One area where it would seem to be particularly appropriate is when there is a mixed-use development, containing both commercial and residential users. In such a situation, the existing rag-bag of leasehold protection legislation can make for enormous complications when dealing with the commercial parts of the development (eg right of first refusal if the commercial element has less than 15% of internal floor area; right to challenge service charges; right for lessees of flats to take over the management of the whole building if non-residential is 25% or less of the internal floor area; a collective right to enfranchisement if the non-residential part is 25% or less – although the freeholder will have the right to take back those non-residential parts on a 999-year peppercorn lease).

The position is far more straightforward with commonhold. All the units are sold freehold and the common parts are transferred to a commonhold association (CA). That CA will then manage the building and be controlled by the buyers of the flats and other units (including commercial units). The community assessment is not subject to a reasonableness test but is levied by the CA, and individual owners can only veto changes to the community statement that would affect the extent of their units or the rights attached to them. When there is a development, the common parts will be vested in the CA as from the transfer by the developer of the first unit. Anyone purchasing a unit, whether commercial or residential, or whether as an occupier or as an investor, will automatically acquire the freehold of that unit. The new owner will become a member of the CA, but will usually be under an obligation to abide by the majority rules (including decisions on maintenance and even on changes to the commonhold statement). Although owners of commercial units will have the option of letting them on any terms they want, those Ts will then be required to abide by any relevant provisions in the community statement (eg use of common parts).

One interesting point made by an article in the Estates Gazette is that there does not seem to be a rule preventing a developer from arranging for the CA to enter into a long-term ‘sweetheart’ contract with the developer (or its nominee) for the ongoing management and insurance of the building. These contracts could be put in place while the developer remains in control of the CA. Needless to say, there is concern that sharp operators could exploit this loophole and it does leave the way open for potential abuse. Needless to say, this could not be done if there was a collective enfranchisement or an exercise of the right to manage (under the existing leasehold legislation), and thus this may be one reason why a developer or fund might prefer to put in place a commonhold arrangement. For an excellent introduction to the use of commonhold in mixeduse developments see [2004] EG 25 September 129. © Practical Lawyer