Following the publication of the Commonhold and Leasehold Reform: Draft Bill and Consultation Paper, on 21st August 2000, the Commonhold Bill Team received just over 100 responses from consultees on the commonhold part of the consultation paper.
The respondents included:
academics such as:
Professor David Clarke of the University of Bristol
Professor James Driscoll of Southbank University
Letitia Crabb of the University of Reading.
professional bodies such as:
the British Property Federation
the Royal Institute of Chartered Surveyors
Association of Residential Managing Agents
the Law Society
the Council of Mortgage Lenders
the Country Landowners Association
leasehold interest groups such as:
the Leasehold Enfranchisement Association
the Coalition for the Abolition of Residential Leasehold
legal practitioners and solicitors firms such as:
Stephenson Harwood
Dechert
Trowers & Hamlins
Clifford Chance
local authorities such as:
Waverley Borough Council
Oldham Metropolitan Council
The above is not an exhaustive list but mentions a sample of those who contributed. All contributions have been carefully considered and have been valuable during the consultation process.
A summary of the responses to some of the questions that were asked in the consultation paper is enclosed in the table.
Sample of responses and comments on the Draft Commonhold and Leasehold Reform Bill
» Conversion Direct from Long Leasehold
» Ownership of Units by the Commonhold
Association
» Commonhold Association as Company Limited
by Guarantee
» Charging of the Common Parts
» Termination
» Insolvency
» Rectification
» Leases out of Residential Commonhold
» Commercial Commonhold
» Relations between Commonhold Associations
» HM Land Registry
» Commonhold based on Leasehold Land
» Reserve Funds
» Dispute Resolution
» Miscellaneous
» Conclusion
CONVERSION DIRECT FROM LONG LEASEHOLD
(Consultation Paper 2.2)
Conversion should be allowed on the basis of simple majority support and any dissenting minority interest should be obliged to convince a court or a tribunal. To allow any individual or minorities to veto an application to convert to commonhold without justification would not in my opinion comply with the Convention on Human Rights.
The 100% qualification for creation of commonholds is unrealistic, 50% and above should be required and no more.
Every effort must be made to explore ways of making conversion from residential long leasehold to commonhold easier. The present proposals offer benefits to everyone except current long leaseholders. It would be politic to show some flexibility if it is possible. However, there are ways to ensure there is at least some amelioration of the absolute 100% position adopted in the Bill. First a provision to allow conversion without the consent of any mortgagee or chargee of any long leasehold flat contained in a block which converts into a commonhold. Such a provision has a precedent under section 58(4) of the Leasehold Reform, Housing and Urban Development Act 1993.
Secondly, where a block of flats is entirely let on long leases and the freehold is held on behalf of the leaseholders, then mandatory conversion should be possible. (This should only apply where the residential occupiers have 125 years remaining on their lease, and where there has been collective enfranchisement). There seems to be no reason why the law should not provide that a small minority of uncooperative leaseholder(s) should be forced to accept a commonhold unit in substitution. Their property interest would be better and it will guarantee them a say and vote in the commonhold association (commonhold association) even if they are currently outside the group of tenants who took part in the collective enfranchisement and secured the freehold.
The final alternative is to allow conversion while retaining leaseholds and permit a requisite majority to convert to commonhold while the minority who do not wish to convert retain their leaseholds or tenancies. Again, it would only be permissible where all the would-be commonhold units are currently subject to long leases. The commonhold could be set up, by a requisite majority of leaseholder and the freeholder, leaving the commonhold association as the lessor of any remaining long leases but with provision for those remaining leaseholders to apply to covert the lease into a commonhold unit at a later stage. Provided this was restricted to a small minority, it could be made to work
It will be practically impossible for residents to get 100% agreement of all flat owners and that of the freeholder.
Very few schemes will be able to convert on the 100% term. Commonholds would be far more widely used were this purity of concept to be diluted. Instead it should be possible to convert a block where almost all the leaseholders agree. Any leaseholder with a lease exceeding 90 years should be able to give the consent without involving the landlord. In short, the conversion requirements are too tough.
Conversion from leasehold management company through right to manage company and collective enfranchisement company to a commonhold association is not well thought through. There needs to be a single company throughout this process. The progression within a management scheme needs to be simplified.
It will be very difficult for existing leaseholder to transfer to commonhold ownership. The 100% agreement will be impossible to achieve in the vast majority of cases.
It is disappointing that the Bill provides no simple mechanism for conversion of existing resident owned and managed blocks to commonhold, without the agreement of every single leaseholder. It will be impossible to obtain the agreement of 100%. Commonhold may become discredited before it has even had a chance to prove itself since most substantial and experienced resident owned blocks will be prevented from adopting commonhold.
Needing 100% support of all leaseholders to enable conversion to take place is considered impossible. Commonhold will only be ideal for new developments of flats.
It is highly unlikely that consent could be obtained from 100% of the leaseholders, instead a formula should be arrived at to enable the will of a majority of more than 50% of the leaseholder to prevail.
I would favour allowing a specified majority (possibly 80%) of leaseholders that are in favour of a conversion to apply to the court for the minority vote to be dispensed with.
The draft proposals for commonhold will make no improvement to the situation of leaseholders because of the 100% agreement to avoid any mixture of tenure. We do not accept this as sufficient reason for the refusal to consider any proposals for transitional arrangements.
Our experience is that achieving 100% agreement between leaseholders can be difficult and therefore many enfranchised blocks will be barred from conversion.
The procedure for converting an existing development to commonhold is too important to be left to future regulations. If it is felt undesirable to include a skeleton of it in the bill, then the draft regulations should be published now.
Should there not be a residual power to apply to the court to dispense with any consent where the landlord or leaseholder has proved to be untraceable?
It may be worth giving power to commercial leaseholders, where there are long leasehold interests at a peppercorn rent, to convert to commonhold. Some existing schemes where buildings have been let on 999-year leases might prefer the commonhold pattern.
We endorse the Government's proposals regarding the conversion to commonhold from residential long leaseholds.
The 100% consent vote requires revision. This is an impractical and effectively impossible stipulation. Further consideration should be given to the concept of 'qualified unanimity' according to which, if a positive vote was obtained by for example 80% of unit holders, then the non-vote/opposition could be overturned by a court or tribunal decision.
We agree that where a lender has granted a mortgage over a leasehold property, then the lenders consent should be obtained where the unit holders want to convert to commonhold.
It is vital for any transfer to commonhold to be entirely with the consent of those who have an interest in the property.
The requirement for the 100% consent will be the most disappointing part of the Bill for leaseholders. However, given that the Bill contains a comprehensive package to tackle the main grievances of leaseholders - poor management and a wasting asset - we think that the requirement for 100% consent is fair, sensible and justified. There is a strong case for keeping the new tenure completely free from the problems associated with leasehold and it would be unfair to force a minority of leaseholders into a new form of tenure that they had not considered when they acquired their interest.
If the enfranchised leaseholders are prepared "to allow the non-participants in for nothing" then they should be able to insist upon conversion provided 75% or 80% support conversion.
It will be very difficult for existing leaseholders to transfer to commonhold ownership. The 100% consent requirement will be an impossible feat in most blocks.
Disallowing the commonhold association to own units within a commonhold reduces the flexibility of the system.
The reasons stated for not allowing the commonhold association to acquire units (page 88 3.2 of the Consultation paper) should not be a reason to prohibit the owning of units by the association. It is suggested that if an association was allowed to own units, then as a safeguard, the voting rights attached to that unit should be suspended while it is owned.
A company limited by shares can, by acquiring it's own shares, become a member of itself. Of the problems to which such acquisitions may give rise, distortion in voting is the only one likely to be of serious significance in relation to guarantee companies. This could easily be dealt with by disenfranchising the unit while the commonhold association holds it.
In order to prevent the problem of a commonhold association buying a unit at below market price it may be preferable to prohibit the acquisition of a unit by the commonhold association.
Ownership of units by the commonhold association should not be possible.
The risk that this section seeks to avoid is greatly exaggerated. However, if this were a genuine concern then the most effective way to avoid it would be to limit the association's right to exercise the votes on the units that it holds.
Commonhold associations should be permitted to own units. The example given in the consultation paper is extreme. If there is concern about a group controlling the votes of the association-owned units, the statute could provide that the association-owned units do not have a vote.
The association should also be able to purchase land to add to the common parts without requiring a unanimous vote. Otherwise requiring a unanimous vote will in essence mean that the action is prohibited. There may also be times when it is reasonable for the association to purchase additional common parts and more than a simple majority should be required to purchase them, not a unanimous vote. It would be best to permit the developers to identify the requisite percentage in the commonhold community statement or the statute can provide that the documents may not set a threshold lower than a specified percentage such as 70%.
The Bill provides the commonhold association may only transfer common parts if there is a unanimous vote, again experience shows that this is impossible especially when there are absentee owners. Instead a super-majority could be required or the commonhold community statement could determine the percentage required, with statute or Regulations creating a minimum threshold.
A commonhold association should not have power to trade etc. but only to do those things ancillary to acting to manage, to secure collective enfranchisement and to act as a commonhold association.
