Please note, this blog post has been significantly extended and updated since it was first circulated.
I have recently discovered that the members of the subpostmaster's trade association were not actually permitted to vote in the association's affairs: the National Federation of Subpostmasters' members are required to nominate a board-approved intermediary to exercise their vote on their behalf! Now in pratice the board has been letting subpostmasters appoint themselves as their representatives, but in principle, the directors have a veto over who can exercise the subpostmaster's vote.
This is a long post, but there are recaps and summaries along the way.
Where I'm coming from is a rather idealistic and romantic view of membership organisations. I think it's great that in the UK, moreso than in many other places, and as part of a very long tradition, strangers from different families can get together, organise themselves and solve their problems amongst themselves, without troubling the government for money or having to ask much in the way of permission from outsiders. Dissenting religious groups could for centuries get together and employ their priests, without having to ask the officially Anglican government for permission. Nowadays we have societies, associations, clubs, trades unions, building societies, social enterprises and all manner of other private collective enterprises. I really don't like it when the proper balance between a group's management and its wider membership gets out of kilter. And if the little guys can't call a meeting and make their case that the group should think again, it never, ever, ends well.
But it's not clear that the NFSP is really a membership organisation in that ideal sense.
The public inquiry into the Post Office scandal has recently taken evidence from a former NFSP general secretary, concerning that body's role in the Post Office scandal. So it's appropriate now to subject NFSP to a bit more scrutiny.
The NFSP used to be a trades union. but about ten years ago, the it was decertified and struck off the list of trades unions. This deprived it of its quasi-corporate status, and restored it to being purely an unincorporated association. Lacking corporate status complicated the enforcement of contracts and ownership of property, so around 2015, NFSP negotiated a funding deal with the Post Office(!), and incorporated as a company limited by guarantee.
Mark Baker, formerly of the NFSP and latterly of the Communication Workers Union, gave evidence to Parliament to the effect that
"Also the formation of the company arrangements of NFSP ltd should be called into question as such a company should be owned and controlled by its members as detailed in their Articles of Association of NFSP Lrd. I am still in contact with many Postmasters who thought they were such company members but they have all confirmed that they have never been asked to legally take on company membership nor have they ever voted at an AGM or appointed the Directors which is the normal practice for members of a company limited by guarantee. Democracy within NFSP Ltd does not appear to exist. The free membership of the NFSP that the Post Office claims they pay for appears to be nothing more than a sham."
(I think Baker is accidentally referring to a subsidiary company here; the names are confusing, a point to which I shall return ...)
Companies all have public constitutions, called the articles of association, available on Companies House. Due to my interest in the leasehold scandal I have read the articles of association of several hundred companies, normally those which are used to allow (or not allow) owners of dwellings to have a say in the collective management of shared facilities. So I know most of the tricks used for pretending that members have power when they don't. (Side track: DLUHC launched a consultation about this yesterday, 1 December 2022).
Do regular NFSP members have a vote?
Section 284(4) of the Companies Act 2006 provides that company members' votes are to be counted in accordance with the company's articles. Unless the articles say otherwise, it's one share one vote if the company has shares, and one member one vote if it hasn't a share capital (as is the case for NFSP).
So for a company limited by guarantee like NFSP, any restrictions on voting rights will be found in the company's articles, and will therefore be a matter of public record. From my experience of Residents Management Companies, I've found that the basic mechanisms whereby members' votes might be restricted are things like:
- clauses that give the company's founders' appointees a supermajority of the votes
- clauses that give certain members a veto
- classes of membership that carry no votes at all
- "friends of" and "supporter" membership schemes that don't amount to formal membership of the company at all
And there indeed legitimate and arguable grounds for using some of these, particularly on a time-limited basis. There's even a company that weights members' votes according to how many internet domains they've registered. I myself am director of a company that allows upgradable, non-voting membership for registered supporters. But we don't go round pretending those individuals are full members.
What matters is how the company holds itself out. If it holds itself out as a bona fide membership organisation, then the members should be able to vote, particularly in elections for the board of directors. Anyone who is liable for the debts of the company should get a vote. Anyone paying for voting membership ought to get a vote, and a vote that's usable.
