Implications of Supreme Court Ruling on Housing Co-ops: Options for Tenancy Agreements, Study notes of Law

Download Implications of Supreme Court Ruling on Housing Co-ops: Options for Tenancy Agreements and more Study notes Law in PDF only on Docsity! Fully Mutual Housing Co-operatives and the Supreme Court ruling in the case of Berrisford v Mexfield Housing Co-op The Confederation of Co-operative Housing has assembled this guidance note to explain the issue and to set out options that fully mutual housing co-operatives may wish to consider; in producing this guidance note, we would like to make the following points clear: 1 We are aware of some co-ops who - although their tenancies are “fettered” and therefore considered to be 90 year tenancies (see below for an explanation of this) – are still taking legal action as if their tenancies are periodic. It is important that co-ops understand that legal fees can very quickly escalate when taking such action, and that there is no chance of success if the tenancies are fettered. 2 In some cases, co-ops are spending tens of thousands of pounds on such actions. Co-ops need to be aware that high cost legal actions could have potential impact on whether they are able to comply with the financial viability regulatory standard. 3 Some co-ops have even suggested that the CCH should establish a fighting fund to fight such cases as test cases. And/or are expecting that the Government will resolve the problem. Even if the Government were minded to provide assistance, it is not legally possible for any Government to change an existing tenancy. Establishing a fighting fund would have no chance of success. To change the Mexfield ruling would require the ruling to be overturned by the Supreme Court. There are currently no grounds under which a case would even make it to the Supreme Court. 4 We stress that co-operatives need to take their own legal advice on this issue, and need to act in accordance with the legal advice they have received. It is important that co-operatives get legal advice from solicitors or barristers who are well versed in tenancy law and the “Mexfield” issue. The “Mexfield” case is complex and we have heard of cases where co-operatives have received inaccurate advice We have included on our website a list of legal advisors we are aware of who have previously dealt with the “Mexfield” case. We are not necessarily advocating that co-operatives should use these legal advisors. Co-operatives should not rely on this guidance note as legal advice; it is not intended as legal advice – it simply summarises information gathered from discussions amongst stakeholders in the co-operative housing sector and from the legal advice obtained by some of those stakeholders. This information and advice will not be applicable to the circumstances of all co-operatives and it should not be the sole source of information that is used to consider the issue. An explanation of the Mexfield case In English law, a tenancy can either be:  fixed term - a length agreed in the tenancy agreement, or  periodic - ie. a length of time that is regularly renewed. Unless some other statutory legislation that affects residential tenancies applies (eg. such as leasehold law or the Secure or Assured Tenancies regimes), a fixed term tenancy can only be ended before the end of the fixed term either through “surrender” (ie. where bringing it to an end is agreed by both parties), through a legal process where there has been a breach of tenancy, or if there is an express break provision in the tenancy. A periodic tenancy can usually be brought to an end “unilaterally” – ie. one or other of the tenant or landlord can issue a notice of end of the tenancy and at the end of the specified period, the tenancy ends. Most fully mutual housing co-operatives have always worked on the understanding that their tenancies are periodic – usually for a weekly or monthly period - where co-operatives are able to bring the tenancies to an end by issuing a Notice to Quit for the specified period. Under these arrangements, a housing co-operative tenant’s “security” was based on the co-operative’s decision-making and policies rather than through the tenancy agreement. advice is “speculative” and the barrister employed by BCHS considered that policies that could be changed would not fetter a tenancy agreement. If a co-operative is seeking to ensure that their tenancies are “unfettered” and periodic, the wording – certainly of the tenancy agreement, but also possibly of policies that “fetter” the termination of tenancies – could well be important. Tenancy agreements and policies would need to be worded in such a way that nothing restricted the co-operative’s ability to issue a Notice to Quit and take possession of the property. Any information about circumstances under which action would be taken would need to be advisory – ie. circumstances in which the co-operative “might” take action rather than “would”. A housing co-operative may explore whether they could convert their tenancies to become “unfettered” periodic tenancies – a housing co-operative could choose to issue “unfettered” periodic tenancies to new tenants. We attach a sample tenancy agreement produced for CDS Co-operatives which their solicitor considers does not “fetter” their tenancy. We are not advocating the use of this tenancy agreement, and make no guarantees that these tenancy agreements are “unfettered” or that they resolve the “Mexfield” problem. We would strongly advise that co-operatives do not simply start using this tenancy agreement because we know from experience that such documents need to be adapted to make them appropriate for the relevant co-operative’s circumstances. In all cases, co-operatives need to seek their own legal advice on the tenancy agreements they use. Converting a fixed term 90 year tenancy to an “unfettered” periodic tenancy is not a simple matter. It would involve the “surrender” of the 90 year tenancy (ie. both parties agreeing to it) before issuing an “unfettered” periodic tenancy, and that the tenants were properly informed and consulted on the proposed changes. Co-operatives could operate in accordance with their tenants having 90 year fixed term tenancies – co-operatives may decide to live with the existence of 90 year fixed term tenancies (or may have no alternative but to). This would mean that co-operatives would need to be familiar with relevant law relating to long tenancies (usually called leases). There are some major consequences to this which co-operatives would need to ensure that they received advice on:  the terms of the contractual tenancy agreement – even if the tenancy has been changed from being periodic to being fixed term, we understand that the non-statutory rights and obligations set out in the existing tenancy agreement would still apply. For example, on the basis of the existing contractual tenancy agreement the co-operative would still be in a position to charge rent to the tenant and require the tenant to be a co-operative member.  