Converting existing leaseholds into commonholds is proving more popular than anticipated, but there are development opportunities available where commonhold offers attractive disposal possibilities together with straightforward legal documentation (believe it or not!). Australians and Americans have stolen a march on the English and Welsh as "strata title" and "condominium title" (their version of commonhold) have been established and extensively utilised for many years.

Commonhold is a species of freehold and is the alternative to the long term residential or commercial leasehold. It allows freehold ownership of "Units" (flats, retail units, sheds, office floors etc) within a commonhold (a block of flats, retail park, industrial estate or office block). Ownership of a Unit (which can be bought and transferred in the same way as a freehold) is coupled with membership of the Commonhold Association ("CA") which is a company limited by guarantee that will own and be responsible for management of the common parts. The CA recovers its costs through the Commonhold Assessment (service charge).

Commonhold is available in developments where there will be two or more Units and the development includes shared facilities, benefits and obligations. The commonhold will be subject to a local law called the Commonhold Community Statement ("CCS") which specifies the properties within the development and the rules and obligations. These are not covenants or easements and nor do they arise by contract - they are mutually enforceable statutory obligations. This document (which is substantially in prescribed form) replaces the countless number of 99 or 999-year leases normally required.

A Unit Holder of a commercial commonhold Unit is free to let this to an occupational tenant on a normal FRI lease basis. However, in a residential commonhold, any letting is limited to a maximum of seven years with no premiums. This prevents issues prevalent in long leaseholds such as absentee landlords.

A concern of developers is the ability to control the development after the first Unit has been sold (activating the CCS). The developer cannot then complete the development as freely as usual. However, the CCS can contain "development rights" which will be drafted by the developer to ensure that the remainder of the development can be carried out and completed as desired.

So where would you utilise commonhold and why is it attractive?

Residential flats

Commonhold enables the sale of freehold flats without creating a wasting asset (the long lease). The Unit Holder is a member of the CA and no ground rent will be payable. There will be no need to negotiate separate residential leases for each Unit due to the solitary CCS. However, commonhold is not going to do wonders for the ground rent portfolio market.

Warehouse/retail parks

Commonhold will be of use where there are shared facilities. The developer can sell off Units to an owner/occupier or small investor. The investor can let the units to an occupational tenant on normal FRI terms. The developer can sell all of the Units to separate investors or owner/occupiers, let some of the Units and sell the remainder or let all of the units in the normal way. This will also be of use in joint venture structures.

Office blocks

17% of all office space in Sydney, Australia is strata title and the remainder is let on normal commercial leases. The office block would be Commonhold and each Unit can be half or whole floors. The developer can sell to investors or owner/occupiers or let the floors in the normal way. Individual investors can buy floors and be responsible for letting and receiving income whilst the building is managed by the CA.

Mixed use

Commonhold can be used for mixed use schemes but, as you cannot have one commonhold on top of another commonhold, the CCS will have to be carefully drafted to deal with (for example) the competing interests of a residential tenant and a commercial investor. Commonhold is a form of landownership which is ready to be exploited - what's stopping you? © Berwin Leighton Paisner