period as tenant etc

229.     Clause 136 amends section 1 of the 1967 Act. It introduces a requirement for the leaseholder to have held his or her lease for a least two years before exercising the right to enfranchise or the right to an extended lease. It also excludes leaseholders from these rights if their tenancy of the house was a business tenancy unless they could pass a residence test. Business tenants are required to have occupied the house as their only or main residence for the last two years or periods amounting to at least two years in the last ten in order to obtain the right to enfranchise and the right to extend their leases.

230.     This clause also brings sections 9(3)(b) and 23(2)(b) of the 1967 Act into line with sections 13(9) and 42(7) of the 1993 Act. Where the leaseholder of a house withdraws his notice of their desire to enfranchise, he will be prohibited from issuing a fresh notice for twelve months (as opposed to three years).

Clause 137: Exclusion of certain business tenancies

231.     Clause 137 provides that business tenants (who must also meet the residence condition in clause 136 above) do not qualify for the right to enfranchise unless they were granted a lease with an original term of more than 35 years, or the lease contained a covenant or obligation for renewal which has been exercised to make the total of the term more than 35 years.

Clause 138: Tenancies not at a low rent

232.     Clause 138 amends section 1AA of the 1967 Act. Subject to an exemption which applies to certain properties in rural areas, it extends the right to enfranchise to leaseholders of houses who were originally granted leases for more than 21 years, but less than 35 years, and who are unable to pass the relevant low rent test. It also makes consequential amendments to the rural exemption.

Clause 139: Personal Representatives

233.     Clause 139 amends section 6 of the 1967 Act. It improves the rights of those who inherit leasehold houses. Where the deceased leaseholder qualified for the right to extend the lease and/or enfranchise at the time of death, personal representatives would be able to exercise those rights within one year of the grant of probate or letters of administration. It also makes some consequential amendments to Schedule 3 to the 1967 Act.

Clause 140: Abolition of limits on rights after lease extension

234.     Clause 140 amends section 16 of the 1967 Act. Section 16 currently limits the rights of leaseholders of houses who have exercised their right to extend their lease. By removing paragraph (a) of subsection (1), leaseholders with extended leases will be given the right to acquire the freehold. Similarly, the removal of subsection (4) will also give sub-tenants of a tenant with an extended lease the right to acquire the freehold if otherwise qualified to do so. These rights will apply to leases extended before these provisions come into force in the same way as it will apply to those extended after that date.

235.     Subsection (2) replaces section 16(1B) of the 1967 Act. The existing subsection 1B prevents an extended tenancy from being an assured tenancy and disapplies the provisions of Schedule 10 to the Local Government and Housing Act 1989. It will be replaced with a provision that allows those with extended leases to benefit from security of tenure even if they can no longer meet the relevant low rent test. This is necessary because the higher ground rent payable under an extended lease will normally be above the limits of that test.

236.     Subsection (3) makes it clear that the above changes apply to leases which have been extended before the coming into force of these provisions. Subsection (4) clarifies the operation of the valuation principles in section 9(1A) of the 1967 Act after the original term date of the lease.

 
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Prepared: 20 November 2001