Permitting unrestricted ownership of units by the commonhold association is not considered to be a great risk. However, rather than a blanket prohibition on the owning of units, I would suggest that an association is not permitted to own any unit where there are 5 units or less, and not more than 20% of the units in any other case.
In the case of residential premises a prohibition on ownership of commonhold units by the commonhold association is desirable. The dangers identified in the consultation paper are real, and if the commonhold association has the power to own units this can be readily manipulated.
Not to allow the commonhold association to own units means that there can be no forfeiture no matter how poor the relationship with an individual unit-holder may become. The Bill's solution is a charging order, but would a charging order survive the unit holder's insolvency? The existing regime gives the community the security that default can be visited with a solution which means that a chargee or trustee in bankruptcy will meet the outstanding obligations in order to protect the underlying security. If a charging order is postponed to a first charge then the first chargee will not assist. Perhaps the question of the priority of charges in such circumstances could be addressed and dealt with specifically in the legislation or Regulations.
We believe that every protection should be offered to the unit holders and can see no reason why the commonhold association should need to be able to buy the units. The concept of caretaker flats forming part of the common parts, as long as this is clearly covered in the commonhold community statement appears to be the solution.
The stated risk is unlikely but possible. The suggested solution would avoid the problem only by preventing unscrupulous people from using the commonhold association itself as a vehicle for abuse. However, abuse might occur by other means, outside the commonhold association. The solution would not bring difficulties because of the designation of land as exclusive use of common parts.
If the commonhold association is not permitted to own units - for example- where a unit occupied by a resident caretaker is designated as an exclusive use common part, it would seem to be that no-one would be responsible for payment of the commonhold assessment in respect of that unit. It is unclear whether there is a real risk of a small group gaining control of a development if the commonhold association is not allowed to own units.
There may be risks if commonhold associations are permitted to own units, but it is not possible to legislate in these circumstances. While the suggested solution might prevent one avenue of domination it is very unlikely to prevent it by other means. If a situation does arise where a commonhold association forces an individual or others to take a course of action which is clearly unfair, or against the rules of the company, then that individual already has recourse to law. Consequently we suggest that such a clause might be inoperable.
We agree that legislation should contain safeguards to avoid the possibility of the development being taken over by a minority. There is more than one way of preventing minority take-over. One alternative could be to disregard the votes in respect of shares owned by the commonhold association. This would not prevent units being sold onto the director's cronies but it would make it more difficult. One disadvantage of prohibiting the commonhold association from owning units is that it will prevent the association from raising finance through short-term letting.
I do not feel that the risk of abuse is high in commonhold associations owning units, but it might be preferable to retain this restriction until one sees how commonhold begins to work in practice, and then decide whether the restriction unduly hampers the working of the commonhold associations.
A more flexible solution might be to allow commonhold association ownership of units but deprive such units of voting rights.
The commonhold association should not be permitted to own individual units other than the flat of a person who provides facilities to a majority of the residents, for example a caretaker or warden. This should comprise no more than a specified proportion of the building.
The ability of the commonhold association to own units should be restricted. On the other hand, provided that the units were acquired for proper purposes (i.e. for the benefit of the unit holders as a whole) then a restrictive approach could make commonhold developments unattractive.
With commercial commonholds there should be the ability of a commonhold association to own units which have a community use (e.g. conference and meeting rooms or offices providing administrative or advice services to unit holders). In the case of residential units it could be beneficial for the association to own units such as warden accommodation or units which could be used for social functions for the residents, if all units owned by the association were common parts and not registered as a unit.
The risk seems small but real. Whatever system is put in place it is likely to be circumvented by really determined unscrupulous individuals.
A corporate structure is appropriate for all large flat management operations. However, there should be a distinct form of corporate entity recognised by English law, called a flat management company. There would be a standard short form of memorandum stating that the purpose of the company is management of a given flat development and this should, by statutory instrument be amplified to cover all of these activities, but exclude pure trading. There would need to be a flat constitution that could incorporate both the conveyancing aspects and the corporate constitution. The old commonhold association was a better model than the current company by guarantee.
The chosen form of governance, company law, is too complex for flat management in most cases.
While we are content with the proposals of using a company limited by guarantee as the vehicle, care will be needed so that the members are not being misled that their liability is just £1.00.
We have reservations about using companies limited by guarantee as the legal framework for commonhold association, these relate to two points:
The need to make returns to Companies House and
The limitation of liability.
However, these reservations can be addressed by modifying the rules applicable to companies used as commonhold associations. The need to file returns at Companies House should be reduced to an absolute minimum and the duties should not include filing an annual return. It is important that the association's members should be fully informed about their affairs, but there is no need for the information to be publicly available.
Limited liability would provide unnecessary protection for unit owners and would also inhibit the satisfactory working of commonholds. The solution seems to lie in a modified form of limitation of liability. There would need to be three stages:
Primary liability would be undertaken by the commonhold association, which would contract with the third party.
Each unit holder would be liable to contribute his share of the cost. However, to meet a default, solvent unit owners would also be liable to contribute their stated shares to the shortfall.
There then needs to be a mechanism to allow third parties to penetrate the screen of limited liability in order to enforce these payments.
The commonhold association as a private company limited by guarantee seems preferable.
It is strange that the Bill embraces the company limited by guarantee rather than the company limited by shares or some modification of it. The company limited by guarantee is an area of company law that is undeveloped compared with the company limited by shares, and it is difficult to establish how company law applies to it.
The chosen form of governance for the commonhold association, which is company law, is far too complex for flat management. No other country with a successful commonhold system relies on company law for this purpose.
It has been stated that borrowing security of the common parts may lead to difficulties, and therefore suggests that there should be a better form of financing or a new Government approved system whereby the unit owners all guarantee the loan.
Do not see how this can arise, as the common parts do not constitute a saleable asset.
The association should be permitted to borrow money. Lenders may lend money on common parts such as a vacant piece of land. The Bill could state that mortgaging of the common parts is permitted unless governing documents prohibit it, and let the commonhold community statement determine whether or not mortgaging will be permitted in a particular commonhold community.
We are opposed to allowing charging of the common parts. There is nothing to prevent a commonhold association selling off part of the common parts if there is agreement and the integrity of the commonhold remains. There is equally nothing to prevent the commonhold association borrowing without security. If a lender considers the service charges sufficient to cover the loan, funds will be available. Permitting charging of sections of the common parts ought not to change the decision of the commonhold association to borrow nor the decision of the lender to lend. But there is a risk of the prospect of an enforced sale of part of the commonhold, and this is undesirable. It is doubtful whether lenders will view the security of common parts with much enthusiasm in any event.
If charging of common parts was permitted then it is essential to specify in Regulations that certain common parts may not be charged and that no charge can be created where to remove the common part would inevitably lead to termination of the commonhold. If charging were permitted then a high hurdle of consent should be required, possibly unanimity.
If a commonhold association is prohibited from mortgaging any part of the land comprised in the common parts or using land in any other way as security for the payment of any money, banks would be unlikely to lend to a commonhold association if additional funds were required to carry out major works. This will therefore necessitate the commonhold association to ensure that reserve funds are established and properly administered to ensure the replacement of major assets comprising the common parts.
We would suggest that some form of security for borrowing should be available to a commonhold association. It is difficult to see that a charge over, for e.g., a stairwell would be usable - it would be difficult to value and impossible to realise in the event of default. At present, a bank can lend to the freeholder of a block of flats on two factors - the future stream of ground rent and service charges receivable, and the realisable value of the freehold as a separate title. If the latter of these is unavailable in commonhold, a way of charging the former should be provided.
We suggest that this should take the form of creating a charge over a specific levy on the unit-holders, allowing the lender to enforce the levy against individual unit-holders if necessary. This would provide a way to allow major work to be financed effectively by allowing a reserve fund to borrow against its future subscriptions.
Institutional lenders must have faith in the value of a commonhold unit as a security. In this regard clause 16 of the Bill is a problem, it cannot be necessary for the commonhold association to be required to join in a charge of a unit or consent to it being charged. It seems essential that a unit holder should be free to mortgage his home in the same way as every other householder. This provision can easily be amended to provide that there is no consent required for standard forms of charge.
Lenders will not accept as security a unit in a development that the members can terminate at will, unless their right to recover their security is made explicit.
If charging is to be allowed it must be subject to restrictions that will prevent areas of the common parts from falling into the hands of parties having no previous connection with the owners of the commonhold units. This could be achieved by placing a prohibition on charges over structural parts of the building. Or limiting the rights of the mortgagee to drawing on the income stream from service charge payments, in the event of default. Thought will need to be given to a limit on the part of the income stream which can be taken as security by the mortgagee. We think it should be the cost of funding element in the service charge that is available to the mortgagee. We see this as an important safeguard against reckless or unscrupulous leadership of the commonhold association.
A charge of any area of the common parts may lead to that area vesting in a third party. If the area were essential to the functioning of the commonhold, this would be unacceptable. Even if it is not essential to the functioning of the commonhold, outsider control of it may still be unacceptable to some unit owners: those in the vicinity may be detrimentally affected by a third party use, and other unit owners may feel that they have been deprived of a facility. For these reasons the prohibition on charges should extend to the whole of the common parts. This would have the added advantage of making it unnecessary to distinguish, in Regulations and in the commonhold community statement, between essential and non-essential common parts. It is considered that this distinction would not be easy to make and could be a focus for disputes between unit owners and could put off some buyers who are primarily interested in desirable but non-essential facilities. Those supplying goods or services or advancing money to the commonhold association, and seeking security, should consider title retention, specifying payment in advance or in stages, personal guarantees, trust accounts or floating charges of the income stream.
