This is the question that was asked at the ALEP Commonhold Lecture held in February this year. The outcome of the Government consultation on ‘Tackling Unfair Practices In The Leasehold Market’ states that the Government ‘wants to look at ways to re-invigorate Commonhold’.
This article looks at the background to Commonhold and what it is and considers why to date it has not been successful and looks briefly at the areas that may need to be addressed if it is to be made workable.
The Commonhold and Leasehold Reform Act 2002 introduced the concept of Commonhold, the relevant provisions became law on 27 September 2004. Since that time there have only been around 17 Commonhold developments.
The Government’s recent consultation received a lot of popular interest and we now have the outcomes document from the Consultation, (published in April of this year). One issue that the Government have identified is that the financial incentive to use Commonhold is not there when a developer can create a sale of its freehold interest and then produce a very marketable ground rent. This future income stream has value.
Clearly, if the Government were to take steps to reduce or abolish ground rent this might (amongst other things) incentivise the use of this alternative way of dealing with commonly held property.
So, what is Commonhold?
Commonhold is a type of freehold land in which each separate property within the development is called a ‘unit’. The owner is called a ‘unit holder’ and the common parts and facilities forming the remainder of the development or commonly owned structure are owned by a ‘Commonhold Association.’
What is a Commonhold Association?
The Commonhold Association is a company limited by guarantee whose membership is restricted to the unit holders within the development. This means that all of the unit holders in a development will have two interests in the property – a direct interest in the unit or units that they own and separately, a membership of the Commonhold Association that owns the common parts.
It is important to realise that both of these interests will be freehold. The Commonhold Association will register its title at the Land Registry. In order to register it will need to produce the Articles of Association of the Commonhold Association and also what is known as a ‘Commonhold Community Statement’.
How do the repairing responsibilities get allocated?
The Commonhold Community Statement sets out the detail of who owns what and who is responsible for what. It is a single form document which is universal to the development and performs the same functions that a lease would cover relating to the ownership and repairing responsibilities.
A unit can consist of more than one area within the development e.g. a flat or a garage or a flat and basement storage room etc. However, the development cannot contain units which sit outside of the title owned by the Commonhold Association, in other words it will not be possible for a unit to straddle the boundary of the property owned by the common hold association.
What about the running costs for the building?
The running charges for the building are dealt with through the imposition of what is known as a ‘Commonhold Assessment.’ This is not the same thing as a service of charge. The intention in the drafting is that the level of the Commonhold Assessment per unit was to be determined by the Commonhold Association but that any disputes are to be resolved in the first instance by ADR.
Can I convert my building to Commonhold?
There are provisions allowing conversions to Commonhold but in order to do this 100% of the property owners and the owners of any other interests such as mortgages etc. would need to agree to this.
The key advantages
Having the units as freehold units without leasehold means that the value in the property will not run down over time. In theory it should be possible to run a mixed-use development where commercial units and other owners can all have a representative say in the management through the membership of the Commonhold Association.
This all sounds like utopia so why hasn’t it taken off?
There are a number of potential problems that will need to be resolved if Commonhold is to be successful. Some of these are relatively technical in nature, but details of some areas of concern appear below:-
Early registration of the common parts in the ownership of the Association and plans – developer issues
- Once the first unit is sold, the Commonhold Association is entitled to be registered as the owner of the common parts. This may cause issues for developers as they may want to keep control beyond the sale of the first unit particularly in a larger estate. It is often necessary for them to maintain ownership of other areas whilst parts of the site are being built out.
- There are stringent requirements for a plan to be produced for each unit.
- At the moment, making adjustments is difficult. New build property often requires small adjustments to be made in the size and location of the unit being sold and this is inflexible. There are issues that may arise given that the Commonhold Association will take possession of the common parts upon sale or transfer of the same units. The issue is that the development can part company with the asset quite easily and apart from the contractual relationship between vendor and purchaser there will be little connection between the original development and the unit owner and the common hold association. If there are issues with build quality etc. then these may be very hard to address.
A high conversion threshold
- Requiring 100% for conversion is ultimately potentially impractical. Particularly, if we consider what might happen in a very large block of say, 100 or more flats.
No more leases
- As currently drafted, the legislation prevents the creation of leases for more than seven years. However, shared ownership structures and equity release often work by creating a lease inside the property. This may need to be looked at again.
Winding up provisions – too easy?
- The company can be wound up if 80% of its members vote to do so. At the moment this provision causes concern for lenders who will not have any obvious security in the event that the company and its property interests come to an end. There will need to be some wider thought given to what will happen if a company fails or is struck off. The fact that the service charge regime is not subject to the tribunal’s jurisdiction in the same way as is well understood in relation to Leasehold property is a potential issue as the uncertainty as to what will happen in the event of dispute is going to put off both developers and potential purchasers.
What about management issues?
- Similarly, there is not obvious provision as to what will happen if the Commonhold Association is not managing properly. There are no equivalent provisions or indications that the Right to Manage Legislation would for instance apply. Similarly, the right to appoint a statutory manager under Part II of the Landlord and Tenant Act 1987 is a valuable protection for long leaseholders. It is not clear as to how a failing association will be dealt with.
- Notwithstanding the best intentions in the drafting it is almost inevitable that with any commonly held or owned property there will be disputes between people that will spill over into the property and Company Law arena.
Firstly, the points mentioned above will need to be dealt with in order to make Commonhold attractive. The Law Commission is currently looking at exactly how ‘the re-invigoration’ of Commonhold might be achieved. It will be interesting to see what suggestions they come up with although I do not expect that there will be a response at the earliest until sometime during 2019.
As mentioned above, if there were to be some further financial incentives such as the restriction of creating new ground rents, this might begin to move developers towards Commonhold. Similarly, other financial advantages such as the tax break or tax incentive e.g a lower rate of SDLT on sales? And/or some other adjustments to Capital Taxes for receipts from developments sold in the way might incentivise the use of this form of land tenure.
So at the moment, the panacea for the ills of leasehold is itself on the operating table, on the basis that it is not currently fully fit for purpose. A clear commitment to make the necessary changes however could see it being fighting fit again at which point the leasehold landscape will begin to look very different.
Mark Chick, Partner at Bishop & Sewell LLP