Commonhold finally comes into force in England and Wales on 27 September 2004, after many years in the making, and after several failed attempts to get it onto the statute books. The new law is contained in the Commonhold and Leasehold Reform Act 2002 and the Commonhold Regulations 2004. With the introduction of commonhold, English and Welsh law will finally get a system similar to condominium title in the USAor strata title in Australia, both of which have been in place for many years. (The box below considers how strata title has been received in Australia over the past 40 years.)

Overview

Commonhold is not a new third estate in land alongside freeholds and leaseholds. It is a special kind of freehold tenure. Under commonhold, various kinds of property can be owned as freeholds in situations where, in the past, a leasehold structure has generally been the only practical solution because of difficulties enforcing positive obligations between freeholders. The aim of commonhold is to ensure that landowners are no longer faced with a wasting asset, in other words a lease with an ever-shortening term. Instead they will own a freehold unit and can participate in the management of their property.

The Act requires commonholds to be set up using standard documentation prescribed by statute, with some minor amendments permitted. This is perceived to be an advantage, making it simpler for everyone. However, some parties may feel that the prescribed wording is inadequate (especially as regards use, repair and insurance), as it is not nearly as clear as one might expect to see in a welldrafted commercial lease. Those involved in drafting commonhold documents will have to deal with these issues.

Whilst commonhold is not the same as leasehold, some aspects of the standard commonhold provisions bear a striking resemblance to what one might expect to see in a lease (such as provisions for the repair and maintenance of common parts or service charges).

The basic concepts

Commonholds can only be created out of freehold land, the title to which is registered with absolute title at the Land Registry. Existing developments may be converted to commonhold, but we expect that initially most commonholds will come from new developments. Some types of property, such as certain agricultural land and land which is a contingent estate, cannot be registered as commonhold land.

Units

This is the name given to each unit on the development. A unit could be an office, shop, leisure facility, flat or house, exclusive car park or storage area. Atypical commonhold development might include a mixture of commercial, residential and leisure facilities

Common parts

These are, for example, common car parks, staircases, access roads, leisure facilities, and the structure of jointly owned buildings

Limited use areas

These can be created to reserve some areas of common parts for the sole use of particular unit-holders. An example might be a service yard for shops.

Commonhold community association (CCA)

A CCA will own (and be responsible for management of) the common parts. This will be a company limited by guarantee and the unit-holders are the members. The memorandum and articles of association are in a prescribed form as set out in the Regulations. Voting rights are allocated to each unit-holder and in some cases weighted voting rights will need to be considered, for example where there are different classes of unit-holders, such as a supermarket with flats above.

The commonhold community statement (CCS)

This is the primary regulator of the rights and duties of the commonhold association and the unit-holder. It is a fairly lengthy document, again in a prescribed form (with some amendments permitted). It describes the extent of the commonhold, and shows the location of the individual units and their authorised uses. It also sets out the rules and regulations regarding the use of units and the common parts; many of its provisions look like a very starkly drafted lease. The Department for Constitutional Affairs is also making available a suite of ‘standard’ additional provisions, covering various eventualities, which practitioners may like to use.

Commonhold assessment

Similar to a service charge, this will be levied by the CCA on unit-holders to pay for the upkeep of the common parts. There are no requirements for ‘reasonableness’ in setting the assessment. The reason for this is that the CCA will be run by the residents (no absentee third party landlords any more) and therefore it is hoped that they will act in the best interests of the development. This carries the risk that minority opinions may not be taken into account.

Commercial commonhold letting

There will be no restrictions on letting out commercial commonhold units

Residential commonhold letting

Residential commonhold units can only be let out for up to seven years and without a premium. This is to foster a sense of community, rather than a culture of absentee landlords.

Setting up a commonhold

There are two possibilities:

With unit-holders

This allows conversion of existing schemes to a commonhold. For example, a block of flats which is already owned by a residents’ management company might want to convert to a commonhold, to save having to extend leases in the future. It will not be possible for leaseholders who want to enfranchise to jump straight to a commonhold.

Without unit-holders

This is the kind of commonhold most likely to be encountered in practice. For example, a developer who is about to embark on a new project might decide to set it up as a commonhold. It would then decide how the units are to be allocated (hence the nomenclature ‘without unit-holders’), set everything up at the Land Registry and then sell off the individual units (as transfers of whole) once they are built.

Consents to conversion

Before a commonhold can be set up, the consent of various parties is required, such as the freeholder and any mortgagees. Depending on the length of the lease, the consent of some tenants may also be required. Consent can be unreasonably withheld. Consent (which may be conditional, such as insisting that the tenant is given a unit to replace its lease) has to be given on Land Registry form CON1. If the application to register the commonhold is not made within a year of consent being given, the consent lapses.

Land Registry

The Land Registry will play a central role in the setting up of a commonhold. Its helpful Practice Guide 60 sets out key information about how it will deal with commonholds. The information required by the Registry to register a commonhold is:

• plans showing the extent of the commonhold, the common parts and the units;
• a certified copy of the CCA’s certificate of incorporation;
• a certified copy of the memorandum and articles of association of the CCA;
• a directors’ certificate;
• two certified copies of the CCS;
• consents to registration (or a court order dispensing with consent);
• a statutory declaration by the applicant; and
• Land Registry application forms (CM1 and – for registrations with unit-holders – COV).