If total prohibition were considered to be too negative an approach, the alternative would be to require the unanimous consent of the unit owners. This procedure could be employed to allow the charging of any part of the common parts, leaving it to unit owners to take the consequences of possibly alienating essential or desirable facilities. This approach too would make it unnecessary to distinguish between the essential and non- essential facilities in the legislation.
The commonhold association should be able to borrow funds for the purposes in its commonhold community statement. However, we do not feel that any commonhold association, in residential commonhold, should be able to charge any part of the common parts to secure such borrowing. But we would not wish to see commonhold being rigid, rather it should be flexible to suit the nature and the intentions of the unit owners, and they can make the decision for themselves. The restriction on the charging of the common parts could be more particularised to the common parts that form part of the building(s) containing the units, but leave the remaining parts capable of being the subject of a charge, provided all the unit owners agreed.
If a residential commonhold is to be allowed to charge its common parts then the protection required is a decision to be taken by a large majority of the unit owners, rather than it being left to the Board of Directors of the commonhold association.
At the moment a lender would be unlikely to lend against common parts if that were all that were owned by a reversionary company. Therefore it would seem to be no hardship for there to be a prohibition. If borrowing were permitted in respect of 'non- essential' common parts then it is suggested that this could only be done if the commonhold community statement referred to it as a future possibility. It could also be a condition of the statement that if it was to be charged then a 75% majority might be necessary before it were charged.
It is questionable whether the commonhold's interest in the common parts will be an acceptable security - the company itself will have no value and nor in reality will the common parts (in most cases). Nonetheless, the power to charge should be given to the association. The alternative is to force either all the members to give personal guarantees for loans, or to make loans impossible. Perhaps a suitable safeguard would be to require an 80% majority in favour of giving the security.
There should be a provision to the effect that no charge may be created or subsist over any common part, the removal of which from the commonhold land would, in the event of foreclosure, in itself lead to termination. In addition there should be other protections which unit-holders should have against foolish or unscrupulous leadership of a commonhold association, such as requiring unanimity or, say, an 80% majority for a decision to borrow on the security of the common parts.
It should be made clear that the commonhold association would be able to borrow on the strength of future service charge income, if lender were willing to accept this as security. It should be left to the market to decide which common parts may not be charged. However, there should be a requirement in legislation that any lender taking possession of common parts as a result of foreclosure will be subject to the rules of the commonhold.
A charge should not lead to the removal of any common part from the commonhold; nor should the realisation of any security charged.
We do not favour giving commonhold associations the ability to mortgage the common parts of the commonhold. Firstly, it is inherently undesirable, because it is likely to lead to serious misunderstandings that undermine the purpose and value of the commonhold. Secondly, it should not be necessary.
The enforcement of any charge should not interfere with access rights or to the servicing of the unit. It would be desirable, therefore, to define a minimum area of common parts which may not be subject to security. Such common parts could be specified in the original commonhold community statement - a simple approach would be to specify that no charge could be taken over the original common parts and these would need to be registered at the land registry.
Any security granted over the common parts will diminish the value of the individual units, and it would be inequitable to allow the value of a unit to fall as a result of a decision of the commonhold association, or even a majority of the unit holders. It is believed that the consent of all of the unit owners should be obtained before any security is granted over the common parts.
We are in favour of the right for commonhold associations to borrow on the security of part of the common parts in certain cases, for example where those common parts might be surplus land and therefore not critical to the commonhold association. However we doubt whether it would be appropriate or even possible for associations to mortgage common parts where these were made up of lifts, stairways or other such areas central to the running of the commonhold. We therefore recommend that the phrase 'common parts' should be more clearly defined and specified.
We agree that there should be provision to the effect that no charge may be created or subsist over any common part, the removal of which from the commonhold land would in itself lead to termination.
Not all commonhold associations should be able to raise funds by borrowing on the security of the common parts. In practice, an association might find it very difficult to find a lender who was willing to lend on the security of the common parts if these consisted of mainly halls, landing and stairs. Such parts could prove to be difficult to value and subsequent enforcement could adversely effect the unit holder's enjoyment of their homes and also their value. We recognise that some leasehold developments might have extensive grounds or other outbuildings that could provide adequate security for loan finance. However, this position is unlikely to be the norm. But with new developments in the future, the potential for raising private finance at a later stage could be factored in from the outset. We recognise that associations will want to raise private finances but simply allowing such associations to charge all common parts will not necessarily represent attractive security for lenders.
If associations want to raise private finances then this might need to be on an unsecured basis with loan repayments being met via an additional service charge income stream.
Commonhold associations will need the power to borrow in the same way as any other company if they are to ensure that it operates effectively. We suggest there is a crucial need to foster and develop a more radical approach to the issue of borrowing. The collective operation of the company borrowing against income stream would be highly desirable, even essential. This would still leave individual company members able to use their own commonhold units as collateral for personal loans.
It should be left to the market to decide whether the Government should specify in Regulations any parts of the common parts that may not be charged. And it is also for the market to resolve whether there should be a provision that no charge be created or subsist over any common part the removal of which from the commonhold land would, in the event of foreclosure, in itself lead to termination. However, there may be a case for ensuring that there is sufficient education and training of borrowing parties to ensure they understand the implications of potential default.
We suggest that no more than a simple majority is required to operate the association.
We agree that there should be a general prohibition on the charging of common parts and charging should only be allowed in cases prescribed by Regulations. We would support limited charging to provide essential repairs and improvements but it should not be permitted to bail out poor management by the commonhold association. It would be sensible to limit charging to a proportion of the equity in the common parts (say 80%) so that in the case of default, the association maintains some ownership and the integrity of the commonhold is not lost.
It is desirable that commonhold associations should be able to borrow money. However, rather than looking at the highly artificial asset of the common parts, the security that can be offered by the commonhold is surely the income stream offered by the commonhold assessment. If raising money on the income stream is to be a workable proposition then the commonhold regulations will have to allow for the commonhold association to recover both the interest and the capital elements of the borrowing from the unit owners via the commonhold assessment. The act will have to allow commonhold associations to grant some form of floating charge to lenders which would enable the lender, if the loan is not repaid, to administer the commonhold association in the place of the directors and to levy the annual commonhold assessment until the loan was paid.
The Bill should therefore; prohibit charging of the common parts, allow the commonhold association to grant a floating charge over its undertakings, specifically allow for any loan to be repaid via the commonhold assessment and make provision for the lender to take control of the commonhold association in the event of the association being unable or unwilling to collect the necessary levies.
It is considered that at least 90% of the members of the commonhold association should have to confirm any decision to borrow on the security of the common parts. There may be occasions on which the commonhold association would need to be able to charge the common parts to borrow but borrowing on the security of part of the common parts may not be a realistic proposition unless it was a separate, self-contained element.
We are not convinced that in the majority of cases, the common parts would provide any significant valuable security for a lender. In any event we would support a cautious approach to allowing an association to charge the common parts. Perhaps Regulations should restrict borrowing to specified categories of lending institutions and to restrict the borrowing to the financing of substantial works to the common parts where hardship would be caused to the unit holders if they were called upon to provide the finance themselves. We agree that there should be at least an 80% majority for a decision of the association to borrow. If these safeguards were in place we think the parts of the common parts which may not be charged can be left to the market rather than attempt to specify them in Regulations.
We do not see any justification for not allowing a commonhold association to borrow using the common parts as security. Whilst in the majority of cases common parts will be relatively "worthless", in some instances they may be worth substantial amounts of money (e.g. gym, land etc.) and as a consequence make substantial finance opportunities available. It may be wise to require a resolution of the association in a general meeting before allowing common parts to be used, for security purposes.
Having made a decision to allow the common parts to be charged then it makes sense to let the market decide whether the common parts have value as security.
The Bill does nothing explicit to protect the interests of secured creditors in the case of voluntary termination.
Where the commonhold scheme has been registered by two developers but one or more of them wish to withdraw then it is suggested that an additional sub-clause be provided that allows the parties to terminate the scheme provided that a third party has not been registered as the proprietor of one of the units. This would be a more simple procedure separate from the Bill's other termination provisions.
It seems unnecessary where none of the units have been acquired by a third party to apply the parts of the commonhold community statement that concern termination. Instead it is suggested that clause 8(b) be used so far as termination in these circumstances is concerned, leaving it to the contract between the developers to address termination. In the interests of consumer protection consideration should be given to a prescribed 'development contract' between developer and unit owner, being applicable, where units are purchased whilst development is ongoing. This is the method adopted in New South Wales. Such a requirement in the Bill would enable developers to finish the scheme without hindrance from unit owners of the first stage of the development or from the commonhold association. At the same time it would provide protection to unit owners, as they would be aware of what must be built and what must be varied. The contract could be one of the items required for registration at the Land Registry, allowing prospective purchasers to inspect the contract and reflect on the developer's intentions before purchasing.
