Commonhold is the rarest type of property ownership throughout England and Wales. In fact, it’s so uncommon that many people are completely unaware of its existence in the property industry. But with the Law Commission’s final report on “Reinvigorating commonhold; the alternative to leasehold ownership” set to be published in the first half of 2020, things could be about to change.
This guide intends to give a simple overview on a number of aspects relating to commonhold, including:
- What is commonhold?
- How commonhold works
- The commonhold association
- The Commonhold Community Statement
- How is commonhold created?
- Advantages of commonhold
- Why is commonhold so rare?
- Disadvantages of commonhold
- Reinvigorating commonhold proposals by the Law Commission
What is commonhold?
Commonhold is a type of property ownership that sits amongst leasehold and freehold ownership; and is applicable to new or existing buildings. Prescribed by the Commonhold and Leasehold Reform Act 2002, commonhold applies to purpose-built blocks of flats, converted buildings containing flats, houses and commercial buildings. It is the newest form of tenure, introduced to the property industry just under a couple of decades ago in order to provide an alternative to leasehold.
While leasehold ownership provides homeowners with a set number of years that they are entitled to live in their property, commonhold affords occupancy for an unlimited amount of time. This is because the owner of a commonhold property owns the freehold of their unit, rather than a third party owning the entire freehold, as it is in the leasehold system. And without a freeholder governing the building, commonholders have increased control but also greater responsibilities as they will be required to take ownership of the building’s management.
How does commonhold work?
A commonholder, otherwise known as a ‘unit-holder’, owns the freehold to their individual demise, which includes the interior walls, ceiling, floor coverings and space between them. However, the common parts of the building are owned and managed by a commonhold association, which is facilitated by the registration of a separate title at Land Registry.
Common parts include the following:
- Roof, floors, external walls – the structure of the building
- Lifts & communal boilers
- Communal entrances, hallways and stairs
- Car park and communal gardens
The commonhold association may also own and be responsible for ‘limited use’ areas which benefit individual unit-holders, for example, private balconies. Although these type of areas are not for communal use, they form part of the physical structure of the building which must be actively maintained and repaired to ensure the continued use of the building for all occupants.
How does a commonhold association operate?
Membership of a commonhold association is restricted to the unit holders within the commonhold building, who are each entitled to join. However, where a unit has joint owners, only one can become a member, whom they can decide between them. If they fail to do so, the first name registered on the title deeds of the unit will be registered as the member of the association, by law.
Each member will have the opportunity to get involved with the management of the building and top-level decision making. This will involve attending regular meetings to provide opinions and suggestions and to vote on matters concerning the building. As such, it can be a challenging and time-consuming task and can easily fail to run effectively if members do not work together or are inexperienced in property management.
Much like any other type of property, a commonhold property will need to be insured, maintained, cleaned and may be subject to occasional major works such as a new roof. This will all need to be paid for by the unit holders with the monies collected by the commonhold association, who will also be responsible for arranging works and services. The association will additionally be obligated to resolve any disputes between the unitholders, which can be an incredibly difficult task.
A commonhold association must be a registered limited company which is limited by guarantee and does not provide shares. As such, if the association ceases to operate, each member’s financial liability is limited to £1. The association must, therefore, abide by both company laws and its articles of association, which set out the duties of the association. The articles of association are prescribed by the Commonhold Regulations 2004 as amended by the Commonhold Regulations 2009 (“the Commonhold regulations”).
Furthermore, the company must adhere to the Commonhold and Leasehold Reform Act 2002 and the Commonhold Community Statement (CCS).
What is a Commonhold Community Statement?
A Commonhold Community Statement (CCS) sets out the rights and responsibilities of the commonhold association and each unitholder and provides a framework for managing the building. Importantly, it also dictates the financial contribution payable by each unitholder for the management, repair and maintenance of the building. This may additionally include payments into a reserve fund, which is set aside for infrequent major works such as the internal decoration of the communal parts.
The Commonhold Community Statement in summary:
- Identifies the individual units in the building together with the common parts, by referring to a plan
- Sets out the percentage of the overall running costs of the building that each unit-holder must pay
- Sets out the percentage of any separate charge for a reserve fund that each unit-holder must pay
- Allocates the number of votes the holder of each unit will have
- Sets the rules for how the commonhold will be run
The Commonhold Community Statement must be registered at Land Registry together with the title documents for the commonhold. Unlike in the leasehold system, there is just one CCS document for the entire building, rather than individual documents for each unit. Though, similarly to leasehold, unitholders must abide by the terms of the CCS. However, in contrast to leasehold, there is no penalty of forfeiture, should the rules be broken. Nevertheless, the commonhold association have the power to use normal debt-recovery procedures if unitholders fail to pay their contribution.
How do you create a commonhold property?
A commonhold can be created in two ways, either with the unitholders in occupation (as a leasehold) or without the unit holders i.e. a new development. The former is a bit trickier as it requires every occupant, together with their mortgage providers to agree to convert from leasehold to commonhold. Furthermore, the applicant must own the freehold, so unless the leaseholders have enfranchised (purchased the freehold), it’s unlikely that a freeholder will agree to convert and lose not only their property but a guaranteed revenue stream.
Of course, a premium payable to the freeholder in return for the conversion may be enticing to some. Nevertheless, if the application is successful, each of the commonhold titles will be registered at Land Registry and the transfer of ownership of the common parts to the commonhold association will take place immediately.
Creating a commonhold on a new development is much simpler, requiring the sole decision of the developer. A commonhold registration application would be made to Land Registry by the developer, who must own the freehold. The developer must also set up a commonhold association as part of the registration process and create a Commonhold Community Statement (CCS). As soon as the first unit is sold, the commonhold association will own the common parts of the building and the CCS will come into effect.
