Soccer and rugby are both games of football. There are some similarities and many differences. The same applies to service charges payable under a lease and the commonhold assessment payable out of a commonhold unit.

Leases

A landlord lets a property (or part of it) for a specific period. The landlord usually retains possession of the common parts. The lease gives the tenant rights of occupation in return for rent. Sometimes the tenant pays service charges as well as rent.

Service charges

Most practitioners are familiar with service charges, where tenants pay the landlord costs of works and services. The landlord can only charge the tenant in relation to items identified in the lease; usually the works or services are in respect of common parts of a building, outside the property let. There are numerous statutory provisions giving protection to the tenant of a dwelling against unreasonable service charges. The statutory provisions do not apply to commercial premises.

However, these service charge arrangements do not apply to commonhold, except, to a very limited extent, when a commonhold unit is let.

Commonhold

The commonhold is held under one set of provisions (set out in the commonhold community statement). This contrasts with a leasehold arrangement where each tenant has their own lease with its own terms. Commonhold units are held as a freehold, and everything that is not included in the definition of a unit is common parts. The common parts are held by the commonhold association, which is the company owned by the holders of the commonhold unit. The unit-holders are therefore (for practical purposes) the only people involved.

The commonhold association is under an obligation to manage the common parts, and it may also have an obligation for the repair or maintenance of some of the units, depending on what is set out in the commonhold community statement.

So far, so familiar, but thereafter leasehold service charges and commonhold assessments differ in very significant ways.

Commonhold assessment

A landlord can only recover items from their tenant which are specified or referred to in the lease. In the case of commonhold, there is no similar provision. The commonhold directors are under an obligation to assess, each year, the amount of money they are likely to need. (The commonhold community statement does not set out a menu of what can be charged for – it is decided annually.) The directors then send an estimate to each tenant in a prescribed form. The letter sets out details of what is to be done, the total cost, the tenant’s percentage, and the amount the tenant is therefore going to be asked to pay. The tenant has one month in which to make a response.

Those familiar with residential property will recognise that the one-month period for consultation is somewhat similar to that in respect of service charges for dwellings. There are, however, two major differences.

1 Although commonhold can cover both residential and non-residential units, the statutory provisions of the Landlord and Tenant Act 1985 (as amended) will not apply to the commonhold assessment, even for a residential unit, because there is no lease or landlord.

2 The 1985 Act and the regulations under it set out a complex procedure for consulting with tenants on works etc. (There are now five different types of consultation, each with subtle variations in procedure.) By contrast the commonhold association only has to give the unit-holders one month in which to make observations. Once that one-month period has gone by, the directors can circulate demands for the amount they require. As stated above, the provisions for reasonableness affecting leases of dwellings simply do not apply to the commonhold unit.

Where a commonhold unit is let

If a commonhold unit is let, then different considerations apply, and as between landlord (ie unit-holder) and (residential) tenant, the reasonableness and consultation provisions of the 1985 Act will apply. However, the critical point is that the landlord only owns the unit (or perhaps a few units); it does not own the common parts which are held by the commonhold association. In reality, therefore, the services to be provided by that landlord, and which can thus be effected by the 1985 Act, are extremely limited.

The services provided by a unitholder/ landlord are likely to relate only to internal matters (or in the case of an independent unit, they could include the landlord’s responsibility for repair of the structure). What they would not cover is what is covered by the commonhold assessment, ie the works etc affecting the common parts by the commonhold association. Indeed, the Commonhold Regulations 2004 (the Regulations) specifically prohibit a landlord granting a lease of a residential commonhold unit on terms under which the tenant is obliged to pay the commonhold assessment. It is possible to do so for a commercial unit, but not for a residential unit.

The position of the unit-holder

The unit-holder (or one of the joint unitholders if more than one) is a member of the commonhold association. Such a person, therefore, has an opportunity to become a director of the commonhold association or attend meetings or otherwise make their views on management known. If a unit-holder receives an estimate, they can make observations to the commonhold association and can also try to rally support for their opposition (or indeed for supporting the proposals) from their fellow unit-holders. If the directors find a large number of the unit-holders prefer not to follow their proposals and estimates then they can, of course, revise the estimates and re-submit them. The standard form of commonhold community statement (which must be used, although some additions can be made) does not give any option for further estimates or unit-holders the right to nominate people to give quotations.