Generally content with how termination should occur, however one change is suggested. Where the termination resolution is by majority vote, Clause 38 appears to suggest that the court has no discretion over whether or not to proceed with the termination but is confined to deciding the terms and conditions of the termination. This is too narrow. The minority needs greater protection. The court should have clear power and discretion not to permit a termination to proceed at all. The minority ought to be able to argue against the decision to terminate before an independent forum.
We are concerned about the provisions to allow a commonhold to be brought to an end. As lenders we are anxious that any procedure to deal with an insolvent commonhold association protects the position of a chargeholder who has lent against the association's income or levy rights. If this is not done, the commonhold will be unable to borrow funds.
If two developers have pooled their land to create a commonhold association then if they have sold one or more units it would seem unfair to the purchaser of that unit that the commonhold could be unscrambled without the consent of that person or without suitable safeguards.
We note that a resolution for termination requires 80% of its members prior to applying to a court for an order as to terms and condition for the termination of commonhold. This does not seem equitable notwithstanding the requirement of applying to the court for an order to determine the terms and conditions, followed by a further voting process which then merely requires more than 50% majority to be taken by members of the association.
A minimum majority of 80% is specified for a termination resolution to be passed. We are concerned that there is an inconsistency here with the 100% consent vote for conversion to commonhold.
There should be power to make Regulations to address the questions relating to termination, as unforeseen difficulties are almost certain to come to light. Consent should have to be obtained, but is should be possible for a majority of those involved to be able to apply to the court to resolve cases where consent is withheld and there are proper reasons why consent should be granted.
It seems that the voluntary termination of a commonhold association is a procedure not unlike a member's voluntary liquidation. It would seem appropriate therefore that a declaration of solvency should be filed with the application to the Registrar of the Companies. This declaration would be a sworn document where the officers of the association swear that all of the liabilities of the association will be met in full within a period of 12 months.
There is more than one definition of "unable to pay debts". We see no reason why the Insolvency Act definition of insolvency is any less relevant for commonhold associations than normal trading organisations, irrespective of its ability to raise money through the levy. Organisations doing business with commonhold associations are entitled to the same protection as they would have in any other situation.
The term "phoenix" has mainly negative connotations in insolvency. Phoenix companies are seen as a vehicle for unscrupulous directors to avoid their liabilities. Clearly, this is not the case here. For this reason, it would be preferable to change the name to something else, such as "successor association".
There is no need to delay the winding up of the old association as long as the new association has been created and the running passed to it. Any post-transfer debts will be owed to the new association and pre-transfer debts will be collectable by the liquidator of the new association. What cannot happen is dissolution of the old association until the administration is complete.
The following are responses to the views sought on insolvency:
We see no justification for disapplying any of the definitions of insolvency in respect of commonhold associations. To do so would very likely have the practical effect of denying creditors their right to petition for winding up as firstly, they would not be in a position to know what the asset/liability position is and secondly an association would always be able to fend off an application by playing the "levy on unit holder" card.
Officers of associations will be subject to the same responsibilities as officers of other companies. If the association is live then it will be subject to the company investigation regime as set out in the Companies Acts, ultimately this might include prosecution, disqualification or winding up. If the association has failed then it will be subject to the same degree of scrutiny as any other failed company. In any case, if an association has a duty/right to levy unit holders to cover service charges, then that power will vest in the liquidator of the failed association and he will be able to recover amounts due up to the winding up order date.
The successor association should come into being as soon as possible. We do not see how it would be possible for a unit-holder to decline membership of the new association. The old association does not need specific authority to proceed as that power will vest in the liquidator.
The current law provides all of the necessary safeguards. The disqualification regime seeks to remove officers who are unfit to be involved in management. The court makes that decision after hearing evidence. Any attempt to seek disqualification by other means should not be considered. To seek to make the new association responsible appears to go against the principle of limited liability.
*It is considered appropriate for the reserve fund to be used as an asset of the company in meeting its debts on a petition for winding up at the presentation of the final account. Such funds will vest in the liquidator on winding up and the new association will be required to build up a new reserve fund. It must be open to the association to use such funds.
Permitting the creditor to bring a cause of action on the debt makes more sense than filing an action for insolvency. Owners should be able to be relieved of their share of the debt by paying their proportional share.
The setting up of a "Phoenix Association" is a creative vision which is not worked out in the Bill. If the rights of secure lenders are to be 'shifted' from units in the old commonhold association to units in the new commonhold association then this will have to be made explicit by the legislation. Much work is needed if the provisions for termination and insolvency are to provide a sound vehicle for secured lending.
By allowing the existing insolvency law to apply in the event of a financial disaster the drafts person has created an incomplete model particularly so far as the lender is concerned.
Extra protection should be considered to prevent winding up orders being sought by creditors too quickly. A provision requiring prior warning of a winding up application might be sensible so that an association could have time to call a meeting of unit holders and/or levy an additional service charge to cover the debt.
The following are responses to the six questions asked on p. 93 of the document in relation to insolvency.
Agree with the suggestion that it be limited to the circumstances covered by s. 22 of the Insolvency Act 1986.
Do not believe additional requirements are required to avoid deliberate failure to pay debts.
Concept of a phoenix association is a very good solution, and agrees that it should take immediate effect on the winding up of the old association. Unit holders should be compelled to be members and the old association should have specific power to pursue debts and liabilities.
No specific conditions should be imposed on management of the new association, instead a court should have wide discretion to require changes, disqualify individuals or impose a manager. Debts should not be transferred, except charges on common parts, if these are to be permitted.
Do not think that charges of common parts should be permissible and parts of common parts should not be severed to pay debts.
Do not consider it appropriate that a reserve fund should be considered an asset in winding up. It should pass to the phoenix association.
Why should creditors enjoy additional protection which involves interference with the usual freedom of a company to govern its affairs? In dealing with a management company the trader has the comfort of knowing that the management company is not likely to run up artificial liabilities without covering them and leaving itself exposed to the expense of insolvency and re-emergence as a phoenix company.
A major problem with a phoenix company is if all the unit holders do not become members of the new association. The new association will have to recover all of its expenses from the unit holders and will need the power to do so whether or not the unit holders defaulted under the previous arrangements. Presumably the liquidator of the old association might have a special power to raise levies if the former association had been careless in not covering anticipated expenditure.
It might be preferable to consider imposing special controls from the outset on the original association to encourage effective management including filing all requisite papers at Companies House to avoid having the association struck off. Striking off management companies is, in our experience not uncommon and invariably causes difficulties that can be very costly and time consuming to rectify.
Perhaps the liquidator could be given a special power to raise a levy against former members if the association has been irresponsible.
If the insolvency of a commonhold association terminates the commonhold, there may be a risk that unit holders will be unable to get mortgages. (The Lender's Handbook states at para. 5.10.2 that a residential lease must not contain any provision for forfeiture on the insolvency of the tenant or any superior tenant.) There is support for the requirement of a phoenix association, so that the original association cannot be wound up until the new one is in place with all units transferred. The consent of the unit holder's lenders should probably be required to a transfer to a phoenix association.
In any insolvency, it will be necessary to ensure continuity both of services and to allow the sale/purchase of units within the commonhold. It would therefore seem logical that the phoenix association needs to take effect from the appointment of a liquidator. The presumption is that a unit holder has elected to acquire a commonhold unit and be bound by the commonhold rules. It, therefore, seems to make sense to require members to become members of any phoenix association. We presume any liquidator would already have the right to pursue defaulting members for incomplete performance but if not, then such authority should be granted. A question arises over the liquidator's costs and whether these should be borne by all members, only the members in default, or the amounts due from the creditors?
As one of the most likely reasons for insolvency of a commonhold association is maladministration, there should be safeguards to prevent repetition. Directors may be personally liable or disbarred from holding further directorship in extreme cases. In the circumstances, the court should have the right to enforce a change of directors. In extreme cases, if the members of the commonhold association are unwilling or unable to manage their affairs, consideration should be given to granting the court the right to appoint a manager.
Although there might be circumstances when it may be beneficial for the court to be able to transfer debts to the phoenix association, in such cases the court should also transfer any rights against defaulting members. Otherwise, members who have paid their service charges in full could effectively be liable for the same items of expenditure in both old and the phoenix association.
The definition of insolvency in a commonhold should be limited to when a company is unable to pay its debts, in keeping with s.122 (f) of the Insolvency Act 1986.
There should be a requirement in the legislation for associations to raise adequate service charges to meet their obligations.
It might also be helpful to include a right for an "interested party" (such as a mortgagee or owners of, say, 25% of the total value of the units) to intervene before winding up, take over the functions and preserve the commonhold for an administration period of up to 3 years (extendable on terms by a court order).
We welcome the proposal to create a phoenix association in the event of an association becoming insolvent. It should come into effect immediately on the winding -up order for the old association. It would be impossible to organise if all unit- holders were not required to join. The old association should be given the authority to pursue debts and liabilities, as this would happen in an insolvency situation anyway.
There should be ability to impose conditions on the phoenix association. The unit- owners should be expected to police them once imposed. The courts should be given wide discretionary powers to order anything necessary to ensure that the commonhold works properly, including requiring changes of directors and transferring any of the old association's debts which it deems appropriate onto the phoenix association.