Advantages of commonhold
- Entitlement to live in the property for an unlimited amount of time unlike leasehold
- No risk of forfeiture as a result of breaking the terms of the CCS
- Increased control of the building’s management
- No third-party landlord or ground rent payable
- Reduced potential of disputes compared with leasehold
- Enhanced marketability/desirability which can attract a higher sale price
- Easier to understand the terms of owning a commonhold, set out by the CCS
- Identical and transparent provisions bind all unitholders within the commonhold
- Terms within the CCS can be easily amended when the unit owners wish
Why is commonhold so rare?
Considering that commonhold seems incredibly advantageous on the surface, particularly for current leaseholders, it may be surprising to learn that fewer than 20 commonholds have been created since the legislation came into force. Of course, this could be attributed to the fact that many people are unaware of commonhold, however, it’s more likely due to a number of underlying problems within the commonhold system. These issues have a major impact on mortgage lenders, developers and of course unitholders.
Disadvantages of commonhold – in summary
- A threat that commonhold associations can become insolvent
- No requirement for the CCS terms to be reasonable
- Unitholders have little control over the running costs of the building
- Not possible to allow specific parts of a mixed-use commonhold to self-govern
- Unitholders do not have any statutory protection
- Mortgage lenders are unwilling to lend on commonhold properties
- Shortcomings in the laws governing commonhold
- Shortcomings in the statutory documents used to manage commonholds
- Less financial incentives for developers i.e. no freehold to sell or ground rent income
- Unitholders may find it difficult to live and work together preventing effective management of the building
- Converting to commonhold from leasehold is a long and arduous process
Mortgage lender issues with commonhold
As commonhold buildings are managed by the residents, it is possible that the building could be ineffectively maintained or underinsured which could result in the building falling into disrepair. Consequently, the value of the property would decrease and subsequently have an impact on a mortgage lenders ability to recover the full sum of the monies owed, should the property be repossessed.
An even more significant concern is that commonhold associations can easily become insolvent. This is because they do not have forfeiture rights which they could implement as a consequence of a unitholder withholding their payment contribution. Furthermore, commonhold associations are not able to use the reserve fund to cover any shortfall in funds as a result of non-payment.
Both of these factors make commonhold an unattractive investment for mortgage lenders as it offers little security for their interest. Thus, if mortgage lenders are unwilling to lend on commonhold properties, it will make selling these properties a lot harder as they would be restricted to cash buyers.
Developer issues with commonhold
Developers encounter several problems with commonhold but most notably is the lack of financial incentive to adopt the system. Unlike the leasehold system, there is no long term income to be gained from ground rent or lease extensions and of course, no freehold title that can be sold to a third party for additional revenue. Furthermore, in the leasehold system, the property reverts back to the freeholder in the event of the lease term expiring, whereas in commonhold the property is owned by the unit-holder for an unlimited amount of time. Therefore, the leasehold system is much more lucrative for developers.
Another issue with commonhold is that it does not work well in mixed-use developments, for example, a block of flats with commercial units such as shops, which are popular builds for developers. While both residential and non-residential parties will have differing interests in the building, it is likely that the party with the most members will be able to influence the management of the building as they will have more votes.
Lastly, commonhold does not provide robust development rights or a flexible way for developers to sell individual units while completing the construction of the entire site. As the commonhold association becomes the registered owner of the common parts as soon as the first unit is sold, the developer must reserve development rights in the Commonhold Community Statement in order to complete the works. However, developers have raised concerns that these development rights do not meet the needs of modern developments.
Reinvigorating commonhold – proposals by the Law Commission
In 2018, the Law Commission called for evidence on the commonhold system in order to produce a consultation paper entitled, “Reinvigorating commonhold: an alternative to leasehold ownership”. This came as part of several other reviews by the Law Commission, conducted on the leasehold system, which is currently fraught with problems.
As highlighted earlier, commonhold was originally introduced as an alternative to leasehold, however, it has not been well-received due to its own onslaught of problems. The Law Commission has therefore conducted this consultation in an attempt to discover which aspects of the law are impeding the success of commonhold. Based on the obtained evidence, the Law Commission outlined several preliminary proposals for reform.
The Law Commission’s proposals for commonhold reform include:
- Enable commonhold to be used for larger, mixed-use developments which accommodate not only residential properties but also shops, restaurants and leisure facilities
- Allow shared ownership leases and other forms of affordable housing to be included within commonhold.
- Make it easier for existing leaseholders to convert to commonhold and gain greater control over their properties
- Improve mortgage lenders’ confidence in commonhold to increase the choice of financing available for home buyers
- Provide homeowners with a greater say in how the costs of running their commonhold are met
- Enable homeowners to end unattractive long-term contracts imposed by developers
- Raise consumer awareness of commonhold as a suitable alternative to leasehold in order to encourage uptake
Following on from these proposals, the Law Commission is preparing their final report on commonhold reform, which is set to be published in the first half of 2020.
It’s unfortunate that the current commonhold system poses significant problems for the various stakeholders involved in implementation and operation; otherwise, it may have been a great success following its 2002 launch. However, there was and still is a lack of awareness in the industry which has undeniably hindered its success. Still, the Law Commission is seeking to rectify these issues, which could lead to a “reinvigoration” of commonhold.
Nonetheless, it is difficult to ascertain just how successful they will be in their quest before viewing their final report and proposals. We may just see leaseholders continuing to enfranchise (purchase the freehold) as a simpler and easier method of gaining greater control of their homes.