After many years and much delay Part 1 of the Commonhold and Leasehold Reform Act 2002 came into effect on 27 September 2004 to give us commonhold, an alternative to long leasehold.

What is it?

Commonhold is a new form of freehold land ownership which can be created for registered land. The nearest comparisons are the "condominium" title in the USA and "strata" title in Australia. Under the commonhold regime each unit in a multi-occupied building or estate is given a freehold title, with the common parts vested in a commonhold community association (CCA) which, as its name implies, is the community of the unit freeholders.

Why has Commonhold been introduced?

For buildings or estates in multiple-occupation, the traditional leasehold structure has generally been the preferred vehicle for land ownership. This is because of the difficulties which would otherwise be faced in enforcing positive obligations between owners. But this structure has a number of drawbacks: the long lease is a wasting asset, the interests between tenants and landlords are sometimes in conflict, and the defaulting tenant can risk the penalty of forfeiture. Problems can also arise due to a lack of uniformity in leasehold documentation, and, with residential premises, service charge legislation is becoming increasingly complex. The purpose of creating a commonhold is to enable unit holders to own the freehold and to participate in the management of the "community".

How is Commonhold structured?

Commonhold is more likely to be used initially for new developments, but existing developments may also be converted to commonhold. A commonhold can only be created on the application of the freeholder. Where there are existing third party interests, there is a regime for necessary consents. Each unit holder in a development is given a separate registered freehold title. Title to the common parts is vested in the CCA. An individual unit might be a shop, office, flat or house, exclusive car park or storage area.

The documentation required for setting up a commonhold is prescribed by statute with some minor amendments permitted for 'local' considerations. The main features of a commonhold structure are:

• The creation of the CCA, a company limited by guarantee with the unit holders as its exclusive members. The memorandum and articles of association of the CCA govern issues such as calling meetings and the exercise of the voting rights which are allocated to each unit holder.
  
• The commonhold community statement (CCS). This sets out the rights and obligations between the CCA, the unit holders and their tenants. Again, this document is in a prescribed statutory form and contains provisions that one might see in a long lease in relation to repair, maintenance of common parts, service charges and insurance. The statutory prescribed wording may be inadequate for use, repair and insurance and can be supplemented by additional drafting that deals with additional rights specific to the commonhold.
  
• The CSS contains detailed provisions for raising funds from unit holders to enable the CCA to discharge its obligations to the commonhold, not dissimilar to the service charge regime in a lease. Each year the directors of the CCA are required to estimate the income that will be needed to meet expenses, and each commonhold unit holder is then obliged to pay an agreed percentage of the total assessment.
  
• There are provisions for the payment of interest on outstanding sums. But it is not possible to forfeit the freehold interest of the unit holder who fails to meet its obligations. In these circumstances unpaid amounts must be pursued in the county courts.
  
• Once a commonhold regime is in place, the freeholder of a residential unit may grant a residential tenancy for no more than seven years but not for a premium. This reflects the intention of the legislation that commonhold should not be used as the starting point for unit holders to grant long residential leases to other occupiers.
  
• There is an exception to that rule. When a commonhold is set up all existing leases are extinguished. Tenancies for more than 21 years are converted to freehold, but commercially the tenant will have to pay for the privilege. Tenants for 21 years or less are entitled to compensation but commercially are more likely to be granted substantially similar leases which will be for the remaining term of the extinguished lease even if it exceeds seven years.
  
• There is no control over the maximum term of tenancies of commercial units.
  
• The CCS cannot impose any conditions regulating the transfer or mortgage of a unit. So a unit holder is free to sell the unit to whoever he pleases. Any debts owing at the time of transfer become the responsibility of the new owner.
  
• The CCS contains a mechanism for the resolution of disputes with an emphasis on arbitration rather than litigation. Maintaining harmonious relationships within the community is one of the guiding principles.

How is the commonhold set up?

There are two possible ways of setting up a commonhold.

The first allows the conversion of existing schemes to commonhold. A block of flats already owned by a residents? management company or by an RTE company following collective freehold enfranchisement could convert to a commonhold. But the freeholder cannot be compelled to convert to commonhold merely because its tenants want to.

The second is the kind most likely to be encountered in practice. This is where a developer who is embarking on a new project could decide to set up a commonhold because it may have attractive marketing qualities. In that situation, the developer remains the freehold owner of the commonhold land until such time as the first unit holder becomes entitled to be registered as the freehold owner of that unit. That event would then trigger the full effects of commonhold but, even then, the developer can be entitled to exercise various rights for the completion of the development.

How is commonhold brought to an end?

Provision is made in the commonhold regulations for termination of the commonhold in the case of an agreement by way of a "voluntary termination resolution" or by way of a court winding up process.

What are the "issues" with Commonhold?

• It is, first and foremost, aimed in practice at new residential developments.
  
• Nevertheless, there is scope for structuring new commercial developments as commonhold where the developer is aiming principally at developing for sale as distinct from leasing for investment. Maintenance of values and community responsibility for common parts would be pluses.
  
• It is not uncommon for a developer to sell some units and lease others. Commonhold would be possible there.
  
• It seems that the statutory prescription on matters of detail needs to mature before commonhold could be as flexible as a leasehold structure on mixed use developments. Tensions could arise within the community of mixed-use freeholders on issues such as weighted service charge assessments.
  
• Promoters of commonhold herald one of its advantages as "there is no landlord", as if the landlord is a bête noire. But the unit freeholders need to understand they are replacing a relationship with one person by a relationship with a community vehicle whose flexibility is governed by a majority or sometimes unanimous vote of its unit owner members.
  
• The relationship between a unit owner and the CCA and the relationship between a unit owner and his tenant are not exclusive to those parties. Unit owners and tenants alike are bound by the CCS. The CCA can enforce the CCS against a unit owner or his tenants and vice versa. Unit owners or their tenants may enforce the CCS against other unit owners or their tenants. This is where the statutory prescribed dispute resolution procedures and the aim of achieving harmony comes into play.
  
• A flying freehold, without the freehold between it and the ground, and agricultural land are two of a few examples where commonhold cannot apply.
  
• It is fair to say that the use of commonhold is "horses for courses". New residential and typical industrial estates for sale of units seem to be the favourite and second favourite runners at the moment. Market perception will dictate the distance between the two.

 © Herbert Smith