17th January 2019
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17th January 2019
As the Law Commission announced the opening of its consultation ‘Reinvigorating Commonhold: the alternative to leasehold ownership’ shortly before Christmas (responses due by 10 March 2019), it is timely for us to look at commonhold as a form of property ownership in this week’s Legal Update.
What is commonhold?
Commonhold was introduced in 2002 as a new way to own freehold property. Commonhold enables a person to own the freehold of a “unit” (such as a flat, shop or office space) within a building or development and also become a member of a company (the “commonhold association”) which owns and manages the shared areas.
This form of property ownership addresses two of the problems faced by residential leaseholders; the enforcement of covenants between leaseholders and the diminishing value of leasehold property as an asset.
How does it work?
A commonhold can be created for new developments before the units are sold off, as well as for existing developments. In the case of existing developments, the applicant must own the freehold and all existing leaseholders and any mortgagees must consent to the application. On the creation of the commonhold, all existing leases will be extinguished and leaseholders will own the freehold to their unit, and become members in the commonhold association.
The operation of the commonhold association as a company is governed by its articles of association, which are largely prescribed by legislation. The rules about how the commonhold is used and managed are set out in a separate Commonhold Community Statement (CCS). Again, the form and the content of the CCS is largely governed by legislation.
The rules included within the CCS are similar to what would be seen as tenant covenants in a lease. For example, each unit-holder will be responsible for maintaining their individual units, and the commonhold association will be responsible for maintaining the structure and common parts of the building or development. The CCS will prescribe the percentages each unit-holder will be liable to contribute towards the expenses of the commonhold association by the payment of a “commonhold assessment”, similar to the service charge payable under the leasehold regime.
As all units are held on a freehold basis, there is no landlord/tenant relationship between the unit-holders and the commonhold association, or any other third party. There is, therefore, no right of forfeiture to be exercised to extinguish the unit-holders’ tenure in the event of a breach of covenant, whether that be for failure to pay the commonhold assessment or to maintain the unit in the manner prescribed by the CCS. The unit-holders also have no recourse to the First-Tier Tribunal to challenge the reasonableness of the commonhold assessment payable.
In the case of a claim for money, any breach of the CCS would be enforced by the commonhold association as a breach of contract claim, for which the usual debt recovery options would be available (see our note sent on 01 August 2018 entitled ‘Enforcement options for unpaid money judgments’).
In the case of any other breach, the CCS makes provision for the resolution of disputes within the commonhold, prescribing three separate procedures for :-
a unit-holder wishing to enforce a right or duty against the commonhold association;
the commonhold association against a unit-holder;
a unit-holder against another unit-holder.
The procedures are based on prescribed notices and encourage the parties to consider other means of resolution, failing which legal proceedings may be commenced. In most cases, this would result in injunction proceedings to compel compliance with the CCS where appropriate.
Can commonhold be reinvigorated?
Despite its apparent advantages, it is understood that fewer than 20 commonholds have been created since the legislation came into force. The heavily prescribed structure and procedures for a ‘one-size fits all’ approach is a common complaint, and the very lack of commonhold developments is a cause for concern and uncertainty, which buyers and lenders do not like.
However, the Government appears committed to reinvigorating the commonhold regime, following its widely publicised review of the leasehold sector ‘Tackling unfair practices in the leasehold market’ in December 2017. Qualification criteria akin to that for collective enfranchisement is being considered for those wishing to convert existing developments to commonhold; options are being looked at to make commonhold easier for mixed-use developments and measures to be introduced to make commonhold associations more robust.
The overall concept of commonhold is based on community, rather than business. Indeed, the Law Commission has said that “Commonhold should not be looked at through the lens of leasehold. Commonhold involves a culture change. It moves away from an ‘us and them’ mindset, towards ‘us and ourselves’”. It is hard to see how such a culture can co-exist with a buy-to-let market.
Consideration also needs to be given to whether unit-holders have sufficient time and expertise to run the commonhold. Whilst many lessee-owned freeholds and management companies run very smoothly, that is not to say that is appropriate for all developments, including for mixed-use.
Only time will tell, no doubt following further Regulations once the consultation has closed, whether commonhold will be taken up as a preferred option for property ownership.
The consultation paper can be found via the following link https://consult.justice.gov.uk/law-commission/commonhold/. For any questions or further information relating to commonholds, please contact Faye Didcote on 01485 897297 or Faye.Didcote@kdllaw.com.
This legal update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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