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Home Page Contact Us About James Driscoll Commonhold Queen's Speech 2004 Leasehold Reforms Practice Points Tenure |
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Ownership will never be the same again
Commonhold is finally coming into force on 27 September, offering a much-needed alternative to long leasehold. In one of six articles on this topic, James Driscoll considers how it will work in practice  After all the delays, it is hard to believe that commonhold is finally here. From 27 September, it will be possible for new interdependent developments to be built on a commonhold rather than a leasehold basis. It will also he possible for a group of leaseholders (or owners of freehold flats) to convert to commonhold tenure. Commonhold is based upon the experiences of Australia, the US and other jurisdictions where systems similar to common-hold have operated successfully for decades. Indeed, the Law Commission recommended it in 1987.
Commonhold is a creature of statute: Part I of the Commonhold and Leasehold Reform Act 2002 sets out, in 70 sections, its basic principles. However, most of the practical detail is contained in the Commonhold Regulations 2004, which deal with such matters as the rules of the commonhold and the constitution of the commonhold association (CA). What is commonhold? In a commonhold development, the CA owns and manages the common parts (whose members are exclusively freehold owners of the commonhold units) and the commonhold community statement (CCS) specifics the properties and the rules of the commonhold. The CA and CCS are standardised documents prescribed in the 2004 Regulations and are regulated by the 2002 Act. Land can be registered as commonhold only if there is:
Commonholds are required to be set up with this documentation. Later amendments will be possible only within the parameters of these regulations and the 2oo2 Act. Some changes to the CCS, such as alterations to units or common parts, will require the consent of both the unit owner and of the CA. Details of particular commonholds, such as use, repair, insurance and payment of commonhold assessments, will be found in the lo-cal rules. (Note that the Department for Constitutional Affairs will be publishing standard voluntary clauses with guidance notes.) A CCS cannot restrict the right of a unit holder to sell, mortgage or otherwise deal with its unit, although restrictions apply on leasing residential commonholds: see sections 17 and 20 of the 2002 Act. Commonhold can be set up over registered land only. If any estates or interests affect the land, consents must be obtained from their owners. A CA must have been registered at the Companies Registry and a CCS has to have been drawn tip. Land Registry will expect any developer that seeks registration to certify that the documentation is in proper order. Only then can the land be registered as commonhold. Land in a new development will be registered in the name of the developer and separate title numbers will be given to each commonhold unit (specified, with plans, in the CCS) and for the common pans: see Practice Guide 6o. A "transitional period" will start with the date of registration and end on the sale of the first unit. This will enable the developer to complete and market the new development free from the restrictions in the CCS and will enable it to alter the rules of the commonhold if need be. But once the first unit has been sold, this picture will change because:
Control and management A developer will retain control during the transitional development period as described above. It may also reserve "developers' rights" as an annex to the CCS (see article p127). These can be exercised in order to complete the development, market it and sell the units. In this way, a developer can, for example, reserve the right to complete works, market units, add or remove land from the common‑ hold and amend the CCS. It will also have the right to appoint and remove directors during the transitional period and thereafter until the development has been completed and all the units sold, provided that such rights have been reserved in the CCS. Leaseholders can convert to commonhold provided that they are unanimous, own the freehold and have the consent of any charges of the flats. Thus, in practice, such conversions are more likely to involve smaller blocks. Commonhold may also appeal to the owners of freehold flats, who, by converting, could make their properties more marketable. The CA will be responsible for managing the commonhold, and it is likely that professionals will be appointed to do so. The directors of the CA (who need not be members) have a duty to manage, run and enforce the commonhold obligations, set and consult on annual commonhold assessments, together with emergency assessments if the need should arise. Reserve funds can also be mablishcd. If units are let, the CA can direct the tenant to pay the rent to the CA if she unit owner should fail to pay assessments. Disputes will have to be resolved by the use of conciliation and mediation, with access to a commonhold ombudsman. When setting assessments, unit holders will be entitled to make representations. Many will see commonhold as far simpler to manage than leasehold, particularly with regard to residential leases, where complex statutorily ftescribcd consultation procedures now Apply (see EGi November 2003, p160.) The CCS will not be able to impose conditions regulating the transfer or mortgaging of units. A unit holder will be free to sell the unit to whomsoever it pleases. A "clean break" will come into operation once the unit is sold. Any debts that are owed at the rime of transfer will become the responsibility of the new owner. Leasing restrictions will apply in the case of a residential commonhold. Broadly speaking, these will allow the unit holder to let the unit on an ordinary tented tenancy; but will forbid the granting of long leases at a premium. Under the 2004 Regulations, residential unit owners will be able to lease for less than seven years at no premium. The government does not want to see the long-lease system being reproduced in a commonhold block of flats. This will not represent a problem for the buy-to-ler market, or for lettings by social landlords, but will pose obvious difficulties for shared-ownership leases and Islamic mortgages, problems that will not be resolved until the next set of rotations is published. Potential for commonhold New residential developments are an obvious candidate, where the combination of freehold ownership of flats or houses, standardised rules and a simpler and non-adversarial form of management and dispute settlement may prove popular. Moreover, the growing regulation of residential freehold reversions, such as blocks of flats, may seem less attractive to developers in the future. Investors, too, may find the prospect of purchasing a freehold of part of an office block or mixed-use development, with a right to lease on commercial terms, attractive. Given the incidence of social housing in new developments, the role of social landlords will also have a major effect. With the introduction of commonhold, two types of application will need to be made to Land Registry. The first applies to the developing estate scenario, where there will be no unit holders when an application for registration of a freehold estate in commonhold land is made under section 7. The second involves a scenario that has unit holders from the out-set, namely a freehold/leasehold conversion under section 9. Requisite documentation An application for registration of a commonhold can accompany an application for a first registration of the freehold land with absolute title or constitute an application for the conversion of an existing registered estate to commonhold. Both would use form CMt, although the application for first registration will need to be submitted on form FRi. Form CMi lists the documents that will need to ac-company the application, although in the case of the second scenario, form COV which seeks the application of section 9 and lists the unit holders, will also need to be lodged. Among the land registration forms will be form CON C. This is to be used by the persons who consent to the application, essentially the freeholder of any part of the land to be designated as commonhold, leaseholders whose term is for more than 21 years and existing chargees: see section 3, if the land is already registered, and the regulations, if it is not. Consent is not required from leaseholders whose term is for 21 years or less and who will acquire a new lease for virtually the same premises on broadly the same terms. The Commonhold (Land Registration) Rules 2004 require the submission of a statutory declaration that: lists all the accompanying consents; confirms that no further consents are required; and addresses other registration aspects, such as the consents of existing chargees, where the charge is over part only of an interest in a unit, and the effect upon the interests of restrictioners. In addition to the commonhold association (CA) documents. the consents and the commonhold community statement (CCS) have been created. These are the directors' certificate as to compliance with the requirements of the legislation, and the statutory declaration clarifying matters for Land Registry. Registers of We With regard to the title registers, the following points should be noted, i. Where the registration does nor involve unit holders, the common parts title and the titles for the units will contain a statement to confirm that the CCS will not be in force during the transitional period. James Driscoll : Published by Estates Gazette 25 Sepetember 2004 |