We are not attracted by the suggestion of phoenix association. If an association is in financial difficulties there should be two alternatives. Either there should be an attempt to manage the association out of its position in effect, putting it into administration. If that fails, or is impossible, there should be winding up.
We welcome the approach that any provisions for the insolvency of commonhold associations be based upon existing insolvency and company law.
The inability to pay debts of a commonhold association should be in line with the Insolvency Act definition and a commonhold association may be subject to voluntary liquidation as well as winding up by the court. This means that a commonhold association would need to ensure that it has sufficient funds before entering into any liabilities and the commonhold association will have powers to levy funds and hold reserves. If there is an unforeseen liability which remains unpaid because of a time lag in collecting funds, the most appropriate way to deal with this situation would be through the use of a company voluntary arrangement or administration order. Using different criteria for "inability to pay debts" would be confusing and unfair to creditors.
The liquidation of a commonhold association should be avoided but with out prejudicing the interests of those dealing with the commonhold association. An additional safeguard would be to require the court to be satisfied that liquidation is the only option, this could be in the form of a statement from a licensed insolvency practitioner.
If commonhold associations are going to be permitted to trade there may be a risk of financial failure especially if carried out by those not experienced in business.
The liquidator should be empowered to levy and collect service charges and any shortfall, as part of the service charges. Any shortfall suffered by the commonhold association could be added to the commonhold assessment items to be included in the commonhold community statement and listed in clause 31. The shortfall should include the costs and expenses of the winding up. We believe that the guarantee by each of the members should deal with the shortfall of the commonhold association in the event of winding up and should reflect the differing contributions that would be made by each member in proportion to their agreed contributions.
It does need to be highlighted that a consequence of the proposed scheme is that unit holders would face unlimited liability as a consequence of the actions of the management of the commonhold association. We consider that the legislation should provide that purchasers of units should be made aware of their potential liability for the debts of the commonhold association, through the service charge and any shortfall in liquidation.
We see no objection to the formation of a phoenix association. The phoenix association will need to come into existence before the completion of the winding up of the old association. The timing should be left to the discretion of the liquidator. During the liquidation the common parts will need to be maintained in the normal way and costs will be incurred. It is intended that these costs be met from the new association and this would seem to require that all unit holders become members of the new association, even though some may not be able to pay. One solution may be for the liquidator to have a statutory charge on each of the units in order to effect a speedy sale in the case of defaulting unit holders.
Insolvency should be defined as a condition arrived at after all possible options and avenues for the commonhold association to meet its liabilities have been fully explored and exhausted. There should be no easy route to insolvency. We agree that additional mechanisms are required to prevent commonhold associations from seeking insolvency in order to avoid payment of debts.
Phoenix associations should take effect when the original commonhold association has ceased to exist. We agree that membership of the new association should be an obligation of unit-holdership and feel they should have obligations and duties towards other members. We also agree that the old association is given the right to pursue debts and liabilities.
To ensure that the commonhold does not become insolvent, it is essential that charging orders be actively enforced.
We agree that a court should wind up a commonhold association either when it is unable to pay its debts or when the court considers it just and equitable to do so. And the court should have discretion to order a phoenix association to be created to allow the continuation of the commonhold where this is feasible. However, any reserve fund should be transferred to the phoenix association.
The position of lenders is somewhat unclear. Will they be protected on winding up by the standard insolvency legislation without any special insolvency regime? There needs to be a statutory obligation on the liquidator to secure the best price reasonably obtainable upon sale of any unit.
The interaction between responsibilities of both old association and the phoenix association appears complex. It is possible that if the defaulting unit holder doesn't pay up and the unit takes a while to sell then both associations could continue in tandem for some time. If the lender was selling in possession, this might not present an attractive situation for a prospective purchaser.
It is suggested that existing legislation is adequate to deal with any situation of insolvency, which might arise. In the event that insolvency arises then normal company law should apply. The company is liable, to its limits, and the individuals in the company will have their own liability.
We suggest that further mechanisms are not required to prevent commonhold associations from perpetrating insolvency in order to avoid payment of debts, as debts could become the responsibility of individual members of the association and existing legislation will apply in the same way as if an individual defaulted on a mortgage or on other debts.
We are not convinced that the creation of phoenix companies is either practical or desirable and may serve to confuse the situation further in the event.
We agree with the proposals to deal with insolvency but believe that it should be limited to the situation where the commonhold association is unable to pay its debts. In cases of severe financial difficulties, an insolvency practitioner should be able to take over the management functions of the directors for so long a period as necessary to put the association back on the right tracks. The courts should also have the powers to intervene in the management of the phoenix association and should have the discretion to replace directors.
It would seem appropriate that a commonhold association should be declared insolvent in more restricted circumstances than would a trading company, as it would have the option of making calls upon its members as contributors to the commonhold assessment.
There should be the option of some equivalent to the "commonhold administrator" being appointed either by the holder of a floating charge over the undertaking or by having such an administrator appointed by the court. Such an administrator would be able to levy and collect the commonhold assessments. Only if it was clearly going to prove impossible to put the finances of the commonhold on a firm foundation should insolvency be considered.
The provisions for phoenix associations seem to get the balance about right. However the Bill should strengthen the hand of the commonhold association in collecting its assessments.
There should be controls to prevent the previous management continuing under the guise of a new company, otherwise creditors will not have confidence in the system. It may be necessary for parts of the common part to be made available and it would be practical and reasonable for them to be sold. Interested parties such as leaseholders or creditors should be able to apply to the court if a phoenix association continues with a poor pattern of management.
The definition of insolvency should be limited to when a company is unable to pay its debts as set out in s. 122(f) of the Insolvency Act 1986. Additional mechanisms should be introduced to prevent associations from perpetrating insolvency in order to avoid payment of debts and those making the relevant decision for the association should be personally liable if it can be shown they either negligently or unreasonably failed to levy high enough charges against its members or failed to make additional assessments.
It should be an obligation for all unit holders to become members of the phoenix association and either the old or the new association should be given specific authority to pursue debts against defaulting members and liabilities of a service provider for failure to perform.
We would favour the court being given the discretion to require changes in the directors where it is evident that such directors had acted incompetently. If it is evident that the insolvency of the old association had been caused by attempting to provide an expensive but non-essential service, the new association should be prevented from providing such service unless the association had sufficient funding from the unit holders before providing the service.
We are in favour of the court being able to order that an old association's debts should be transferred to the phoenix association, except for any debts due to a unit holder or to a company of which any unit holder is a director or senior officer.
We think parts of the common parts should only be available to be sold to pay the debts if such sale would not prevent a reasonable enjoyment of a unit.
If normal insolvency law is to be followed there is no need for a commonhold association to be insolvent before it can be wound up by the court, as being insolvent is not a prerequisite for a winding up by the court under s.122 (f) of the Insolvency Act 1986. In the event of a winding-up order being made, levies which have been made by the directors or an administrator before the commencement of winding-up, but which have not been satisfied, will be debts that the liquidator will collect from the defaulting unit owner. If there has been a failure to make levies prior to the winding up the question would then arise as to whether the liquidator would have levy-making power in the course of the winding-up. He has power under s.167 and Pt II para 5 of Schedule 4 of the Insolvency Act 1986, with the sanction of the court, to carry on the business of the company so far as may be necessary for its beneficial winding up. This may then enable him to make levies to cover debts to third parties incurred before commencement of winding up. Members of a company limited by guarantee do not normally expect to pay more than they have guaranteed in the event of a winding -up. However this difficulty may be overcome by recognition that members have two roles, the membership role and the ownership role, the ownership role carrying separate responsibilities. While as a member of a guarantee company, a unit owner's liability would be limited to £1, as a property owner he would be liable for a fixed proportion of the deficiency. In effect this would be similar to the restricted liability which was a feature of the 1996 Bill. But by insisting that any winding up is preceded by an administration order, and that only the administrator can petition to wind up, this would ensure that this problem did not arise. A provision barring creditors from petitioning for winding up could hardly be said to be following "the basic insolvency regime". Simply restricting the grounds upon which creditors can petition may do less violence to the stated policy.
No additional mechanisms would be required to prevent a commonhold association winding-up to avoid payment of debts.
A phoenix association should take effect when all creditors of the old association have been paid or when the deficiency has been ascertained and accepted by the phoenix association. The creation of a phoenix association should be the result of an order of the court. When such an order is made unit owners qualified to transfer to the phoenix association should be required to do so.
No specific authority is required for the old association to pursue debts and liabilities against defaulting members or incomplete performance by a service provider because the liquidator in a winding-up by the court would have a duty to get in the assets of the company (s. 143 Insolvency Act 1986).
In relation to the transfer of outstanding debts to the phoenix association, one assumes that these would represent a final deficiency in the funds of the old association, such deficiency being the result of non-payment of levies by a proportion of the unit owners. If the deficiency were to be transferred to the phoenix association, it should be satisfied out of the payments of arrears by new owners of the defaulting units and not by the imposition of higher service charges on all unit owners. Loading the cost on all unit owners would be, in effect, unlimited liability but the decision to use a company limited by guarantee would be inconsistent with such a course.