According to its articles of association, NFSP members aren't supposed to be able to directly vote, even though they are liable for the company's debts. Now there is a £1 limitation on that liability, but obviously the amount is beside the point. The gory details of how the NFSP has rigged this up are in article 8 of their articles of association (filed on 10 Sep 2015). They provide that
- "All Members shall exercise their membership rights and fulfil their membership responsibilities through one or more Organisational Representative(s)." (a8.2)
- "The Council may not accept, or require the replacement of an individual as an Organisational Representative provided an alternative is possible. If an alternative is not possible the Council may exercise constitutional rights in respect of the Member directly." (a8.10)
- "Voting rights under the Articles may be exercised only by Organisational Representatives." (a8.11)
- "To become a Member [...] a sole trader [...] must [...] nominate [...] one Organisational Representative [...]" (a9.2)
I've never seen anything like this. If you don't want people to have voting rights in a company, you can say so. For companies with share capital, it's routine to have non-voting shares, which often come with better dividends, and there's a nice wizard on the Companies House website to help you write the legalese that you have to publish to describe the situation. For companies without share capital, like NFSP, you can write it in plain English. You don't need a convoluted scheme like NFSP's Organisational Representatives unless you're ashamed of the arrangements and don't want to own up to them. I find it difficult to believe that NFSP's peculiar voting arrangements obtained when it was still a trades union; they might have their roots in an attempt to ensure that unincorporated businesses are equitably represented in voting weights, solving a problem like the relative voting strength of a two-person partnership that runs one sub post office, versus a sole trader who operates two sub post offices, and so. But nonetheless, you don't need to give the board control over members' votes to fix this.
What NFSP membership amounts to formally is a written agreement to obey the NFSP's regulations, an agreement to accept limited liability for the NFSP's debts, the various non-voting powers available to members under the Companies Act, such as zero fees for requesting certain information from the company, and the notional power to nominate a board-approved Organisational Representative to vote in one's own place. Oh, and the right to sue the board for discriminating between members, pursuant to section 994 of the Companies Act ...
It's not clear that most people who had been members of the previous NFSP structure before incorporation as a limited company ever actually formally joined the company, or they'd have been aware of the indirect voting scheme and complained about it. Someone should demand access to the NFSP's membership register to see if anyone other than the subscribers ever managed to join.
But my point here is not really how many members the NFSP has on its books, but the fact that the NFSP's constitution seems to say that members can only vote through intermediaries; that might work when everyone is content, but when push comes to shove, members could find it extraordinarily difficult to exercise their rights. That's the sense in which it's a "sham membership organisation". It's obviously not a sham organisation, it's there on Companies House and actually provides unusually transparent publications, e.g., on its finances, that go beyond the legal minimum requirements. But I suspect it's not really a membership organisation in practice.
There remains the question how much the Post Office influenced these arrangements ...
Why does NFSP's membership model matter?
One would tend to assume that a company limited by guarantee is not for the profit of its own members. This isn't formally the case. You can have a for-profit company limited by guarantee, and a not-for-profit company limited by shares, like St John's College, Durham.
The National Federation of Subpostmasters can apparently hand its assets over to its own members in expectation of the organisation being wound up. It therefore matters who the members actually are. A lot of those assets seem to have come from Post Office Limited, a company wholly owned by the British government. Since the net assets of NFSP were £3,627,700 in its 2021 accounts, that would amount to about £250,000 each if it only the directors were members. I suspect that the membership is much broader than that.
But we don't actually know how many members NFSP really has, and it would be useful for someone to request access to the NFSP's membership register to find out.
Who are the NFSP's members?
NFSP's unusual constitution requires that members nominate an Organisational Representative to exercise their voting rights in their stead. You can find the constitution on Companies House, in the very first document filed for the company, in September 2015. In principle, you can't now join NFSP without nominating an Organisational Representative, as we shall see.
NFSP is now incorporated as a company limited by guarantee. Purportedly, in 2015, all the members of the predecessor unincorporated association were to have been admitted to membership of the new company. This is in article 9.1 of the new NFSP's constitution. It's not clear whether this kind of arrangement really works legally without each of those transferring members formally agreeing to take on some liability for the new entity and agree to be bound by its rules, provide an up-to-date service address, and so on. Some former or serving subpostmasters have repeatedly questioned the membership arrangements.
New subpostmasters joining NFSP post-2015 are required under article 9.2 to nominate one of these "Organisational Representatives" as a condition of admission. This shows that the automatic transfer of members is a bit of a fudge: all members, auto-enrolled or otherwise, must nominate an Organisational Representative in order to vote, but only in the case of new members admitted post-2015 is this stated to be a requirement of admission. That may leave the auto-enrolled members without a duly appointed Organisational Representative.
