Recently, the country’s first large commonhold development was announced, which will be built in Milton Keynes.

A mixed-use development, the Oakgrove Millennium Development, as it will be known, will, on completion, consist of more than 2,300 new homes – a third of which will be for affordable housing – two schools, a health centre, a landscaped wildlife corridor, shops and other amenities, and commercial premises.

On completion, the development will be managed by a ‘sustainable manage-ment organisation’ on behalf of the Oakgrove community. In the case of Oak-grove, this SMO will be a subsidiary of the Hyde Housing Association (advised by Trowers & Hamlins). The lead devel-opers are Crest Nicholson.

So, why commonhold? Why not use the traditional freehold or leasehold form of development that the market is familiar with?

Commonhold, the new form of tenure for interdependent property develop-ments, has been available since Part I of the Commonhold and Leasehold Reform Act 2002 came into force in September 2004. But take-up has been slow, although a number of smaller-scale developments have been announced. Perhaps the Oakgrove announcement will encourage other developers to take a look at the advantages of using commonhold.

The availability of freehold ownership of flats, offices and other units, coupled with one standardised set of rules for the whole of the development and a modern democratic style of management, should appeal to the market.

It is certainly gaining the confidence of lenders, many of whom have stated their willingness to lend on commonholds.

Commonhold is better for long-term management schemes

Those advising in the Oakgrove develop-ment took the commonhold route, not only because of the advantages of this new type of legal arrangement, but also for more pragmatic reasons. Using a tra-ditional freehold/leasehold model, where the costs of managing the development are secured by service charges, simply wouldn’t work. The sheer complexity of leasehold law, the consultation require-ments for service and improvement charges and service contracts, to say noth-ing of the collective rights of leaseholders to opt out by exercising the right to manage or to enfranchise, rules out any new development where long-term man-agement (such as the SMO in Oakgrove) is an integral part of the scheme.

But householders and others living in a commonhold development have little to fear from not having the complex package of statutory rights now given to leaseholders. These have had to be adopted because of the shortcomings of the leasehold system, such as the lease being a wasting asset and the sorry his-tory of much leasehold management. The owner of a commonhold dwelling, in contrast, has outright freehold owner-ship, coupled with the right to be a member of a company (the Commonhold Association), which owns and manages the common parts of the development.

Many will see the Oakgrove announcement as the perfect advertise-ment for the 2002 Act: leasehold reform to shore up the law for those living in leasehold flats and houses, but a modern form of ownership in commonhold.

Common assumptions about commonhold

But commonhold continues to have a ‘bad press’. Some typical misconceptions are listed below.

The restrictions on leasing residential commonhold units rule out commonhold for new developments where registered social landlords are concerned

No, as RSLs are best advised to use the co-ownership trust model as the modern way of delivering low-cost home owner-ship. Under this model (and a major lender – the Nationwide Building Society – has announced that it will lend on it) the RSL and the ‘tenant’ co-own the unit.

This is the same principle that applies to ownership occupation, generally, where partners, married or otherwise, co-own their home. In the case of co-ownership there is automatically a trust for land, and the actual terms of the trust are a matter of agreement for the owners.

With a low-cost home ownership scheme, the terms could include the divi-sion of ownership (eg a 70/30 split between RSL and the ‘tenant’): the ‘tenant’ pays an occupation rent to the co-owning RSL for that part of the equity they do not own, and on terms as to the repair and maintenance of the dwelling.

Using the co-ownership trust is entirely consistent with the statutory restrictions on leasing residential com-monhold units.

As the commonhold association cannot forfeit a unit for non-payment of assessments or other debts owing by the unit owner, it will be difficult to recover assessments

No, in practice forfeiture is very rarely granted to a landlord in respect of a residential lease of a flat or a house. Besides, ‘forfeiture’ has by now been almost eliminated for such leases by reforms made under Part 2 of the Commonhold and Leasehold Reform Act 2002. For example, forfeiture for non-payment of a service charge is only permitted where either the leaseholder has admitted the validity of the charges or the matter has been referred to a resi-dential property tribunal to determine the validity of the charges.

Forfeiture for small sums has been abolished, and forfeiture for other breaches of the lease can only be under-taken if the landlord has first proved that the leaseholder is in breach of the lease by application either to the tri-bunal or a court.