There should be no charges of the common parts, except possibly with the consent of all unit owners. Outside of a winding-up there should be no sale of the common parts without the consent of all unit owners. Debts should be met by levies. On a winding- up the common parts are assets which would, in the normal course of events, have to be sold to meet the claims of creditors. Such a sale would place the viability of any new commonhold at risk. Perhaps the transfer of the common parts to the phoenix, rather than sale could be justified.
There needs to be a safety valve for amending documents. You should permit a specified percentage of the owners to apply to court to amend documents when the commonhold community statement cannot be amended because the amendment provision either does not exist or sets too high a threshold.
There should not be any instances where rectification ought not to be ordered. There should be an overall long stop period. Rectification of commonhold documents could be made retrospective. It would be sensible to have a fall back mechanism. Time limits are properly applicable.
Where consent is required from third parties then it seems inappropriate there should be rectification without their consent. If there is some major defect in the commonhold statement but not all agree then there should be a residual right to apply to the court, similar to the situation where an individual lessee may apply to rectify defective lease.
It should be possible to rectify anything, if it is reasonable to believe that it requires rectification.
The Registrar should be empowered to deal with a registration in error as at present, with the discretion to refer a case to the courts if that was though necessary.
Rectification of commonhold documents should not be retrospective.
A time limit for applications to rectify documents under clause 33 will ensure that there is a degree of certainty and there should be a restriction on the provision's untrammelled use. However, six months would be more appropriate than three.
Where documentation comes to light at a later date there should always be an opportunity to consider rectification of the register in the light of all the circumstances.
There should not be an overall long stop period for applications to rectify or amend the register held at HM Land Registry.
Where there has been an error in registration, applications for rectification of the register should be made to the Registrar at HM Land Registry.
Whether or not rectification should be ordered retrospectively should be at the discretion of the Registrar.
It is considered appropriate that there always be an opportunity to apply to the Registrar for mistakes to be corrected as every case will be different and may have to be adjudicated upon. It is suggested that there be a system for the various parties to reach agreement regarding the resolution of the mistakes and for this to be put to the Registrar for confirmation.
There should be no time limits for applications directed by documents relating to commonhold by individual unit holders, initially, if at all, as it will take a considerable length of time for the parties involved to become familiar with the system and for it be ascertained whether the system is working.
Applications for rectification should be made either to the Registrar or the court, as at present under s. 82 of the Land Registration Act 1925. Rectification could be retrospective provided this does not adversely prejudice an innocent third party.
The time limits proposed for making applications for rectification are appropriate bearing in mind that the court is to be given the power to permit an application which is outside the specified time limits.
It has been suggested that if the majority of members of a commonhold association agree to forbid subletting then this should be the case. However, if subletting is permitted then it has been suggested that the commonhold association should levy a charge on the unit holders who do sublet.
There should be provision for short term subletting, but not for long term subletting.
It is good to allow the association to have a direct cause of action against a short- term tenant who is not complying with the rules. Clause 30(f) permits the Regulations to give this right to the association. Regulations may also wish to provide the owner must be notified of the association's actions, the owner may wish to terminate the tenant for cause.
If the owner is not paying service charges its good to have cause against the tenant, however, it is important to also make it clear that the association has a right of action against the owner. If service charges are collected from the tenant there needs to be a provision permitting the tenant to deduct this amount form the money he owes the landlord. But it may not be wise to give a short-term tenant a cause of action against another short -term tenant or the association without the owner's permission.
Letting of commonhold units should be restricted. Long leases and leases of premium should not be possible. But there should not be any severe restrictions imposed on leases of commonhold units at a market rent or at 'best rents'. In such a case make no restriction except that the lease must not be for more than 21 years. I would urge that the restriction on letting be to 10 years and no less. And any commonhold unit owner who lets his unit for more than, for e.g., 1 year will be required to appoint an agent to attend meetings and vote on his behalf; and in default of such appointment, for the Bill to state that the tenant of the unit will be his agent with power to attend and vote at management meetings. Lettings must be subject to the commonhold community statement and any Regulations applying to the commonhold.
In the case of residential commonhold the length of lettings will need to be restricted. The maximum permitted length of term only needs to fall short of that which, in the market conditions existing from time to time, could expect to be susceptible to the sale of leases at a premium on a ground rent. Whatever period is initially set may need to be changed, preferably by statutory instrument, in the event of a significant shift in market conditions.
We would suggest a max letting period of 7 years for residential property, but on the basis that any letting would potentially contain an option to renew for a further period of up to 7 years. As to the terms of under-letting we would only like to see the following:
A provision prohibiting any breach by the tenant of the requirements and terms of the commonhold community statement.
Payment to be direct from the tenant to the commonhold association in the event of non-payment by the holder of the commonhold unit.
Restrict letting units on anything but short-term leases (except for commercial property).
Any restriction on letting to short term lets will effectively preclude Registered Social Landlords from becoming involved with commonhold developments.
If there is to be sub-letting of units then a percentage restriction should be put on investors who have purchased flats solely to sub-let. However it would be preferable if there was 100% owner occupiers as this would enable us to put an end to greedy investors.
Leases out of residential commonhold should be restricted to a short term (two years) at a rack rent to ensure the continued involvement of the unit owner.
The period for the maximum length of let should be 7 years as this term length coincides with the point where a tenant becomes responsible for repairing the structure and providing services.
Provisions allowing tenants to vote on matters that affect them might be advisable. Additional community regulations and short-term exclusive use agreements and the level of disbursements required for day to day management should be made with the consent of all owners. Landlords should be allowed to retain the right to vote on matters which directly affect their longer-term interest in the building. Very short-term lets such as less than six months could carry no voting rights.
I would advise against restricting the power of a unit holder to grant leases out of residential commonhold. To introduce such restrictions would run contrary to the general spirit and philosophy of outright ownership. It will also have a deleterious effect on the marketability of residential commonholds. This could include a disincentive for investment in flats where the investor wishes to let the flat on short-term tenancy. It is better to leave it to the market to discover whether this is likely to take place on any appreciable scale.
The length of a tenancy from a residential commonhold should be no longer than seven years. It should be required of each unit owner proposing to sub-let, in a residential commonhold, that the unit owner will (a) inform the commonhold association of the subletting, (b) provide the names of the new lessee, (c) ensure that the lessees are given a copy of the commonhold community statement and (d) the unit owner will provide details of where he or his agent can be contacted.
If consent is required then it should not be unreasonably withheld; it should also be implied into each tenancy that the lessee will comply with the commonhold community statement. A commonhold community statement may need to include a covenant that in the event of a breach by the lessee of the commonhold community statement that the commonhold association, having taken a vote, can require the unit owner to enforce the breach.
Where short-term leases are to be granted there should be a provision made relating to a perpetually renewable lease so that s. 145 and schedule 15 to the Law Property Act 1922 will not apply. This would prevent the creation out of commonhold of fixed term leases of 2000 years.
Limiting the owner's freedom to deal with his own property might effect the long- term popularity of the whole concept of this new development. As long as no premium is taken then why should the relationship between the owner and the association be weakened by the grant of a lease? The owner would have sufficient stake to ensure his continuing interest in the affairs of the building.
It is thought that any sub-letting at a rack rent should be no longer than three years.
We would welcome the commonhold community statement setting out and insisting upon any letting agreement including all relevant provisions and requirements as if the tenant were the unit holder. In addition the tenant should be made to register with the commonhold association and consideration could be given to the tenant being directly responsible for the payment of relevant service charges.
As it stands, the proposals to limit the length of residential lettings out of commonhold may jeopardise the willingness of the development industry to adopt the new tenure.
We understand and appreciate the political will to avoid the recreation of residential long leaseholds within commonholds, but this will be achieved by insisting that all leases on residential commonholds must be at a rack (or market) rent, and that no premium can be paid to acquire the tenancy. The current proposal to limit the length of leases is unnecessary, and the suggested limit of a maximum period of five years appears to be arbitrary. If there must be a restriction in lease lengths, it should be set at 7 years. This has logical justification, as it links the limit to the point at which the repairing and insuring obligations transfer from landlord to tenant under the existing legislation.
Any letting must be indefinitely renewable. Surely if a landlord and tenant are happy with each other they should be permitted to continue their relationship as long as they wish?
The tenancy agreement should include an obligation for tenants to abide by the relevant covenants and the rules of the commonhold community statement and be required to be included in any statement by the regulations governing these matters.
We do not believe that short-term tenants should be given the right to sue or enforce obligations against another unit-owner. The action should be taken by one unit- owner against another. This is covered under existing legislation. The tenant should also be entitled to set off any payment made to the association against any sum due to the unit- holder as landlord.
It should be possible to grant commercial leases out of commonhold land as this will be essential to its success in the commercial sector. There should be no additional restrictions on commercial leases granted out of commonholds. It should be for the landlord and the prospective tenant to decide whether or not they wish to avail themselves of the provisions of Part II of the Landlord and Tenant Act 1954.
Leases should be possible for any purpose and there should be no restriction on their length. However, two considerations must be addressed.
The capital value of the units should be retained in the freehold;
A lease of one unit should not be permitted to prejudice the rights of other unit holders to seek termination of the commonhold and to realise the value of their property.