Anecdotally, it would seem that subpostmasters may not have been asked to agree in writing to be transferred to the new NFSP in 2015, or to nominate an Organisational Representative subsequently. NFSP's membership application paperwork makes it absolutely explicit that new applicants are agreeing to abide by the NFSP's articles of association. But it doesn't mention the requirement under article 9.2.2 to nominate an Organisational Representative. Either that requirement is improperly being waived, or it is being fulfilled separately from the membership application form, or no-one is actually really being registered as a new member of NFSP. Of course, it's not in the NFSP's interests to draw attention to this requirement, so maybe if it's being fulfilled at all, it's by correspondence after the membership form has been submitted.
In any case, article 16 suggests that the identities of Organisational Representatives of Members must be stored together with the Register of Members. So NFSP really is supposed to be recording this data.
There is a form, which I've linked, for appointing an Organisational Representative, on the NFSP's website. The question is whether that form is really being used.
To summarise so far: it's not obvious which persons have been properly registered as members of the NFSP. And it's important to understand that, according to the NFSP constitution, these questions are linked, as new members are required to nominate their Organisational Representative as a condition of joining the company.
Association or Foundation model?
There are two basic models for the membership of non-profit organisations, which in the case of one special type of non-profit organisation (CIOs) have even got semi-official names: the Foundation model and the Association model; sometimes also called "small membership" and "large membership". The Association model is where a large group of members elect a smaller committee to be in charge, and can hold that committee to account. The Foundation model is where the only members are the committee. One is a self-selecting democracy, the other is a self-selecting oligarchy. But these two models are just two points on a spectrum, and an organisation may combine elements of both.
The committee in either of these models has power day-to-day. The question is, is there a wider group with a final say, above the committee, or not? Both models are perfectly legitimate; they're just different.
What is not legitimate is holding yourself out as following the Association model, whilst actually operating on the Foundation model.
There'll now be a little digression about how trivial mistakes by accountants can sometimes shed light on the nature of membership, and they'll crop up later on, too ...
I became interested in this problem a few years ago in relation to residents' associations (RAs): the RA for my ward, Trumpington Residents Association, was clearly set up on the Association model, and indeed was both a limited company and a registered charity, but its annual accounts stated explicitly that it was the Foundation model: supposedly, the only members were the board of directors/trustees. I pointed this out at a meeting, wondering if I myself were really a member, in the sense of the Companies Act, of the Trumpington Residents Association; the alternative was that the statement in the accounts was right and the only members were the board of directors, and that the elections weren't really binding and the people who thought they were members, and paying for the privilege, weren't really members --- what I'd sometimes call a "sham membership organisation". There was a little headscratching, but they quickly confirmed that the organisation was operating on the Association model and made sure the accountants didn't misrepresent this in future years. It had simply been a harmless mistake by the accountants, including boilerplate language more appropriate to a Foundation-style organisation.
(By contrast, the residents association for my own development, Trumpington Meadows Community, operated on the Foundation model but held itself out as a bona fide association: it simply was not prepared to permit outsiders to have any influence, any ability to hold the committee to account, and indeed TMC did not maintain a register of members. Given that it also held itself out as a conduit of communication with the developers and managing agents, this caused considerable tension; it had a strange resemblence to the NFSP in this regard.)
To summarise: the committee managing an organisation might be accountable to a wider group of members, or it might not. It is illegitimate, in my view, for there to be too great a divergence between theory and practice: if the rules say the committee is accountable to a wider membership, that should be true in practice too. That is why I described NFSP as a "sham membership organisation": when push comes to shove, the board can refuse to accept a member's choice of who should exercise his/her vote.
These Organisational Representatives sound very much like proxy voters. The right to vote by proxy on company business is provided by section 324 of the Companies Act. The NFSP's articles of association go to some length to try to circumvent the possibility that a member might appoint someone other than an Organisational Representative to this role, article 50 providing that "It is expected (but not required) that [...] Organisational Representatives, rather than the Members they represent will exercise any power to appoint proxies".
It may be the case that every Member since 2015 has always been able to appoint himself, or a preferred individual, as his Organisational Representative (and I say "him" for brevity here, though the public statistics show there are lots of female subpostmasters, as you'd expect). But when push comes to shove, the NFSP board could easily nobble the votes of hostile members.
What I suspect is going on is as follows: the NFSP did indeed register as members the people who had been members of the previous unincorporated association, on or shortly after the NFSP turned itself into a company. It probably has been registering those who've subsequently joined as well. The register of members is held by the NFSP and anyone wishing to access it must give ten days' notice. This allows companies to correct an "out of date" register before disclosure.