If the unit-holders make representations objecting to some part of the estimate, the legal position is that they have no right to do anything else. A unit-holder can be outvoted and have no recourse.

It is worth commenting, in this context, that the tenant of a commercial lease has no right to apply to court in relation to an unreasonable service charge demand in absence of provisions in their lease. However, the tenant of the dwelling does have the right to apply to a leasehold valuation tribunal for this purpose.

The commonhold unit-holder may be able to object to a demand on limited grounds. For example, if the estimate was fixed at a meeting which did not have a sufficient quorum, or perhaps included works outside the commonhold, or the demand included the wrong service charge percentage. However, in the absence of a flaw along these lines, the unit-holder who is outvoted has no avenue to challenge the demand.

If the directors of the commonhold association of a block of flats decide to cover the roof in gold leaf, this would be perfectly permissible. If one unit-holder out of ten objects, they are likely to be outvoted, and even if in an objective view this would be considered to be unreasonable, the unit-holder will be obliged to pay.

Clearly, the solution for unit-holders is to take an active part in management and perhaps to consider becoming directors of the commonhold association so that they can influence what is going on more directly. The unit-holders may want to consider changing the commonhold community statement to include provisions for a greater degree of consultation.

A company which is a unit-holder needs to ensure that, as soon as an estimate is received, it is inspected carefully so that any representations can be made within the 30-day period. It may also feel that it has suitable expertise to put forward a nominee for director.

Summary

Practitioners need to be aware that although service charges and commonhold assessments seem to be similar, they have only a superficial similarity. When advising you must ensure which set of rules applies, like the football referee.

Other aspects of commonhold assessment

Common parts

The commonhold association is responsible for common parts. Under the 1985 Act, common parts are everything that is not defined as a unit. In the case of multioccupied buildings, the structure and exterior must be common parts, although in the case of an independent unit (perhaps a single industrial unit on a little commonhold industrial estate) the structure and exterior can be either common parts or part of the unit as desired. The effect is that in the case of a multi-occupied building, the common parts and structure must be maintained by the commonhold association; otherwise this can be part of the unit if desired.

The critical point is that the commonhold assessment relates to the common parts of the whole commonhold, and the demand is payable by the (freehold) unit-holder.

The proportion payable

Service charges in leases can be either fixed percentages or a ‘fair proportion’. In the case of commonholds, the commonhold assessment must be a fixed percentage. This is set out in the commonhold community statement, and thus the commonhold assessment percentage for each unit is known to all parties. It is possible to change a commonhold community statement (with consent of all the unit-holders and their mortgagees) including, for example, changing the commonhold assessment percentages.

The Regulations provide, however, that a unit-holder is entitled to protection against a change of commonhold assessment percentage which would allocate an unreasonable percentage, either to their unit or to other units. A unit-holder can be outvoted on various items, but has limited protection on this point.

Interim levies

The commonhold association can call for interim service charge payments (an interim levy) if needed for special purposes.

Reserve study

The commonhold association must arrange for a reserve study to be carried out every ten years. This is to assess what obligations the commonhold association will have and, in effect, is an excellent idea to oblige the commonhold association to assess the physical state of the premises at regular intervals. If the directors fail to do so, unit-holders can require them to do so. If such a reserve study is carried out, the commonhold association can set up what the legislation describes as a reserve fund (which is the equivalent of a sinking fund). There is a useful provision that the commonhold association must try to ensure that unnecessary reserves are not accumulated. This would give a unit-holder scope to object to particularly heavy reserve-fund demands.

Diversion of rent

In the case of both residential and non-residential units, the rent payable may be diverted. This applies where a unit-holder has failed to pay the commonhold assessment. In such a case, the commonhold association can serve a prescribed notice requiring the tenant to pay their rent to the commonhold association. The tenant is only obliged to pay what they would be paying to the landlord, and this is treated as a complete discharge to the tenant of their obligation to their landlord (so the landlord cannot pursue the tenant for the rent). Furthermore, it is also a discharge to the unit-holder insofar as the rent is sufficient. The tenant cannot exercise rights of set-off: if the process is followed, the tenant has to pay the rent in full on the due dates to the commonhold association.

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