entitlement to welfare benefits – potentially a major consequence of co-operatives being considered to have 90 year fixed term tenancies is that people with a fixed term tenancy of longer than 21 years are not usually entitled to claim Housing Benefit. This is because tenants with tenancies of this duration are usually considered to be homeowners. The CCH has received the following advice from the Housing Support Division at the DWP: ‘Although the Department for Work and Pensions has overall responsibility for the scope and structure of the Housing Benefit (HB) and Council Tax Benefit (CTB) schemes, local authorities have full statutory responsibility for their day-to-day administration. This Department cannot give an authoritative interpretation of the regulations; that is a matter for authorities to decide subject to any court ruling and depending on the circumstances of each individual case. I hope, however, that you find the following comments helpful. We are responsible for offering our interpretation of the HB regulations but your enquiry concerns tenure legislation. Therefore, I can only advise you to seek your own legal advice on the status of this liability but offer the following views. Housing Benefit can only be paid to a person who has a legally enforceable liability to pay rent on the dwelling they occupy as their home. I understand that the indeterminate duration of the tenancy may effectively grant a tenancy for life to the tenant. A tenancy that has no prescribed term of years and effectively terminates on the death of the claimant is in law a tenancy for 90 years and therefore has the appearance of a long tenancy for benefit purposes. Payments under a long tenancy are not eligible for Housing Benefit, a long tenancy being defined as one originally granted for more than 21 years, Housing Benefit regulation 12(2)(a) refers. Those with a long tenancy are treated as owners, for benefit purposes, and help with their housing costs is available through Income Support, income based Jobseekers Allowance, Employment Support Allowance or Pension Credit on much the same basis as Housing Benefit. The above regulation therefore acts as a means for determining, for benefit purposes, whether a person is a tenant or owner. A legal distinction is made between a lease originally made for more than 21 years and one for less. Essentially the distinction is between a short term tenancy that ends on the departure or death of the tenant and a long term tenancy which runs its course and which can be renewed, passed on or sold on. This effectively determines the difference between a tenant and an owner/leaseholder, which is picked up in the income related benefits. HB helps with the housing costs of the former and the others (IS, JSA, ESA or SPC) help the latter. However, there is case law for Jobseekers Allowance (CJSA/2746/2008) that clarifies the situation a little more. The Judge in that decision highlights that a long tenancy should be made by deed and be registered with the Land Registry. If that is not the case then the tenancy would not satisfy the definition of long tenancy in HB regulation 2(1) and therefore eligible for HB so long as all other conditions are met.’ In considering Housing Benefit entitlement with their legal advisors, co-operatives may wish to consider the matters raised above by the DWP. We are not aware of any instances of local authorities refusing to pay Housing Benefit to tenants of fully mutual housing co-operatives as a result of the “Mexfield” case. The CCH has asked Government to clarify that tenants of fully mutual housing co-operatives with 90 year fixed term tenancies can claim Housing Benefit, but as yet they have declined to do so. In the meantime, we would suggest to co-operatives that if a tenant is refused Housing Benefit as a result of the “Mexfield” case, they should contact us and we will do what we can to assist. We hope that this will not be the case, but if it transpires that tenants with a 90 year fixed term tenancy are unable to claim Housing Benefit (which would mean that the co-operative would have no alternative but to issue Forfeiture proceedings against them whereby they would lose their home – see below), this may be an incentive for them to agree to “Surrender” that tenancy in favour of an “unfettered” periodic tenancy. With no current cases of tenants of fully mutual co-operatives being refused Housing Benefit as a result of the “Mexfield” case that we are This may be a critical issue because the law treats 90 year tenancies that are assignable differently to those that are not with regards: o the lower limits for taking arrears action (see above) o the requirement to apply to the court or the Leasehold Valuation Tribunal prior to issuing Section 146 Notices (see above) o lease extension (see below) o leaseholder enfranchisement (see below) o issuing Section 166 Notices (see below) It may be the case that some of the more difficult aspects of leasehold law in relation to the issues listed below, do not apply if the tenancy agreement specifically prohibits “assignment” and subletting. If assignment is possible, the clauses in the original tenancy agreement would still apply to the assignee. This would mean that the assignee could, for example, be required to become a co-op member. If a 90 year tenancy is assigned, it remains a 90 year tenancy (ie. it expires 90 years after the start of the original tenancy).  