What I'm much less confident of is the possibility that the NFSP has ensured that all members even have a duly appointed Organisational Representative.
But, the register of members' Organisational Representatives is an NFSP-specific thing, rather than a statutory requirement, and so is not subject to a right of access, and it is doubtless also restricted by GDPR.
The fact that a member can appoint a proxy other than an Organisational Representative is a chink in the armour of this scheme; I imagine very few succeed in doing so in practice, and that there are no general meetings at which such member-appointed proxies could vote. After all, under the Companies Act, to call a general meeting requires a requisition supported by five percent of those entitled to vote at the meeting, so that would involve dozens or hundreds of members each persuading their board-approved Organisational Representatives to sign the paperwork. An a general meeting is the only way to hold the board to account.
Effectively, the NFSP constitution creates by the back door a non-voting membership class. Of course it may be that the board has always allowed members to appoint themselves as their Organisational Representatives, but it still amounts to the board having a veto on members' voting rights.
What do the accounts say?
The accounts of the old NFSP are available for a few of its final years, at the National Archives. The figures around 2012 note membership income of £893194 from 7168 members, implying a subscription fee of £125 per annum.
When it was deregistered as a trades union, the NFSP could have swiftly incorporated a company limited by guarantee, with members paying the same subscription fees to the new company. That's not what seems to have happened; instead a Grant Framework Agreement between the NFSP and the Post Office provided that the Post Office would top up NFSP's subscription income to £1,500,000 beyond what was raised in member subscriptions, and the subscription fee was effectively reduced to zero. Some weeks after the initial Agreement was concluded, NFSP incorporated, and registered its articles of association; article 12.8 provides "subscription policy may take account of funding arrangements between NFSP and POL.", which is quite the understatement.
Before the funding agreement with the Post Office, the NFSP was fiscally accountable to its members; if they didn't like what the NFSP board was doing, they could vote with their wallets as well as their feet. Of course, much of that income was really down to the fact that the NFSP had a monopoly on representing subpostmasters to the Post Office. By tying itself to the Post Office's purse strings, the NFSP untied itself from its own membership.
Accounting for members' funds
That £1,500,000 figure comes from Schedule 1(II) of the Grant Framework Agreement.
Is this figure borne out by the accounts? NFSP to its credit provides nice searchable PDFs of its more important Companies House filings, and for the 2021 accounts it does so with additional detail. NFSP turned over about £1.8 million in 2021, slightly above the guaranteed grant income. I tried comparing the version of the accounts filed at Companies House with the more detailed figures on NFSP's website, as the documents seemed to be from different time periods (the list of directors had changed).
When the light came it on almost blinded me.
It was another of those harmless accountant's errors. All limited companies in the UK must publish their balance sheet, which shows that the net assets of the company match the members' funds. In company law, "member" and "shareholder" are fairly interchangeable; if a company has shares, then the members are all the shareholders and only those shareholders. If a company doesn't have shares, then its members are just members; we would only call them shareholders very loosely. In a company with shares, the equity line on the balance sheet might be called something like "Shareholders' funds". For a company without shares, it might be "Members' funds" or similar.
Yet NFSP balance sheet says "Shareholders' funds".
Why do the accountants think of the members as shareholders? Are they entitled to those funds?
From the point of view of accounting, it doesn't make any difference whether the equity is described as belonging to shareholders or members, but it got me thinking. We tend to think of the difference between companies limited by shares and companies limited by guarantee as the difference between "for profit" and "not for profit". The shareholders / members must contribute funds if the company hasn't got enough money when it is being wound up, up to a defined limit. But before winding up, while the company is still in business, it can pay dividends to shareholders / members out of its accumulated profits, but not out of money they've invested. The reason is that the invested money has to be kept in case it's needed to repay creditors. This is a basic quid pro quo in return for being able to limit the members' liability to creditors. Companies limited by guarantee are not allowed to distribute profits to non-members. But what about distributing profits to members? They can do so; however, a very large proportion of companies limited by guarantee choose not to do that, and instead their constitutions provide something like the following:
"The income and property of the Association, whencesoever derived, shall be applied solely towards the promotion of the objects of the Association as set forth in these Articles of Association, and no part thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus, or otherwise howsoever by way of profit, to the members of the Association."