False. Under the rules, which apply by statute to all commonholds, the associ-ation has the option of using court proceedings to recover moneys or in cases of an emergency. In those situa-tions conciliation or mediation is not required as a prerequisite to court proceedings.

All potential litigants should think about the desirability of using ADR, and this is an express requirement for associations, but it is not compulsory to use ADR where it is not appropriate.

The statutory rules governing commonhold assessments and reserve funds are too simplistic and fail to make provision for either a mixed-use development or any development that consists of more than a block of flats

It would be simpler if the commonhold rules allowed expressly for differential assessments, as is the case with modern freehold/leasehold documentation. However, by taking a creative approach, the commonhold community statement can provide a way of fairly dividing up the assessments and the other contribu-tions through using a series of reserve funds for different parts of the develop-ment. For example, a reserve fund for a commercial part of a development would divide up the actual contribu-tions between the owners of the commercial units concerned, whilst the owners of the residential units would be shown as paying 0% for that particular reserve fund.

It is also clear that more than one estimate and assessment can be raised – the singular is used, but it includes the plural in all legislation and instruments made under it unless excluded.

Developers will not use commonhold, as they will lose the profit they make on a freehold/leasehold development by selling the freehold reversion

Once it becomes apparent that common-hold units will sell at a premium over a comparable leasehold unit, this will cease to be a concern.

Purchasers are likely (if well advised) to pay more for a freehold purchase, particularly as they will not have to pay a ground rent for the whole term of the lease, and will have more control of other expenditure.

Also, investors should now be more cautious about purchasing freehold con-versions because of the new restrictions on ground rent recovery introduced by Part 2 of the 2002 Act. Both the volume of collective enfranchisement and lease extension claims made by flat leasehold-ers demonstrate that flat owners are unhappy with this and other aspects of leasehold management, and are in con-sequence willing to pay premiums and costs to acquire the freehold or a longer lease, even where only a nominal rent is payable.

Other complications, such as the tenant’s pre-exemption rights under Part I of the Landlord and Tenant Act 1987, can also militate against freehold sales by developers.

As the modern leasehold documentation for residential developments usually allows for 999-year leases and a management company owned by the leaseholders post-development, commonhold is not now needed

No, because the flats are still leasehold, and it is leases themselves, not just freehold ownership along with the com-plications of leasehold management, that many leaseholders would prefer to avoid. Besides, all commonholds have standardised documentation prescribed by statutory instrument.

The combination of freehold ownership, a simpler and more democratic decision-making process, and standard-ised documentation make commonhold a better alternative to the much-criticised leasehold system, and it is likely to be more attractive as well. A long lease term and a share in the freehold-owning company are better than a short term and no control over the freehold, but still there are major problems with leasehold tenure.

Lenders will be reluctant to lend as unit holders could resolve to wind up the commonhold where it is solvent and lenders would lose their security over the individual units

False. Yes, unit holders can, subject to the rules, resolve to wind up the common-hold, in which case the whole of the freehold (ie the common parts and the freehold of the individual units) vests in the commonhold association. This is a helpful provision, which will aid the eventual disposal of the land. But there is nothing in Part I of the 2002 Act that extinguishes the existing charge; besides, these are preserved under the Land Registration Act 2002. The only provision in the commonhold legislation that allows for the automatic extinguishment of charges is that which provides that any charges over the common parts of a new development are extinguished on the first sale of a commonhold unit. Lenders would keep both their security and the covenant to pay.

Lenders will not lend and purchasers may be advised to avoid commonholds, because if the commonhold association is struck off the companies’ register, this effectively ends the commonhold and the units become unmarketable

True, but in principle this is no different to a leasehold development where the company owning the freehold is struck off because of a failure to file returns with Companies House.

There is good reason to believe that the owners of a commonhold, who are the only members of the commonhold association post-development, have a mutual interest in ensuring that man-agers and other professionals are used for this and other aspects of management.

This should be contrasted with free-hold/leasehold developments, where there is frequently a remote landlord over which the leaseholders have limited powers.

This encourages good company management, and failures can be put right by the unit holders – an insolvent or struck-off landlord is much more difficult to deal with.

Conclusion

Since so many of these common criti-cisms are, in fact, unfounded, there is nothing to stop commonhold from taking off and becoming an increasingly widely used form of tenure.

With the Oakgrove Millennium development now getting under way, this landmark project should encourage developers, lenders and prospective pur-chasers to embrace change rather than fear it.  © Property Law Journal