KEY POINTS

• Commonhold is still expected to come into force later in 2004, although there may be some minor slippage in the timetable.
• It is designed principally for blocks of flats, but could also work for commercial properties.
• Each unit holder will own the freehold of their own unit, while the "commonhold association" will own the freehold of the common parts.

WHAT IS COMMONHOLD?

Commonhold is a new way of owning land or buildings split into a number of units. It is designed with blocks of flats in mind, and is similar to strata title in Australia or condominium in the USA. The basic idea is that each unit holder owns the freehold of their unit. The freehold of the common parts is owned by the "commonhold association", in which each unit holder has a share.

WHEN WILL COMMONHOLD BE BROUGHT INTO FORCE?

Officially at least, the Government is still committed to bringing commonhold into force on the previously announced date of 23 August 2004.

In practical terms, however, there is some doubt as to whether this target will be achieved. To be fair to the Government, getting it done right must be more important than getting it done quickly.

WILL COMMONHOLD BE COMPULSORY?

No. Whether you are dealing with existing buildings or new developments, conversion to commonhold will be strictly optional - and will require the consent of virtually everyone with a stake in the property. Many estates will stick with conventional long leasehold structures, at least for the time being.

THE COMMONHOLD AND LEASEHOLD REFORM ACT 2002

Part 1 of this Act introduced commonhold, which is the subject of this article.

Part 2 made numerous changes to the separate area of law known as "leasehold reform", which gives rights to residential leaseholders to buy their own freehold, extend their leases, manage their own buildings and avoid unreasonable service charges.

Although Part 1 of the Act laid down the framework for the commonhold system, it left much of the detail to be filled in by regulations.

THE COMMONHOLD REGULATIONS

After several postponements, a further revision of the commonhold regulations was released this spring. However, David Lammy MP, the Minister at the Department for Constitutional Affairs responsible for commonhold, has subsequently asked for further changes to be made to the termination provisions.

In the meantime, the Regulations remain in draft. If the intended implementation date of 23 August 2004 is to stand, the planned 12 week period between issue of the regulations and full implementation will have to be curtailed.

However, the most recent message from the Department for Constitutional Affairs was that 23 August 2004 is still the target date.

WHAT DOES COMMONHOLD ENTAIL?

We last looked at commonhold in our September 2002 newsletter. For a comprehensive review of the subject, please see page 24 of that issue.

By way of a brief recap, commonhold provides a new way in which owners of a building or estate, split or intended to be split into separate units, can own the freehold of their unit (although subject to lease-type covenants) with regulated control of the common parts.

Although it is envisaged that commonhold will mainly be used for blocks of flats, nevertheless it could equally well be applied to any communally owned development with shared facilities, such as a business park or an industrial estate.

HOW DOES IT WORK?

A "commonhold association" is incorporated to hold the freehold in the common parts of the property. The commonhold association is a private company limited by guarantee, and each owner of a unit in the building/estate is a member. The memorandum and articles of association are to follow standard drafting prescribed by the regulations, although certain additional provisions are permitted.

In addition each commonhold estate will have its "commonhold community statement" (CCS) setting out the arrangements for services and obligations and containing the unit holders' and commonhold association's obligations. These will include the type of covenants which, in a traditional leasehold scheme, would appear in the leases of individual flats as landlord and tenant obligations. The CCS may be amended by ordinary or special resolution of the members, depending on the nature of the amendment.

The draft regulations prescribe a standard form of CCS, although additional provisions are permitted. The CCS will be a standard document for the entire building or estate, thus removing the ability of individual tenants to negotiate terms.

The Act prescribes certain mandatory requirements for the CCS, covering income and expenditure, its allocation to each unit, and repair, maintenance and insurance. The Act refers to other optional provisions which may be included. The regulations effectively set out minimum provisions for any CCS and further regulate the additional development clauses which may be included in a CCS.

WHO MAY APPLY?

The Act does not limit commonhold to residential properties. It can be used be for commercial property too. The only exclusions are agricultural land, flying freeholds and certain specialised cases where a site may revert to a third party.

Existing buildings or estates may apply, so long as consent is obtained from:

• the freeholder(s)
• every person with a leasehold interest, unless the original term of their lease was 21 years or less
• anyone with a charge over any part of the property.

Unanimity is required. The general view is that conversion of existing buildings or estates to commonhold will be unattractive, because of the administration and expense involved, to say nothing of the usual difficulties in obtaining consensus.

Commonhold is therefore considered at this stage to be of most interest to new development sites.

WILL COMMONHOLD WORK FOR COMMERCIAL PROPERTIES?

The basic aim of commonhold is to get rid of long leases at a premium and a ground rent which are granted for legal reasons only (ie the impossibility of enforcing covenants between freeholders).

Our commercial property clients will query whether they should be interested in the proposals, given that in the UK commercial market, rack rent leases are common but long leases at a premium are not.

However, in jurisdictions where commonhold is an established part of the property scene, commonhold has been used not just for residential estates but for all manner of developments, both commercial and mixed use. Commonhold does provide a viable alternative for the development of business and industrial parks where developer retention of common facilities and control is not an issue, and the intention is to sell the freehold of plots or (less commonly) grant ground leases.

At present, developers of business or industrial parks tend to set up a management company to provide estate services, the cost of which is recovered through a service charge levied on plot owners. When the development is completed, legal title to the common parts and estate roads is typically transferred to the management company. Control usually passes to the plot owners within the estate, who take shares in the management company and run it for their mutual benefit. In some ways this tried and tested structure is quite similar to the commonhold model.

With the trend towards mixed use developments, commercial developers may want to consider whether commonhold provides a useful structure for any residential element, even if it is not an appropriate vehicle for the entire mixed use development.

NO RESTRICTION ON LETTINGS OF COMMERCIAL COMMONHOLD UNITS

There is no restriction on lettings of commercial units in a commonhold, subject to the terms of the CCS for that property. The Act and Regulations do, however, restrict lettings of residential commonhold units to a maximum of seven years with no premium.

DEVELOPER CONTROL

For development schemes where there are no existing unit holders, a transitional period will apply until the sale of the first unit. During the transitional period the developer retains full control. During the next phase (that is, until effective handover to the commonhold association) the developer must maintain its control by including extra rights for its benefit in the CCS. The draft Regulations permit this, so long as such additional rights are prominently labelled as "development rights" in an annex to the CCS, and are "designed to permit the developer to undertake development business or to facilitate his undertaking of development business." Development rights must not, however, be exercised so as to interfere with or disturb unit holders' rights.

The draft Regulations also limit appointment of developer directors. Use of proxy votes by the developer has been mooted as a way of overcoming these difficulties.

SUMMARY OF BENEFITS

1. Unit holders receive a freehold interest, rather than a wasting asset, with control over common services and facilities.

2. Once the industry familiarises itself with the procedures, documentation should be streamlined and uniform, thus reducing costs.

3. The commonhold regime permits enforcement of positive obligations on successors in title (a previous shortcoming on freehold sales, where enforcement could only be achieved using a management company).

4. Commonhold provides a framework for managing and dealing with common parts where a developer has limited interest (if any) following completion of a development and its disposal to the occupying unit holders.

IN CONCLUSION

It is likely that there will be further changes to the draft Regulations and to the planned implementation date. As we have noted in our previous articles on this subject, commonhold cannot eradicate the day to day difficulties of shared schemes, such as bad neighbours or the drudgery of management.

Conversion to commonhold for existing developments seems unlikely to have any immediate appeal, but it remains to be seen how readily the property industry will embrace the new structure for new schemes.

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