Author : Mary-Anne Bowring
Striving for Net Zero emissions on a global scale is a complex endeavor that aims to realize a delicate balance between greenhouse gas emissions and their removal from the atmosphere. However, the presence of leasehold tenure makes achieving the formidable Net Zero goal even more challenging. It brings in its own set of hurdles.
Here is a breakdown of why leasehold tenure can pose extra difficulties in the pursuit of Net Zero:
Leasehold tenure limits the opportunity for net zero enhancements
Owning a lease is a situation where you possess the privilege to inhabit a property for a fixed duration, but the land beneath it is not yours. Unfortunately, under this setup, you cannot substantially modify your property at will internally; let alone the building structure and fabric. A license to alter (permission from the freeholder) is required to make alterations or improvements to inside the flat, and for net zero improvements to the exterior structure and fabric are often curtailed, as energy efficiency measures as generally classed as improvements and many service charge clauses that say improvements cannot be recovered by leaseholders as service charge.
This barrier of a license to alter is enough to put off many energy-efficient enhancements, and the covenants as to what can be recovered as service charge are enough to thwart many of the renewable energy structures necessary to attain Net Zero. It is as if the law has banned leaseholders from participating in the drive to net zero
Leaseholders and landlords have different priorities and motivations regarding sustainability and Net Zero targets. Leaseholders usually have a shorter-term interest in the property, while landlords often focus on long-term investment, save for where the landlord is effectively a collective of leaseholders e.g. via an RTM or RMC. This divergence in goals can create obstacles in introducing sustainable measures crucial for reaching Net Zero.
Two common examples where collectively through a board of directors the leaseholders sit in the landlord's shoes are Right to Manage (RTM) companies and Residential Management Companies (RMCs). Let me explain each in more detail:
1. Right to Manage (RTM) Companies: RTM companies are created under the Common hold and Leasehold Reform Act 2002. They allow leaseholders of flats to take over the management responsibilities of their building from the landlord or the existing management company. The purpose of an RTM company is to give leaseholders more control over the management and maintenance of their property. It allows them to collectively manage the building, including tasks such as arranging repairs, maintenance, and insurance.
2. Residential Management Companies (RMCs): RMCs are private companies established to manage the common areas of residential development, such as shared facilities and communal spaces. They are typically set up by the developer or the original freeholder of the property. Leaseholders within the development usually become members of the RMC and have a say in its operation. The RMC is responsible for the management and maintenance of the common areas, collecting service charges, and ensuring compliance with relevant regulations.
Both RTM companies and RMCs make decisions through a democratic process involving their members or shareholders. Here's a general overview of how decisions are typically made in these entities:
1. Meetings: RTM companies and RMCs hold regular meetings where members or shareholders come together to discuss and vote on various matters. These meetings can be general meetings or extraordinary general meetings (EGMs) called for specific purposes.
2. Voting: During meetings, decisions are made through voting. Each member or shareholder generally has one vote, regardless of the size of their property or shareholding. In some cases, the voting power may be proportional to the size of the property or shareholding, depending on the governing documents of the entity.
3. Quorum: For a meeting to be valid and decisions to be binding, there is usually a requirement for a minimum number of members or shareholders to be present or represented. This minimum number is known as the quorum. The quorum can vary depending on the specific rules outlined in the entity's governing documents.
4. Resolutions: Decisions are typically made in the form of resolutions. Resolutions can be ordinary resolutions or special resolutions. Ordinary resolutions generally require a simple majority (more than 50%) of the votes cast, while special resolutions usually require a higher threshold, such as a 75% majority.
5. Proxy Voting: Members or shareholders who are unable to attend a meeting may appoint a proxy to vote on their behalf. The proxy holder must follow the instructions given by the absent member or shareholder.
It's important to note that the decision-making process may be subject to the specific provisions outlined in the entity's articles of association, memorandum of association, or other governing documents. These documents provide the framework for how decisions are made and the powers and responsibilities of the members or shareholders. Consulting these documents is crucial to understanding the decision-making process in a particular RTM company or RMC. That said, unless the money for greening initiatives is collected as a call upon members rather than as a service charge, then the lease would most likely deem the initiative an improvement. And if referred to the Tribunal, a leaseholder who didn't want to pay unless the lease had a very strong clause that favoured improvements, probably would not have to pay.
6. Restricted Influence over Shared Spaces
Leasehold properties often feature shared areas under the landlord's or managing agent's jurisdiction. Leaseholders might find themselves with limited sway or authority over these shared spaces. Introducing energy-efficient changes or setting up renewable energy solutions in those zones.
There could be several reasons why a freeholder of a leasehold block of flats might be hesitant to invest in greening initiatives. Some possible reasons include:
1. Cost Considerations: Implementing greening initiatives, such as installing energy-efficient systems or renewable energy sources, can require a significant upfront investment. The freeholder may be concerned about the financial implications and potential increase in service charges for leaseholders, or most likely are not recoverable as service charges at all.
2. Lack of Financial Incentives: Depending on the local regulations and incentives available, there may be limited financial benefits or incentives for the freeholder to invest in greening initiatives. If the freeholder does not see a clear return on investment or cost-saving potential, they may be less motivated to pursue such initiatives.
3. Lack of Awareness or Knowledge: The freeholder may not be fully aware of the environmental benefits or long-term cost savings associated with greening initiatives. They might not have the necessary knowledge or understanding of the available technologies or funding options. In such cases, education and awareness campaigns may help to address their concerns and promote the benefits of green initiatives.
4. Leaseholder Resistance: The freeholder's decision-making may be influenced by the preferences and concerns of the leaseholders. If there is resistance or lack of interest among the leaseholders regarding greening initiatives, the freeholder may be less inclined to pursue them.
5. Regulatory Constraints: But the real challenge is the legal barrier that is clauses in the leases that ban improvements from being collected as service charges. And implementing green technologies would be an improvement from the day 1 position when the lease was written.
Sustainability concerns towards Net Zero for leaseholders in blocks of flats
In the world of leasehold tenure, making decisions about property enhancements and sustainability measures can be quite complex. Multiple parties, including leaseholders, landlords, and managing agents, must have the same approach in these matters. Unfortunately, this intricate decision-making process can lead to delays, disagreements, and complications in implementing sustainable practices to achieve Net Zero.
Despite these complex decision-making obstacles for RTMs and RMCs, leaseholder short-term thinking and freeholder dis-interest efforts are underway to seamlessly integrate sustainability and the drive for Net Zero outcomes within the framework of leasehold tenure. The notion of "green leases" appears to be a promising remedy. Essentially, green leases merge sustainability objectives and add clauses directly into lease contracts. This integration aligns the interests of leaseholders and landlords, encourages the adoption of energy-efficient behaviors, and facilitates the path toward achieving Net Zero targets.
To conclude, while the global journey to Net Zero is undoubtedly demanding, the presence of leasehold tenure brings its unique complexities. The constrained control over property enhancements, differing priorities between leaseholders and landlords, intricate decision-making dynamics, and limited influence over shared spaces all contribute to these challenges. Adopting green leases and collaborative endeavors among leaseholders, landlords, and managing agents can help surmount these obstacles and achieve the worldwide Net Zero objective.
Mary-Anne Bowring FIRPM FRICS FARLA FCABE Founder/Head of Asset Management
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