There are thousands of organisations that include some variation on this formula in their governing documents: charities, non-profit associations, every block of flats' Right To Manage company, even some Royal Charters have it. Having this provision or something equivalent is a statutory requirement, for limited companies that omit "Limited" from their official name. As we know, the official name of NFSP is "National Federation of Subpostmasters". Not "National Federation of Subpostmasters Limited".
The requirement in regulation 3(3)(b) linked above relates to the behaviour of the company while it is in business, not when it is being wound up. Winding up is covered by regulation 3(3)(c), which requires that "all the assets that would otherwise be available to its members generally to be transferred on its winding up either [...] to another body with objects similar to its own, or [...] to another body the objects of which are the promotion of charity and anything incidental or conducive thereto [...]".
So I looked in NFSP's articles again, and sure enough, there was a variation on the "No profit distribution to members" formula in article 5, and I say "variation" advisedly. But when I found the provisions as to winding up, in article 61, that warning light became an alarm bell. For on winding up, NFSP's articles provide that the assets can indeed be given to other organisations fitting the rubric of "similar objects" or "charitable or community purposes", but also "distribution among the Members on a reasonable basis determined by the Council"!
So that disqualifies NFSP from entitlement to the benefit of the section 59 exemption from using "Limited" in their name, which has stood as a provision of English company law since time so ancient the memory of the Internet runneth not to the contrary. These sections of the Companies Act go all the way back to an origin in the Companies Act 1867, section 23. If anyone has a digital copy of that, please do send it me.
A closer look at NFSP's article 5 shows there's a loophole: "No part of the income and property of NFSP may be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to any Member (subject to Article 61)." [italics added, natch] Some variation!
This means that NFSP's constitution is, at best, self-inconsistent. The previous article (4) says NFSP's "income and property shall be applied towards the promotion of its objects in pursuit of its authorised activities", but those objects are drawn very widely indeeed.
If people see a limited company without "Limited" or "Ltd" or "Plc" or their Welsh equivalents in its name, they're entitled to expect that it's not ultimately being run for its members' benefit or allowed to give the Members its assets if they decide to wind it up. Now there is a benefit of membership that the NFSP has probably failed to tell its members about!
There are no prizes for slipping one past Companies House; they don't check the paperwork submitted. But NFSP should really change its articles, or change its name. NFSP is a for-profit company, and it should bear the name of a for profit company, included the "Limited".
Large membership organisations that are sitting on piles of cash come under pressure to demutualise, and release the accumulated cash pile for the benefit of the current members, who therefore might have an incentive to vote for winding up. This might be a reason why the members are impeded from voting. In any case, the question who is a really a member of NFSP, and the question can NFSP members really appoint Organisational Representatives in defiance of the board, are questions with a potentially significant price tag attached. And that price has basically been paid out of Post Office funds.
As a matter of public policy, the Post Office should not be handing what's effectively public money to an organisation which holds itself out as not being for its own members' benefit when in principle it is. Nor should public funds be doled out to an organisation with such peculiar governance arrangements. I shall be writing to my MP on this question promptly.
What NFSP can do to fix this is either of the following:
- change its name, to add "Limited", and remove the impression that its assets cannot be distributed to members
- or remove the inconsistency in its articles, and actually unambiguously prohibit distribution of assets to members
It should also remove the absurd paraphernalia about Organisational Representatives. Either:
- reclassify the members as non-voting (good luck with that if there are a lot of them)
- remove the concept Organisational Representatives and let members vote directly
It should be more explicit, when asking people to join, about what the constitutional terms of the membership offer actually are.
Commonhold in the UK is a system of land ownership that can be used as an alternative to leasehold. However, it is currently very seldom used.
Leasehold has a number of problems, and I know my own situation as a leaseholder without these problems makes it much harder to empathise with people in situations that seem fairly extreme and unjust.
But leasehold is a tool that is used to solve some genuine problems, too. The main ones are:
- managing negative externalities and collective action problems within blocks of flats or on private estates
- enabling a tax-efficient system of shared equity home loans, known as Shared Ownership
Commonhold is a solution to the first of these, and irrelevant to the second.
To phase out residential leasehold tenure, there must be an alternative, and commonhold is the only available alternative.
There are two points to this longish article. They are to consider:
- how feasible it would be to mandate the use of commonhold on newly constructed blocks of flats, and
- the viability of commonhold on existing sites, given the problems of "fleecehold"
Wider availability of commonhold risks the creation of an additional tier in the UK property tenure system, to the detriment of any leaseholders who cannot convert to commonhold. So the feasibility of conversion to commonhold matters. There is also the problem that the assumed benefits of commonhold are not necessarily available on sites that have converted to commonhold from leasehold, about which I shall write much more below.