The Land Registry will then prepare a title for each unit and another one for the common parts. Where the registration is without unit-holders, the titles will be in a ‘transitional period’ and will remain in the name of the applicant until the first unit is sold. At that point, the common parts will be transferred into the name of the CCA and the transitional period will end.

During the transitional period, the commonhold can be ‘unravelled’ if the applicant changes its mind, but consents must be obtained from everyone who consented to the conversion to commonhold. The land will then become ‘plain’ freehold. If there are any amendments to the memorandum or articles of association of the CCA, or if the CCS is changed, they do not take effect until the amended document is lodged at the Land Registry.

Developers’ rights

Developers are able to reserve rights over a commonhold to enable them to complete their development; these have to be set out in the CCS. Development rights will be particularly important for staged development.

A CCS may entitle a developer to appoint and remove developer’s directors: up to two during the transitional period and one quarter (or the nearest whole number exceeding one quarter) of the maximum number of directors while the developer is a unit-holder of more than 25% of the total units.

Commonhold and mixed use schemes

Based on experience in other jurisdictions, commonhold is likely to have particular attraction for mixed-use schemes. In Australia, strata title development is widely used for schemes such as resort complexes and urban village complexes which will consist of a mixture of commercial, retail and residential space. Under commonhold, these types of scheme can be set up on a freehold basis but the CCS would have to be drafted carefully to take into account all the different interests in the scheme.

One disadvantage of the ‘entry-level’ legislation with which we are starting off is that all the units in a single building have to be part of the one commonhold. This means that, for example, a block of flats above a shopping centre will not be able to ‘self-govern’ in respect of its own affairs – for example, whether to replace to roof. This will be a matter for the whole CCA, so all the members will have a say. In some jurisdictions in Australia (unlike in England and Wales) it is possible to have an ‘umbrella commonhold’, so the block of flats could look after its own common parts and be part of a larger overall commonhold as far as development-wide issues are concerned.

In a mixed-use development where there are discrete areas (retail, offices, houses, flats) it would make sense to allow each element to govern its own affairs insofar as they do not affect anyone else. With the current drafting, this is not possible where the various areas are part of the same building and only possible for separate buildings where there are separate commonholds.

Also, a commonhold can only have one commonhold assessment. By comparison for a mixed-use structure within a leasehold framework, it is usual to have different types of service charge: a service charge for the commercial units, a separate one for the residential units and an overall building service charge. Under commonhold this is not possible. The way the legislation is drafted does not allow for there to be different ‘heads of assessment’ – there is a single commonhold assessment and everyone pays their share. There is some scope for flexibility with the use of reserve fund levies, which are intended to be equivalent to a sinking fund. It is possible to allocate a separate levy in respect of these reserve funds, so that, for example, a separate fund is set up to pay for flat-specific maintenance costs, and only the flat unit-holders contribute to this. Ideally, some more flexibility should have been included but a workable system can be created with a fair allocation of assessment liability and with the use of reserve funds for significant expenditure items.

Affordable housing

No allowance for commonhold applying to affordable housing has been included in the drafting to date. Restrictions on residential lettings and ‘staircasing’ provisions make a typical affordable housing structure incompatible with commonhold. We believe that the government will be issuing a second phase of commonhold legislation in the not too distant future to cover affordable housing.

Enforcement provisions

These are weaker than had been hoped for. Unlike a lease, there is no right of forfeiture. In Australia, a unit-holder loses their right to vote while levies are outstanding and outstanding payments operate as a charge on the property. The CCA will have to use standard debt-recovery methods to recover outstanding levies. An ombudsman scheme is being promoted as the best way to resolve disputes. Detail on the system proposed is awaited.

One size fits all?

The Act and Regulations are drafted so there is no differentiation between simple schemes with a couple of units or a large development with hundreds of units. The same Regulations will apply to all schemes. Other jurisdictions such as Queensland have introduced a system of regulatory modules that can be applied to different types of schemes, for example commercial schemes and small (six units or less) schemes. The differences between the Regulations for these modules reflect the differences in management practices for different types of schemes. For example, the small schemes module allows for more informality in decision making.

Islamic finance

So far commonhold does not fit in with the requirements of Islamic finance. We understand that future legislation will be introduced to deal with this.

Conclusion

Only time will tell whether developers and lenders embrace commonhold or whether they prefer to continue using familiar leasehold structures. However, there is already interest in the market, particularly among developers and investors who have had experience of similar systems in other jurisdictions.

The experience in Australia

The commonhold system is based loosely on the system of strata title that has existed in Australia since 1961. However, the legislation in Australia has evolved over time and it is widely accepted that commonhold has neither the complexity nor the flexibility of the Australian systems.

The Australian system has evolved since its introduction and the legislation in most states is now in a third-generation form. It is likely that further evolution of the commonhold legislation will be necessary once commonhold takes root in the market. The experience from Australia is that subsequent legislation will build in more detailed dispute resolution provisions, more flexible management structures and greater consumer protection.

The strata title industry now represents a significant part of the residential and commercial property market in Australia. For example, it is expected that 70% of new properties built over the next five years in Sydney will be strata title.

Further reading

In addition to the textbooks which are already available, the Leasehold Advisory Service (www.leaseadvice. org) will be preparing further guidance on the topic.

Chris Baker is a senior solicitor and Katharine Fenn is a professional support lawyer in the real estate department at Denton Wilde Sapte. Chris Baker is also qualified as a solicitor in Australia.  © Property Law Journal