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Commonhold; the new kid on the block

16 September 2004

Although conceived on 1 May 2002 ,when the Commonhold and Leasehold Reform Act 2002 was enacted, commonhold will not be born until 27th September 2004. This is when it is anticipated that Part I of the Act is to be brought into force by regulations previously placed before Parliament. 

Commonhold is a new form of tenure, which is designed to meet the management needs of estates with common parts and above all blocks of flats. However, it is not solely limited to residential property but can be used for mixed commercial and residential or commercial estates which previously might have been sold on long leases.

So why is commonhold being introduced? The traditional concept of long leasehold interests sold at a premium has been criticised on several grounds:

  • A lease is a wasting asset. Leases with less than sixty years to run are difficult to sell because mortgagees are reluctant to accept them as a security. Lessees [a person/people to whom a lease is granted] are faced with the necessity of extending their lease through the convoluted statutory procedures or endeavouring to buy in the freehold communally to extend the term.
  • It is difficult for lessees to enforce covenants directly between themselves. Generally the assistance of the Landlord is required.
  • High ground rents and management charges imposed by some landlords affect the value and management of property. Forfeiture of a lease for failure to comply with the lessee's obligations is a draconian remedy.
  • Landlords may be indifferent to the management of their property.
  • Management schemes and leases vary widely from property to property. Commonhold is brought in by regulations with recommended documentation so there is the prospect of standardisation of estate schemes throughout England and Wales.

If commonhold is going to be adopted on a new development (and it is not obligatory to do so) developers will need to get to know the new arrangements. In particular they will require the following:

  • To set up a commonhold association. This is a private company limited by guarantee and which will hold title to the common parts of the freehold estate.
  • To produce a commonhold community statement setting out the rights and duties of the commonhold association and the individual freehold property owners who will be given the rather prosaic name of 'unit holders'. This will have some of the characteristics of a lease but without forfeiture provisions or restrictions on assignment
  • To ensure each unit holder understands how the management works and the respective obligations imposed on the directors and office holders of the company.

Should a developer wish to sell flats or commercial units on an estate he will need to make a decision early on in the development. A developer has to designate an estate at the Land Registry for commonhold management before his lawyers start drafting all the estate documentation. He will have to decide with his agents how marketing will be achieved. With reservations for many new properties taken well before building commences, curious purchasers will want to understand how it all works.

So from the developers perspective what are the advantages? It's a novel concept in the United Kingdom. Sales may have a certain cachet; it might even be regarded as 'sexy', which is not a word used widely when referring to English land law. A buyer should regard commonhold as more valuable asset; it is not wasting and cannot be forfeited in the event of default. So perhaps prices of commonhold units will be higher? The conveyancing process may also eventually be simplified because of standardisation of the estate documents.

One of the commercial forces which will determine success or failure will be the attitude of the banks and building societies towards commonhold management. Unit holders can mortgage their units in the same way as a leasehold so there are no legal restrictions. With the absence of forfeiture and a well-structured management, finance should be readily available in the market for individual units.

Perhaps commonhold may commend itself to existing leasehold properties where a management company, which now wishes to extend the leases, has acquired the freehold. However, all the lessees must consent to this proposal which may be difficult to achieve in practice.

Whatever, the position this new concept should not be dismissed out of hand. Like any new comer it should be given respect and an opportunity to grow. Cautious developers will continue to follow the tried leasehold regime but those who might accept the dare could end up the winners.

For more information please contact Andrew Gough, Partner.
 

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