Under commonhold, there is no time-limit on how long the owners of flats own the flats. It follows that there's no additional party whose interests must be protected, other than those of the neighbouring flat owners. Commonhold requires that the block of flats be owned by a body corporate whose members are the flat owners. In the UK, this body corporate is just a normal non-profit membership organisation registered as a company with the usual company registry, Companies House.
Since the UK has very democratic company law, and a very technologically progressive registry for companies, this is a good thing; in strata title jurisdictions, the main registry is the one for land ownership, not company ownership. Where a collective enterprise is dealing with the UK bureaucracy, experience has shown that companies, whether big multinationals and tiny non-profits and NGOs, are treated as first-class citizens, and other types of body (trusts, non-company charities, mutuals, trades unions) have to use outdated technology and rules. Commonhold associations get the perks of just having to deal with Companies House.
How ready is Commonhold?
There are one or two problems that mean that commonhold isn't ready for the average block of flats yet:
- in principle, it's hard to recover service charge arrears in a timely fashion
- it's virtually impossible to have delegated management of less than a whole block of flats (a "section")
Now some blocks of flats are fairly uniform, but in my own case, there are 12 flats, 10 of which have access to the internal corridors and two which don't. It's not fair for the two non-connected flats to have to pay for the cleaning, heating and maintenance of those corridors, nor is it fair for them to have a say in the management of services. This can be achieved under share-of-freehold but not under the current commonhold legislation. There is some difference of opinion about the management of subsections of a block under the current law. I am not going to say the Law Commission is wrong when they say that it's "virtually impossible" to exclude some flat owners from voting on such matters, but I've certainly heard a credible counter-argument.
The more complicated a site is, the more awkward the inflexible governance model becomes. But this is a key trade-off: inflexibility is the key advantage of commonhold over share-of-freehold, as commonhold lacks the flexibility that would permit deliberate or accidental unravelling of the shared freehold arrangements. "sections", along the Law Commission's proposed lines, can currently be implemented under share-of-freehold but not under commonhold. Only larger, more complex sites would require them.
The issue about service charge arrears could be solved with a one-clause private members' bill. The sections issue could probably be solved with a one-clause bill plus a schedule.
The Law Commission's report on reforming commonhold runs to about 20 chapters, a third of which are taken up with making it easier to convert to commonhold, and therefore irrelevant to the question of commonhold on newly constructed blocks. The commission's reports deal with the two issues I raise above, and some unrelated matters. It is not a huge amount of work to partition the commission's 121 recommendations into matters which must be addressed before mandating commonhold on newly constructed blocks, versus matters which are "nice to haves".
There's also the question of Shared Ownership schemes under commonhold; it's my understanding that currently commonhold does not permit a flat to be owned under a Shared Ownership scheme, with the implication that commonhold will might exclude social/affordable housing units. It may be that I've slightly misunderstood this, and there's an equally tax-efficient shared equity scheme that is compatible with commonhold as it currently stands.
- commonhold already works.
- it needs some reform to improve the handling of service charge arrears, and this affects all sites
- many sites would also benefit from a statutory scheme for "sections" of the property to be treated separately (in the sense that not all the commonhold members would have a say in the governance)
- there are some other, less important, reforms that would be beneficial
Mandating commonhold on new sites
We are not at the point where commonhold can be made mandatory for new blocks of flats. But it requires only two or three small reforms to make it viable for new blocks.
Therefore, I support a ban on third party freeholders for new blocks of flats. What that means today is that if such a ban were implemented, any new blocks would have to be share-of-freehold (with no third party investors) or commonhold. Once commonhold has been reformed, that ban could be tightened to mandate commonhold across the board for new blocks.
Until quite recently, it had been assumed by many that there would be a grand bill submitted to Parliament which would include an implementation of the Law Commission's recommendations on commonhold. I never thought that was likely. The Law Commission's proposals go much further than the minimal changes that would be required to make commonhold mandatory for newly built blocks. The Powers That Be seemed to be going for a "big bang" reform, but I no longer think this is the case.
If the measures can be broken down into smaller pieces, then it would be theoretically possible to reform commonhold to the point where it could be mandated. No political party is currently proposing either such a breakdown or such a mandate. Yet.
Aside: cooperative model for commonhold?
