What is commonhold?
Commonhold is a type of property ownership available in England and Wales, which was introduced in 2004 as part of the Commonhold and Leasehold Reform Act (CLRA) 2002.
Commonhold is a system of owning ‘freehold units’ within a building or block comprising of separate properties and with all unit-owners having a joint responsibility for the common parts. The units are usually residential properties but commonhold can also apply to commercial premises containing offices and shops. The owners of these ‘freehold units’, which will usually be flats, are often called unit-holders.
What are the common parts and who controls them?
The common parts are any part of a commonhold development, which is not a unit. This could include shared facilities such as the roof, stairs and entrance hallways. Similar to a leasehold flat, commonhold unit ownership are usually limited to the internal walls, ceiling and floor between each unit and do not include external walls.
All of the common parts are owned by the Commonhold Association (CA), which is a company limited by guarantee. Therefore the CA are responsible for arranging or carrying out the management of these common parts. Membership of the CA is restricted to unit-holders but there is no obligation on the unit-holder to participate in the activities of the CA.
Commonhold is similar to other resident controlled forms of ownership where active participation of some flat-owners is needed to ensure the effective running of the CA. Unlike leaseholders, commonhold unit-holders have two different interests in the property. The first is a direct interest in their own unit and the second is an interest in the communal parts of the building through their membership of the CA.
What is a Commonhold Community Statement?
There is no lease and therefore the CA will manage the entire commonhold development in accordance with the terms of the Commonhold Community Statement (CCS). The CCS sets out the extent of the commonhold properties including the common parts, the rights and obligations of the CA and the unit-holders and will specify details of the following:
- how funds will be raised to enable the CA to pay for its obligations;
- buildings Insurance;
- maintenance obligations;
- procedures for dispute resolution between unit-holders and between a unit-holder and the CA; and
- other issues affecting the unit-holders, such as letting, alterations and nuisance.
These provisions would therefore be similar to those set out in a lease. An advantage is that the CCS applies to the entire building rather than just to one flat, which avoids the problem of documentation being inconsistent, meaning that each unit-holder’s interests and obligations should be the same.
What is the status of the Commonhold Association?
As the Commonhold Association (CA) is a company limited by guarantee, it needs to be registered at Companies House and must have a memorandum and articles of association. The CCS and the memorandum and articles should all be registered at Land Registry.
The Memorandum and Articles of Association are prescribed in the Commonhold Regulations 2004, referred to in a Schedule to the CLRA 2002, and must comply with the rules and procedures of the Companies Act 2006. As the CA is a company limited by guarantee, its members are guarantors and there is no share capital held by shareholders. A guarantor’s liability is limited to the sum of £1. This relatively small amount is the limit of each member’s liability in the event of the winding up of the company. This type of company cannot distribute any profits to its members or anyone else, any profits would only benefit the CA.
How does commonhold differ from leasehold?
Commonhold is intended to offer an alternative for flat-owners to the current leasehold system. The most significant benefits of commonhold over leasehold is that:
- commonhold units do not lose their value over time due to a diminishing lease term;
- there is no landlord and therefore no leases and no landlord and tenant relationship, which in theory should reduce conflict;
- the commonhold documents are in a prescribed format with few exceptions unlike leases which can contain a wide variety of terms; and
- there is only one set of documents for the entire commonhold.
However, it now appears that in respect of the first point, commonhold does not offer much advantage over the collective purchase of the freehold, known as enfranchisement, as after following this process the resident freehold company can draft new leases for all flat-owners to grant them a very long lease-term such as 999 years.
With regard to the second point even though there is no landlord and tenant relationship there appears to be the same scope for flat-owners in commonhold to be dissatisfied with some aspects of the management of the common parts. Unlike leaseholders who can exercise the Right To Manage (RTM) to gain responsibility for the management, unit-holders in commonhold have no such recourse. Neither do they have the statutory right to make an application to a First-tier Tribunal (FTT)for appointment of a manager.
It should be noted that in residential commonhold, there is no long leasehold interest in any unit, as any letting is restricted to a term of seven years and no premium can be charged. Although it appears the intention of this aspect of the legislation was to discourage long-term absent landlords in commonhold property, it has resulted in a situation where a unit-owner has no right to sell a long-lease on their unit, and therefore raise significant capital, in any circumstances.
It was thought that a disadvantage of commonhold would be unit-holders having more responsibility in respect of the common parts of the property, unlike leaseholders who are only responsible for the payment of the service charges under the terms of their lease. However it would seem that this would only apply if the CA chooses to carry out the management of the commonhold itself. If the CA decides to appoint a manager, which would be expected in most cases, the responsibilities for the common parts will pass to the manager. As there is no superior landlord interest, the CA will have the right to decide which organisation manages the commonhold and to determine the length of the contract. As there is no recourse to RTM or appointment of a manager to replace a manager appointed by the CA, there is no right for flat-owners to replace under-performing/over-charging managers.
Does leasehold legislation protect commonhold owners?
The nature of commonhold ownership means that unit-holders will not have many of the statutory rights that are available to leaseholders. For example there is no right to challenge the charges at a FTT. This means that the commonhold unit-owner will be relying mostly on contractual provisions rather than the many decades of landlord and tenant legislation that provides legal rights and remedies for leaseholders.
What is the commonhold process for newly built developments?
In the case of a newly built development the commonhold will be registered without the unit-holders, as the units will be sold at a later date. Initially, all of the units and common parts will be registered under the name of the developer. The individual units are registered as separate titles, which makes the conveyancing process simpler when the units are individually sold and therefore transferred from the developer to the purchaser. It is the developer who will form and register the CA and will be responsible for drafting the CCS. This registration will mean that the development will have a number of freehold titles, which will initially be registered in the name of the developer. During the ‘transitional period’, which is the time between the registration of the developer and the sale of the first unit, the developer has the option to sell the units under the usual freehold and leasehold tenure. After the sale of the first commonhold unit there is no basis for conversion to any other form of tenure.
Can developments be converted to commonhold?
Under Section 9 of the Commonhold and Leasehold Reform Act 2002 it may be possible to convert to commonhold from leasehold tenure, however the CLRA specifies that 100% of all interested parties must consent to this. This would include all leaseholders, landlords, managers, if they were a party to the lease, and any lenders. Obtaining consent from all of these may be difficult as each party will want to protect their own interests which may be conflicting.
Although a freeholder can choose to convert the land with the consent of all the leaseholders, there is no provision for a group of leaseholders to compel a freeholder to change leasehold interest in the land into commonhold. It is most unlikely that existing leasehold blocks or developments will convert to commonhold and as it is not compulsory for any new developments, few commonholds are expected in the foreseeable future unless there is a significant change in the legislation.
Please see the LA information sheet 101 Glossary for a precise explanation of the terms used in this information sheet.
Disclaimer: This is a very general explanation of the subject. Where issues are not governed by statute the information is our opinion or best practice. You are advised to seek professional advice before acting on the guidance contained herein. Whereas The Leaseholder Association endeavours to ensure that published information is correct, it does not warrant its completeness or accuracy. The Leaseholder Association assumes no responsibility or liability for any injury, loss or damage incurred as a result of any use or reliance upon the information and material contained herein.
Info Sheet: 116/8/14 ©Copyright