Commonhold Property Ownership Explained
Commonhold is a new type of property ownership. It was created by the Commonhold and Leasehold Reform Act 2002 (CLRA 2002) as a possible alternative to leasehold title. The CLRA 2002, together with the Commonhold Regulations 2004, came into force on 27 September 2004.
This represented a major change in property law and like any change, people, in this case developers, their solicitors and banks, have been slow to embrace it, preferring instead to stick with the leasehold arrangements that they know and understand. Inevitably however it will become more widespread once a few trailblazers take the plunge. A similar system is already operating effectively in other parts of the world, such as the United States, where commonholds are known as condominiums (“condos” for short).
What is a “Commonhold”?
A commonhold estate is made up of individual properties known as units and of common parts. Typically the units will be flats in a block though it could equally be houses on an estate. The inter-dependent nature of flats in a block means they are more suited to commonhold than houses which stand alone just as they are more suited to leasehold title.
The units are freehold properties and the owners are called unit-holders. They can be residential, commercial or a mixture. The common parts must include every part of the estate which is not part of a unit, including communal gardens, parking areas, private estate roads, halls, stairwells, landings, roofs and foundations.
The common parts are owned by a special type of company called a commonhold association.
The Commonhold Association
The commonhold association is a limited company set up to own and manage the common parts. Each unit holder must become a member of the company and no none-unit holders are permitted to be members. A unit holder therefore has two interests, the freehold of their individual unit (such as their flat or house) and a share, of equal value to all other unit holders, in the common parts via membership of the commonhold association.
The effect is that the unit holders, as a collective, own and manage the common parts of the estate/block which contains their properties. The commonhold must be managed in accordance with the terms of a commonhold community statement.
The Commonhold Community Statement
The commonhold community statement is a document which contains all of the rights and obligations of the unit holders and defines the extent of the common parts. It describes the procedures for resolving disputes and it is binding on all unit holders who in addition to be being bound, are able to enforce obligations against other unit holders.
It is similar to a long lease of leasehold property, which contains rights and covenants, however unlike a long lease; the basic framework of a commonhold community statement must be in a standard form. This will ultimately make it much easier to interpret and leave less room for the type of defects that sometimes appear in a lease.
Registration of the Commonhold
As well as registering the individual units, and the common parts, with the land registry, the commonhold community statement and the commonhold association’s memorandum and articles of association must be registered with land registry and available for inspection.
In addition, as a limited company the commonhold association must be registered at Companies House. It must have a memorandum and articles of association (the rules that govern any company) which must be in standard form.
Commonhold versus Leasehold
Essentially commonhold is intended to be an alternative to leasehold. With the leasehold system, a collection of properties, say a block of flats will form an estate which will be registered with freehold title. The individual flats will be hold by the flat owners on leases. A lease is granted for a fixed term, typically 99 years for a flat.
The freehold title, which will include the common parts, will either be retained by the developer or sold on to a management company. This will sometimes be a company owned by the tenants of the flats but will often be a private enterprise.
The freeholder, or landlord, though bound by certain covenants in the lease and statutory provisions, essentially controls the way in which the estate is managed.
Mutually Enforceable Covenants
With the leasehold system, covenants (obligations on tenants to perform, or refrain from performing, some action) are only enforceable by the landlord. Any tenant can approach the landlord to ask him to enforce but he will have to indemnify the landlord against costs.
With commonhold, action can be taken directly by unit holder against another. Although this makes enforcement easier, it could lead to an increase in petty actions, borne out of spite rather than practicality.
Freedom for Developers
A developer will often want to construct a development and then forget about it and move on. With leasehold apartments this is not always possible. He will have to retain responsibility at least until he can dispose of the freehold. With a commonhold development he will not have this problem as the common parts will vest in the commonhold association.
Depreciation in Value as Lease Term Diminishes
The major flaw, from a tenant’s point of view, with the leasehold system is the fact that the lease term is finite, so they don’t own the property forever. As the term diminishes, so does the property value, to the point where it becomes necessary, should the owner wish to sell, to purchase an extension from the landlord. Conversely of course this can be good for the landlord as it provides a future source of income.
With commonhold, the tenant owns the freehold so the problem of the diminishing lease term is entirely removed.
Management and Administration Fees
Landlords are often entitled, depending on the terms of the lease, to charge a management charge of perhaps 15% of the total service charges. They will also receive a commission from the buildings insurance provider which may be reflected in the premium and in addition they will charge ad hoc fees for things such as replying to pre-contract enquiries if a tenant is selling, granting consents to let (where required) or consents to alterations, receipting a notice of assignment following a sale etc.
Sometimes, particularly where the freehold is owned by a company who specialises in buying up freeholds for the fees they can charge, the fees are ridiculously high. There is a body, the Leasehold Valuation Tribunal, to whom fees can be referred for adjudication however this can be a slow process and is rarely practical for a tenant trying to push through a sale.
The commonhold system should remove all of this. There will still be some administration fees because there will still be some administration and it is likely that the commonhold association will employ a managing agent to deal with the day to day running but as the fees will be set by the tenants, as owners of the company, there would be no point in setting them any higher than they needed to be because no one would profit.
Resolving Disputes
The commonhold community statement will contain clear rules for dealing with disputes and this, together with the fact that it is the tenants and not an unscrupulous landlord that is making the decisions, should make disputes easier to settle.
On the down side, it may be that your neighbour is bringing an action against you, rather than a landlord whom you never meet, which could damage community relations.
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