Shoosmiths

A resurgence of commonhold?

Question

What is commonhold, and will this become a more popular choice for property ownership?

Answer

Commonhold was introduced in 2004 as a new way to own freehold property by the Commonhold and Leasehold Reform Act 2002. The aim was to offer an alternative to leasehold title, and the act enables both residential and commercial owners to collectively own their property, but retain the freehold interest in their individual unit or flat. While commonhold offers a number of advantages over the more traditional leasehold ownership model, only 20 commonhold developments have been created since the concept was introduced some 15 years ago.

The Law Commission is therefore canvassing opinion from interested stakeholders on the use of commonhold in practice and has issued a consultation paper with the aim of improving the way in which the commonhold system operates. This article mentions only some of the points that are considered, given that the consultation paper is 480 pages long. The deadline for responding to the consultation is 10 March 2019.   

Background

Various suggestions have been made as to why commonhold has not proved to be a popular choice for multi-tenanted properties among buyers, lenders and developers. Commonhold was intended to offer solutions to some of the problems posed by a leasehold arrangement, in particular that leaseholds are time-limited, often to as little as 99 years. The current commonhold framework is based on dividing freehold land into separate units and common parts. The Land Registry creates a freehold title for each unit (registered in the individual name of the owner) and a separate one for the common parts. These are owned and managed by a commonhold association, which is a company limited by guarantee, of which all the individual unit holders are members.

The main proposals of the consultation paper are to:

  • 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; and
  • enable homeowners to end unattractive long-term contracts imposed by developers.

Advice to developers and homeowners

How may these changes affect the advice given by lawyers to a wide range of clients? The current legislation adopts a ‘one size fits all’ approach to the commonhold system. For arrangements where tenants contribute different costs for services provided, the system is inflexible and does not allow for separate pots of money to be used where common parts are not shared equally. As such, the Law Commission is proposing a reform that would allow separate classes of membership within a commonhold structure. This would enable different categories of owners to vote on proposals or costs that affect only them (useful where a development contains both residential and commercial units).

Where current flat owners in leasehold developments wish to convert to commonhold, consent must be obtained from the landlord, the tenants, everyone’s lenders and anyone else with a significant interest in the property. In practice, this is difficult to achieve. If recommendations from the consultation are adopted, leasehold structures could be converted to commonhold more easily, as there would only need to be a majority of tenants in favour – landlords would be bound by this decision and would have to participate in the process. Provisions would of course need to be made for tenants who did not want to participate or could not afford to do so. The Law Commission makes some suggestions as to how this might be achieved.

Advice to lenders taking security over a commonhold development

Under the current scheme, lenders have been cautious in their involvement with commonhold titles. Main concerns centre on the robustness of commonhold associations, especially if there is a risk of insolvency, or if the association is unable to raise funds for essential repairs to the structure of the building. The association will have capacity to borrow money by virtue of its articles of association. As such it may create a fixed legal charge over the common parts (under a single title number) provided that unanimous consent is obtained by all unit holders. This is unattractive to lenders for fixed charges, because the common parts of a building may not provide sufficient security for the loan if they cannot be sold separately (eg, exterior walls, staircases, and landings). As an alternative, a floating charge may be created, as this is not attached to any particular assets. However, the 2002 act does not expressly state that a commonhold association has the power to grant a floating charge.

In response to this, the consultation is seeking views on measures which would make commonhold more attractive as investment security for a loan. Currently, individual owners may need to obtain a lender’s consent before they can agree to a charge being granted by the commonhold association over the common parts. The consultation paper considers whether it would be appropriate for the First-tier Tribunal (Property Chamber) – or the Residential Property Tribunal Wales for properties in Wales – to have the power to override a lender’s decision to refuse consent. This would help in situations where a commonhold association needs to raise emergency funds to carry out works which, in turn, may prevent them from becoming insolvent.

Conclusion

For commonhold to be a more attractive option for residential, commercial and mixed-use developments, it is hoped that the Law Commission’s proposals will go some way to overcoming its perceived shortcomings by stakeholders in the property market, and as a result, encourage an increase in its uptake.

Hayley Band is a first-year trainee solicitor at Shoosmiths. She is currently sitting in the real estate team and is based at the firm’s Thames Valley office.

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