Any lease of a unit granted at a full rack rent should be granted on such terms.
If a commonhold is terminated, it will be necessary for the lease of any individual to come to an end, and if the lease ended before the term date then the tenant should be entitled to compensation.
It should be possible to grant commercial leases out of commonhold units in a commercial development.
The appropriate period for the maximum length of a let should be 3 years with renewal thereafter. We recommend that the special terms to be included in any letting agreement should include a statement that the unit is part of a commonhold and that certain restrictions apply. They should be subject to Regulations governing the contents of the statement.
In practice, where borrowers want to let out their properties then lenders are usually willing to agree where this is for a short period, for e.g. one to three years. However, the success of the Buy to Let scheme needs to be taken into account. If tight time limits are imposed, this could severely curtail the introduction of commonhold for existing properties and make it an unattractive option for developers.
Long leases should not be permitted, however if they are then the maximum length of a single lease must be less then seven years because a longer lease permits the transfer of repairing obligations to the tenants.
A periodic tenancy or a succession of short leases should be without any limit on the actual duration of the occupation, for e.g. a weekly tenancy might last ten years or more and would be acceptable.
The duties expected of an occupant should be included in the terms of the let, if they are not then it would be up to the association member to make other arrangements to ensure that duties are carried out. If there is a failure to do so other members of the commonhold association have their own recourse to law. For the association member who becomes the landlord the obligations of the Landlord and Tenant Act apply, as do the duties to the commonhold association.
Provisions precluding leasing of commonhold to limited circumstances will not encourage investment or enthusiasm for this alternative tenure. We suggest that a commonhold unit could be let on an unlimited number of renewable leases for a maximum period of up to 7 years each.
Letting of commonhold units should be restricted to short -term lets. It would defeat the purpose of commonhold if units could be let on long leases.
The definition of short-term should be restricted to leases that are less than seven years in length.
It is regrettable that there is an absolute provision on any restriction on dispositions of commonhold units. Five years should be the maximum terms of let that is allowed. But the term ought clearly not to be so long as to tempt the granting of leases at a premium.
It should be a requirement of any tenancy agreement that the content of the commonhold community statement and any relevant Regulations should be brought the attention of the tenant so that they are aware of what restrictions they should observe.
It is suggested that the maximum length of a letting should be three years and the commonhold community statement should make provision for this.
In the case of commercial units it should be possible for the owner of the commonhold unit to grant leases in a form approved by the commonhold association. And the development of commonhold out of leasehold tenure in relation to commercial or industrial units should be permitted. It is also suggested that, in such cases, the commonhold association should have the right to purchase the freehold interest prior to the expiration of the leasehold interest.
The maximum length of a let should be 5 years. The commonhold association should have the ability to take effective action against a tenant who is not behaving properly. It is suggested that the lease should be in a form prescribed by the commonhold community statement and should be the subject of the Regulations governing the contents of the statement.
There is likely to be a call for purely commercial developments based on commonhold. However commercial commonholds might differ from residential commonhold in the following areas: there need not be a requirement to produce a prospectus, disposition of part should be possible in a commercial commonhold, there should be no restrictions on the power of a commercial commonholder to lease their unit, commercial commonholds may not require the same degree of disclosure in relation to the development rights as in residential. A balance between the two sets of requirements will need to be struck in mixed-use developments, particularly where the mix is lateral across an estate, the Regulations relating to the management of a commonhold need not be as prescriptive as with residential communities. It may be best to permit these provisions to be varied or waived if thought to be inappropriate. It will be then be for the prospective purchaser of a unit to apply the principle of Caveat emptor.
We agree with the approach to mange the development as a single commonhold with relations between the parts being set down in the commonhold community statement. However it is important to recognise that some developments may wish to manage themselves as a single commonhold. The legislation should be sufficiently flexible to accommodate this, if that is what is desired.
If neighbour commonholds are developed to rely on the existing law to cover the circumstances envisaged, this might not be adequate. It would be useful to be able to create affirmative easements which did not touch or concern the land.
There should be no restriction on the use to which commonhold developments can be put. The demand for mixed-use or purely commercial commonhold schemes will be market-led and may well depend upon the buoyancy and nature of the market from time to time.
Permit a master commonhold association, or permit the creation of a master commonhold association between the residential commonhold and the commercial property that is not held in commonhold. If a master association can be created in this situation, then the law needs to state that affirmative covenants in the association agreements run with the land.
Commercial commonhold should be permitted. The market place in England and Wales can determine the extent to which this arrangement is used.
Mixed-use projects that permit a residential commonhold over commercial area that is not a commonhold also should be permitted. This arrangement is common in the US and Australia. As there is a market for combined residential and commercial projects it would be a mistake to prohibit this type of commonhold.
Commonhold tenure should be available to developers of commercial and mixed- use property. There would be a call for purely commercial commonholds.
A restriction preventing investors from granting leases out of commonhold units would wholly prevent the creation of a commercial commonhold market. In order to make commonhold commercially viable, leases of up to 25 years for non-industrial property and say, 40 years for industrial property should be possible. Institutions will tend to invest in leases with a term of 21 years, so 25 years seems adequate.
A mixed-use setting necessitates a master commonhold. Two commonholds are needed because, say the owners of the residential apartments wish to pass a resolution to allow for the disbursement of monies on redecoration of their own area, why should they need the consent of the owners / users of the offices? The existing law of easements would adequately govern relations regarding access between users. However, easements do not allow the dominant owner to collect money from the subservient owner and therefore, maintenance and enforcement of other positive covenants becomes a problem. Easements are also restricted in their scope and it is doubtful they could provide adequate governance to the situation in a mixed-user estate, where complex arrangements are needed between several users.
There will be a demand for purely commercial developments based on commonhold, we should expect and welcome them in England and Wales. Commercial leases out of commonhold units in a commercial development should be possible, provided that those leases were at an open market rent and the terms of leases did not exceed a stated period, perhaps 25 years.
Having a master commonhold is not necessary, at least until there is experience of needs in practice. A single commonhold with relationships set down in the commonhold community statement is preferable.
The ideal situation would be management of the distinct developments as a single commonhold. However, in certain cases it may be better to have a master association consisting of representatives of the two commonholds holding the 'common' common parts.
Where there are neighbouring associations it seems that one or the other of the associations should own the shared area. The principles applicable to easements can be used in such circumstances.
It is preferable to have two associations with mutual rights and obligations. However, one practical drawback may be reluctance on the part of those concerned to become involved in the deliberations of more than one association. There might be the difficulty that a positive covenant to contribute to say a shared access way might be difficult to enforce as between the two associations, but would the longstanding principle of accepting a burden if the benefit were enjoyed (Halsall V Brizel) not be sufficient to cover those situations?
We are strongly in favour of commonhold based on freehold to extend to commercial property. There will be a demand for this, particularly in the case of industrial units. We also agree that commercial commonhold must be free of the restraints on letting which are proposed for residential premises, for a number of reasons: 1. Different types of commercial use call for different lengths of term. 2. The variety of lengths of term has become a major tool in construction of financial models for property investment, development and funding. 3. As the UK tax regime currently stands, a variety of tax consequences are linked to the length of term, offering tax-planning opportunities.
There may be a significant market demand for commercial commonhold including commonhold out of a commercial lease development.
Commercial leases should be capable of being granted out of commonhold units in commercial developments.
Commercial development might be suitable for the industrial estate with shared facilities and where unit holders have long leases at low rents but unlikely to be adapted to rack rent situations.
Where there are two commonhold associations who share facilities between them, the better solution would be to create a master commonhold association. Whilst the general law governing rights of way and easements could be employed, the difficulty is that positive obligations would not be enforceable if, in the future, the identity of the commonhold associations changed.
There should be maximum flexibility for commonhold developments, so stating that there must only be one commonhold association could be restrictive. The proposal for a master association could be bureaucratic but the preferred alternative would require very careful drafting by the lawyers.
It is essential that the legislation be framed so as to permit commercial commonholds.
There is likely to be a call for purely commercial developments based on commonhold but this response will be more limited than that from residential leaseholders. The key divergence necessary to accommodate commercial commonhold will be a more relaxed leasing ability, for example being able to lease for 5 to 10 years.
We would prefer the operation of a master commonhold association and would rather not rely on the general law governing rights of way and easements.
It should not be possible to grant long commercial leases out of commonhold units in a commercial development.
We support the contention that it would be best to rely on the general law governing rights of way and easements to solve any problems arising.
It is difficult to see what advantages commonhold can offer, with regard to commercial premises, over and above the leasehold alternative under the Landlord and Tenant Act 1954 which clearly works to the satisfaction of both landlord and tenant.
The preferable method for dealing with shared access would be to use the law of rights of way and easements. The danger of using master associations is that a group which has an interest in both pieces of subservient land could dominate it. The value of a development could be at risk if control over essential services fell into the hands of one group. This problem does not arise with easements.
It is difficult to see that commonhold is likely to be particularly attractive to commercial developments.
In relation to mixed-use developments whilst they have their advantages they also produce a high proportion of disputes over service charges and insurance arrangements etc. It would be better for the time being to restrict commonholds to single tier commonolds and to see if there is demand later for multi-tier master commonhold arrangements.