Some people want to introduce the one-member-one-vote system of cooperatives into commonhold or into Right To Manage companies. Under the current law, the cooperative model is allowed for share-of-freehold, but completely impossible for commonhold and RTM companies, both of which are strictly required to be companies limited by guarantee, and must additionally be run on a one-flat-one-vote basis.
It is, however, perfectly legal to run a share-of-freehold on a one-member-one-vote basis, due to the protean flexibility of share-of-freehold.
I'm a big supporter of cooperatives. For those unfamiliar with how they work in the UK, they are similar to companies, but have to be for-profit, and come with a statutory lobster trap that protects the little guy from being outvoted by larger investors.
I think the for-profit character is a red herring; the problem is that it will just strike too many people as unfair that someone who owns two flats in a building should get the same voting strength as someone who owns only one. I don't think there's any political will whatsoever to allow such arrangements within commonhold or RTM. As companies limited by guarantee, with prescribed constitutions, commonhold associations and RTM companies already have adequate protection for the little guy.
One possible exception to the above: any one voting member ought to be able to force a commonhold or RTM company to hold an AGM; the current threshold is that five percent of the members must act jointly, which means more than one member if there are more than twenty flats.
Commonhold on existing sites
We must step back and take a broader and historical view. What is happening is that the relationships between dwelling owners are coming more and more to be regulated by a different type of law: before the 1980s, it was mainly property law, the law of landlord and tenant. Increasingly, however, company law is playing a larger role, for better and for worse: commonhold relies heavily on company law, as do tripartite leases and so-called "di Marco clauses". This shift is driven both by industry and by government-initiated reforms opposed by the sector. The roots of the current reform situation go back to the 1980s, when the Thatcher government reformed leasehold law and began the move to implement commonhold, which was the baby of the Lord Chancellor, Lord Mackay of Clashfern; the commonhold project was delayed by Thatcher's deposition and two elections, but taken up by the second Blair government and enacted in 2002.
The 1980s government crackdown undermined the ability of freeholders to profit from the provision of services. A very brief account of this is presented in a deleted article on Flat Living, which claims that tripartite leases arose as an attempt to offload management powers that were no longer going to be so profitable after the accountability measures imposed by this legislation. Thus began the plague of tripartite leases and monocratic Residents Management Companies.
A tripartite lease is one where there are three or more parties. In addition to the freeholder and the leaseholder, there will be one or more management companies, called RMCs ("residents' management companies"). The term "RMC" has no agreed definition, though there has recently been an attempt to specify one under building safety legislation. Tripartite leases will set out the respective roles of the parties, with the management functions under the lease exercisable by the RMC rather than the freeholder. In practice, this made it easier for developers to sell on the freehold and the management rights separately: freeholds are a fixed income investment, management rights not so much.
The management company party to a lease might have any governance arrangement: it might be wholly independent for-profit company over which the leaseholders have control, or a firmly leaseholder-controlled entity, or something in between. There's also no reason that a management company might be restricted to managing leasehold property, and instead might manage a wider estate. Some management companies permit or indeed require leaseholders to be members.
The constitutions of management companies ("articles of association") are available at Companies House, and I've read literally hundreds of them, as they're all different. RTM companies, by contrast, are required to have the articles of association in identical form, and this is effectively true for commonhold associations as well. Resident Management Companies, on the other hand, exhibit a wide variety of constitutional arrangements with respect to how unitholders (the leasehold or freehold owners of dwellings managed) relate to the company and each other:
- unitholders might be required to be members of the company
- unitholders might be required to follow the rules of the company, or pay money to it
- unitholders might be allowed the decisive vote on all matters, or some matters, or none
- there might be private contractual arrangements overriding the publicly acknowledged arrangements
Now some of this clearly overlaps with the terms of a typical lease, which require leaseholders to pay money and follow the block regulations and so. But it also overlaps with local government, particularly all that stuff about voting and collective management of land. If a body can tax you and enact bye-laws, how different is it from a government? This is basically the thesis of Professor Hazel Easthope who studies strata title in Australia.
Tripartite leases have the effect of compelling leaseholders, freeholders and management companies to enter into a mesh of additional relationships under company law, alongside those they have under property law. Despite its numerous flaws, landlord-tenant law does at least require that service charges be reasonable and reasonably incurred, but an equivalent fee exacted under company law need not be. A lease might provide that the leaseholder agree to join the management company, and the company articles might provide that accepting the transfer of a housing unit constitutes agreeing to join the company, indeed it will often deny the company directors any right to refuse membership to a leaseholder.
