What is the law of Commonhold?
Commonhold as a tenure of ownership is in the spotlight. The Law Commission has recently announced plans to reinvigorate its use as a replacement for the existing “leasehold” mechanism for ownership of flats and other multi-occupancy buildings.
Commonhold is a system used widely in the world by countries such as the USA and Australia and it is seen as an alternative to leasehold.
The essence of commonhold is that rather than taking a lease of a unit (typically a flat) forming part of a building, where such lease is time limited (to say 99 or 125 years), the owner will instead acquire an interest that lasts forever. Whereas with leasehold the control of a flat is shared, and perhaps limited, by a landlord, this does not exist with commonhold.
Commonhold also provides a structure to manage the relationship between owners of separate units forming part of the same building. Each owner will own its individual unit, but then also become a member of a company which owns and manages the common parts of the building. This company is called a ‘commonhold association’.
Commonhold is seen to have advantages over leasehold because:
- No extension costs – there is no requirement as now, towards the end of a lease term to pay substantial sums to extend that term;
- Take back control – the commonhold structure gives ownership and control of the common parts back to the owners of the units, taking away the risk of substantial hikes in ground rents or service charges, or unaccountable poor management, or landlords making a windfall profit by carving out new lease areas out of former boiler rooms and service areas or roof space, many of which issues have been issues identified in the media in recent months;
- Standardisation – there are set rules and regulations which should make it easier to understand what an owner’s rights and obligations are and crucially these same rules and regulations apply to everyone in the building.
- Building Adaptability – it is seen as being more receptive to change. If changes are needed to better protect residents or otherwise improve fire safety etc, these can be implemented more quickly and easily. Rather than needing to vary the terms of each and every lease, the terms of the ‘commonhold community statement’ and the articles of association of the commonhold association can be varied with over 50% support.
- No risk of forfeiture – Whereas with a lease there is a risk that if a leaseholder breaches the terms of its lease the landlord can bring the lease to an end, take back the property and not be required to pay any money back to the leaseholder, with commonhold there is no risk of this occurring.
Notwithstanding these advantages this tenure of ownership is not widely used and this is why the Law Commission is proposing to make changes. Some of the key issues identified by the Law Commission concerning the existing law of Commonhold relate to:
- how to covert an existing leasehold to a commonhold – Under current law, to convert to a commonhold the consent of everyone with an interest in the property is required – this will include the freeholder and all long leaseholders. In practice, this is almost impossible to achieve.
- the costs of commonhold – At present there is a lack of flexibility over how commonhold costs (being the costs of maintenance and running of the building or the commonhold association) are shared between the unit owners. There is also a lack of control over how the costs are set and there is often insufficient recourse against those unit owners who fail to pay their share of these costs.
- the inflexibility of commonhold with mixed use blocks – this is an issue in a large development which combines both residential and non-residential property, including the inability to incorporate ‘shared ownership’ leases (being one of the main ways in which affordable housing is currently delivered in England and Wales) because with commonhold it is not permitted to grant a residential lease for a term longer than 7 years.
- the impact on bank security – as the commonhold association is a corporate entity it may become insolvent or otherwise cease to exist if the various formalities for companies are not followed. There is also the further risk that the owners could terminate the commonhold at any time. For lenders, if this were to occur there is no one against whom the obligations to repair and maintain the overall building can be enforced. If this was to occur, then the envelope of the building may fall into disrepair thereby affecting the value of a unit in the commonhold and so its saleability and its value as security for funds borrowed.
These are just some of the issues identified with commonhold and it remains to be seen what changes the Law Commission might implement to deal with these. For now it seems that the law of commonhold will remain an ‘unknown’ and developers, lawyers and others in the property sector will continue to look to leasehold as the tried and tested way of dealing with multi-occupancy buildings.