lease extension – a “leaseholder” has a statutory right to apply for an extension to their lease and a formula determines how much they would pay for this extension (this could be expensive because it would cover the cost of rent during the period of the extension). It may be the case that a tenancy agreement clause prohibiting assignment and subletting may make the right to lease extension inapplicable.  leaseholder enfranchisement – a “leaseholder” in a house is legally entitled to “enfranchise” – ie. they can buy the freehold of their property. Similarly 50% of “leaseholders” in blocks of flats may choose to enfranchise the whole block of flats. If this happened, all the leaseholders in the flats would retain the same lease with the newly established freehold owner. A formula determines how much such enfranchisement would cost. For most “leaseholders” the fees that enable them to occupy their homes for the duration of the lease are paid in advance (ie. the cost of buying the leasehold property). In fixed term 90 year tenancies in housing co- operatives, the costs of occupying the home during the fixed term are spread across the 90 year period (ie. the weekly or monthly rental payment). We would speculate that the cost of enfranchisement might take into account the amount of rent owing for the remaining period of the fixed term tenancy, but it may take into account other factors as well. It may be the case that tenants of housing co-operatives with 90 year tenancies would have a form of Right to Buy through this route. Again, it may be the case that a tenancy agreement clause prohibiting assignment and subletting may make the right to lease extension inapplicable.  Section 166 notices - we have been advised that some 90 year tenancies may be subject to the requirement in Section 166 of the Commonhold & Leasehold Reform Act 2002 to issue rent notices between 30 and 60 days prior to rent becoming due. This legislation was clearly aimed at long leases where rent is due annually or at least on a much less frequent period than weekly. The legal opinion we have received on this matter suggests that the relevant clauses have been poorly drafted and judicial interpretation in relation to shared ownership leases have concluded that S166 notices are not necessary in those circumstances. However, the same judicial interpretation would not apply to fully mutual housing co-operatives, and the CCH has raised with Government that it would be useful for co-operatives to get certainty on this matter through some clear exemption from the requirement.  duty to report changes to lenders – where co-operatives have received legal advice that their tenancies are fixed term 90 year tenancies, co-operatives will need to consider (possibly in conjunction with their legal advisors) whether they have a duty to report a significant change to their lenders. Whether they need to do so might depend on what lenders were originally told regarding the nature of the co-operative’s tenancies. Co-operatives could choose to cease to be fully mutual, thereby resulting in their tenants being subject to Assured Tenancy legislation – this does not solve the Mexfield “problem”, but it would mean that tenancies would be managed in accordance with Assured Tenancy law which would be easier to manage than using Forfeiture and more familiar in the social rented sector. Paragraph 12(1)(h) of Schedule 1 Housing Act 1988 states that fully mutual housing co-operatives are not permitted to issue Assured Tenancies. If co-operatives chose to end their full mutuality – ie. changing their rules so that not all members are required to be tenants or prospective tenants and that all tenants are required to be members –their tenants may automatically become subject to Assured Tenancy law. If they previously had “fettered” tenancies that had become 90 year fixed term tenancies, they would still be 90 year fixed term tenancies. But if the tenancies had become subject to the Assured Tenancy regime, their termination would be through Assured Tenancy legislation (ie. issuing Notices Seeking Possession which would be familiar to courts). We are not advocating this approach, but it may be an option that is right for some. Whilst non-fully mutual co-operatives are still co-operatives - full mutuality defines the identity of many co-operatives. Becoming non-mutual would mean that a co-operative’s tenants could not be required to be members of the co-operative (ie. tenants would choose whether to become members) and potentially the co-operative could have a membership policy that allowed others apart from tenants and prospective tenants to be members. Co-operatives would need to ensure that they were fully aware of Assured Tenancy rights before taking this step. For co-operatives registered with the Homes & Communities Agency and with homes developed post 1996, issuing Assured Tenancies would also mean that some of their tenants may have the “Right to Acquire” (a right similar to the Right to Buy but which is rarely used because it involves much lower discounts). The CCH has also discussed whether it may be useful to seek legislative change to enable the tenancies of fully mutual co-operatives to be subject to the Assured Tenancy regime; this is now possible in Wales but not currently in England and there is no imminent sign that the UK Government will follow the Welsh Government’s action in this area. Setting up separate legal entities to issue tenancies – a suggestion was made to us that co-operatives might be able to set up separate legal entities to which the tenancies are transferred so that they can issue Assured tenancies (and the co-operative remain a fully mutual organisation). Issuing short term tenancies – CDS’s solicitor suggested that co-operatives could issue short term tenancies (ie. 1 year, with quarterly cut off points) to enable co-operatives to terminate tenancies. This is unlikely to be an attractive option to many co-operatives. It could only deal with future tenancies, and could not be retrospectively applied to existing tenancies.