Where the leases do not permit the management company to extract money from the leaseholder in the way it desires, there may be a route under company law; this sort of arrangement was upheld by the courts in the Morshead Mansions Ltd v Di Marco case. The management company in the Di Marco case had given up using its rights to exact service charges under the leases, and instead relied on a clause it introduced into the company constitution allowing it to charge its members (which included Mr Di Marco and the other leaseholders) for the purposes of furthering the company objects, which were of course to manage the building.
Where this leaves us is that we have quasi local governments in the form of Residents Management Companies, with very diverse constitutional arrangements, all the way from democratic to monocratic. Membership of such companies can be unavoidable for leaseholders in a block of flats, and the membership may be shared with neighbours in other blocks of flats or of freehold houses. The company might manage both blocks of flats and wider shared areas, which might or might not be accessible to the general public. Some of this property might be municipalisable, and adopted to be maintained at public expense by the local authority. But it's often that local authority which signed off the arrangement in the first place in return for concessions in a section 106 agreement, and the local authority would rather not be maintaining gardens and soft landscaped areas and so on when others are obliged to pay already. Getting local authorities to maintain, at public expense, the parts of the property that are not even accessible to the general public is a political and moral non-starter.
These sorts of estates have proliferated since the Commonhold and Leasehold Reform Act 2002, which introduced commonhold and the Right To Manage. The property sector has successfully sidestepped the act by fighting to overturn parts of it in the courts(!) and by laying out estates such that neither Right To Manage or commonhold is effective in ensuring that flat owners have control over their collective property or service charges.
The mechanism is as follows: an estate is laid out and developed, with shared areas (car parks, bike sheds, bin sheds, gardens, soft landscaped areas, the corridors and roofs of blocks of flats, etc). As part of this, the developer concludes an agreement with the local authority not not adopt the shared areas. In any case, local authorities would not adopt a lot of this land, e.g., car parks or the common parts inside blocks of flats. Anyone buying a house or flat in the estate is compelled to join the management company under the terms of a tripartite lease or an equivalent provision in the freehold transfer deed. The management company will usually have provision for different members to pay different amounts depending on what access they may or may not have to various "sections" of the common areas, and may or may not have provisions for different members to vote on matters affecting only those sections. This can lead to a situation, for example, where owners of houses have the majority of the votes determining the size of the sinking fund for a block of flats that none of them occupies.
How do commonhold and RTM address this?
Well, RTM now covers only the block of flats and any property that is exclusively used by the owners of the flats but not by the wider estate, which may be a problem. Commonhold completely extinguishes the tripartite leases, but on such estates that's only one of the two relationships that the flat owners will have with the management company: they likely would remain involuntary members, and thus subject to the management company's rules and charges along Di Marco lines, or they'd lose their membership, and with it their vote on wider estate matters. Similarly, the management company might well lose the revenue from the former leaseholders, which may bankrupt it if has a structural deficit without the income from the flat owners. The situation could put leaseholders in flats at serious odds with their neighbours.
Commonhold for an entire estate is a non-starter, because when a commonhold is dissolved, the commonhold association becomes the owner of all the housing units, including the detached houses, which is not a situation that house buyers will likely enter into knowingly.
There is a provision in the 2002 Act, s3(1)(d), allowing the government to give management companies a veto on whether a block of flats can convert to commonhold. Expect this veto to be enacted once leaseholders start converting to commonhold on private estates. I raised this issue at a 2022 meeting of the All Party Parliamentary Group on Leasehold and Commonhold Reform, and publicly the minister wouldn't address it, but at least the issue is understood in government. I raised the matter publicly with Michael Gove when he was reappointed, and similarly he dodged it.
The widespread rollout of private estates and the transition to company law has created "facts on the ground" which impede the adoption of commonhold. Estates are laid out in a manner which entangles blocks of flats with nearby dwellings, and commonhold, which does address the fundamental "wasting asset" issue of leasehold, does not interoperate well with private estate management. This likely affects millions of home owners.
What commonhold gives you is ownership of a flat without a time limit or a third-party freeholder. It is too widely assumed that this brings management, charges and regulations under the control of the flat owners, but sadly that presently will only apply in relation to the block of flats, but not the car park, gardens, bin stores and so on. Effectively the property sector has had a twenty year head start to vitiate the benefits of commmonhold for many sites.
What is to be done?
In addition to reforming commonhold and mandating it for new blocks, there has to be mandatory democratisation of residents management companies and estate management. Effectively, fleecehold needs to be banned.