There is a market for purely commercial use both for converted and new build.
In mixed-use developments the different uses should have control over those matters which relate to their part of the development through a master association. The existing general law governing rights of way, easements etc, although well known, has proved to be defective in so far as methods of imposing mutually enforceable property rights and obligations in relation to freehold property.
It is not considered that pure commercial property should be subject to the commonhold scheme as it would restrict businesses which do not need the same degree of protection as residential occupiers.
The existing general legal rights should be relied upon where there are two or more commonholds on one site.
There is likely to be some call for purely commercial developments based on commonhold.
In the case of neighbour commonholds we consider that in principle the general law of easements can be relied on to deal with common areas between the two developments, provided that the documentation dealing with the easements was satisfactorily drafted.
On the basis that the Land Registry approves the registration of the commonhold, should it not be incumbent upon the Land Registry to ensure that the commonhold documentation is in order? This would avoid the potential uncertainty that would arise at a later time to challenge a commonhold scheme. Any such challenge could prejudice the value of the units and a lender's security on those units and prejudice the disposal of units pending such resolution.
What safeguards will be built in to prevent the commonhold association being saddled with debt at birth, as it can incur post-incorporation but pre-commonhold liabilities? It would be preferable if pre-commonhold liabilities were the sole responsibility of the directors. This could perhaps be achieved by requiring the Companies Registry to deliver the certificate of incorporation direct to the Land Registry in escrow, the corporate entity coming into existence at the same time as the commonhold itself. All previous dealing would then be pre-incorporation contracts for which the promoters and not the commonhold association would be liable.
The developer's freehold interest prior to the making of the application under Clause 2 of the Bill would be subject to a charge in favour of a lender. Clause 4(1)(c) states that the consent of "the registered proprietor of a charge over all or part of the land" would be required but nothing is said about the preservation of that charge when the land is registered as commonhold. It is true that the registered proprietor could stipulate that the applicant creates a replacement charge over the commonhold but the lender will have concerns about that because of the possibilities of the replacement charge being set aside in the insolvency of the borrower/charger, and of the difficulties there would be in the way of enforcing the charge unless and until HM Land Registry complete their re- registration of the title as commonhold. These difficulties and problems, from the secured lenders point of view, would be lessened if the Bill contained provisions stating that any charge over the freehold of the land before the application under Clause 2 is made may be registered as a charge over the commonhold land without the creation of nay further consensual charge by the freeholder in favour of the chargee and for the charge over the commonhold to have the same priority as the original charge. Absent those provisions, the registered proprietor of the charge may be reluctant to consent to the application for registration of the commonhold.
Commonhold should be permitted on leasehold land for purely commercial developments, provided there is at least 125 years remaining on the headlease at the time the application to register the commonhold is made. Provision should be made for any attempt to forfeit the headlease on which the commonhold is based.
Not in favour of a scheme of commonhold based on leasehold land for a number of reasons:
A major attraction of commonhold is the acquisition of a freehold interest, which is not subject to any rights of termination or forfeiture.
It raises complex issues as to the protection of the position of the freeholder and any mortgagee of the freehold interest.
It would introduce a complex structure which would have the reverse effect of a major attraction of commonhold, which is the simplification of land tenure which it offers for future developments and for converted schemes.
The current Bill gives no indication where commonhold is located in the map of estates. Perhaps it is simply a method of managing horizontally divided property, whether freehold or leasehold, which can be registered at the Land Registry, rather than an estate itself. If this were so, it would open up a theoretical pathway to a leasehold commonhold. The status of the commonhold needs to be clarified (as does the distinction of the applicant's freehold after registration).
It ought to be possible for commonhold to arise out of leasehold land in the residential and mixed residential context, for example if there is a lease of 999 years or other substantial period. Alternatively, it seems that commonhold could be applied out of leasehold where a local authority or the Crown has the freehold. In this way long-term ownership would remain for the local authority and the Crown but provides to leaseholders the benefits of membership of the commonhold association to the same extent that it would have it been a conventional commonhold.
If it is possible to create a commercial commonhold out of leasehold title, it will be necessary to take into account the effect of the Landlord and Tenant Act 1954 at the end of the commonhold.
If there is to be a commonhold declaration which will trigger a clawback of capital allowances etc then this is likely to discourage use of commonhold in the commercial context.
It may be, in the case of commercial properties, that the tax regime (particularly in relation to capital allowances) may well be a relevant factor in encouraging, or discouraging, the conversion of properties to commonhold.
Commercial commonhold developments on leasehold land should be available to property owners / lessees on a voluntary process.
We believe that the legislation should strive to achieve maximum flexibility, and should therefore allow developers to seek to resolve the problems for themselves if they believe it to be in their interest to construct a commonhold scheme on a leasehold site. We would prefer that the absolute restriction against developing a commonhold on leasehold land should be restricted to residential commonholds only.
It is unlikely that many commercial developments will want to make use of commonhold, but if they do then for simplicity and to avoid commonhold getting bogged down in detail it would be better if commonhold were initiated on the basis that it had to be on freehold land only.
If pure commercial leasehold property were converted to commonhold there would be an inability to redevelop schemes which have become obsolete and the problem of unused landfill sites could be compounded.
Reserve funds are not always the most appropriate way to fund expenditure, particularly as they limit flexibility as to the timing of the expenditure. Also, the existence of substantial funds gives opportunity for irregularities, management disputes and fraud, although the structure of the commonhold association should help to constrain this risk.
Clause 32(4) states that reserve funds can't be used to enforce a debt except a judgement debt, but emergencies may arise therefore there should be some type of safety valve here.
Creditors should be able to execute judgement against a reserve fund and such recourse should be available to any class of creditor. In the context of a commonhold association a reserve fund should simply be an accounting device to facilitate saving for large items of expenditure. An association wishing to protect its reserves should ensure that service charges are set at a level which enables it to pay all its creditors.
Reserve funds are normally held on trust. To allow it to be used as an asset in such circumstances could be very harsh on those who have contributed all along.
Reserve funds are raised for a specific purpose. Any of the commonhold association's liabilities relating to items of expenditure for which the reserve fund was raised should be met by the reserve fund. Generally, however, the reserve fund should not be used as asset of the company in insolvency. Reserve funds will only work with the trust of the contributors who need to be assured that their money will be safe. Such trust is essential to the effective operation of a reserve fund, the knowledge that their contributions cold be used in any winding up would severely damage such trust. Members who have contributed should be fully protected from any claims on the reserve fund other than legitimate expenditure for which the reserve fund was set up.
It should be possible to use the reserve fund to prevent the association becoming insolvent. The reserve fund should be held in trust for the unit holders as a body, subject to the previous point. The requirement to arrange suitable insurance in relation to directors and officers liability should also extend to cover fidelity insurance of the fund, and appropriate public liability and professional indemnity insurance.
We welcome the fact that commonhold associations will be required to maintain reserve funds for major expenditure items. The need for such funds for commercial developments is more open to question and they also involve taxation difficulties, so they should probably not be required. The society considers that, until termination, it should not be possible for a reserve fund to be used for any purpose other than its designated purpose, unless that purpose has been finally abandoned. On termination, reserve fund balances should be regarded as part of the association's general funds available to satisfy the general body of creditors.
The use of reserve funds should, as far as possible, follow the general law.
There is a general concern that if an allocation of cash is too specific, this might lead to a situation where the commonhold association has no funds to deal with immediate problems, but yet has significant capital locked away for an eventuality that might be some years off.
It is highly unusual for reserve funds to be used to finance and repair the maintenance of units. The explanatory notes detail conditions under which an insurer could not touch the fund. We are concerned that this might function to prevent the association from using and paying money voluntarily rather than protect the fund from outsiders.
We agree that it is appropriate for the reserve funds to be used as an asset of the company in meeting its debts. However, professional guidance and education should be provided to commonhold association members and appropriate insurance be made mandatory. These measures are the most effective means of addressing the problems of bad management. We agree that funds should be protected against theft but feel the commonhold association must pay its debts like any other organisation.
If the commonhold association becomes insolvent then it would seem right that any reserve fund that it had built up should be available for its creditors generally and should not be transferred to become the reserve fund of the phoenix association.
A balance of fairness needs to be struck between creditors and the association. The unit holders should be assumed to be aware of what the company is doing or has done on their behalf. And it is considered that the court should always have power to order that the reserve funds be used in a particular situation notwithstanding the views of the commonhold unit holders.
It is considered appropriate for the reserve fund to be used as an asset of the company in meeting its debts on a petition for winding up, provided it is not used to pay a debt to a unit holder or any other persons in relation to the transfer of debts to the new association.
Generally, we do not consider it appropriate to protect unit holders from incompetent or fraudulent running up of debts by the association at the expense of the creditor unless it is evident that a creditor had colluded in the incompetence of fraud.
Unless any reserve funds are properly constituted as trust funds, we do not see that there is any prospect of these reserves not being available to the liquidator in the event of a winding up.
Cheap, speedy and informed tribunals are needed to provide for the resolution of commonplace disputes.
To encourage resolution of disputes there ought to be an attempt at mediation. Should mediation fail then it is suggested the next stage should involve the submission of written representations by the parties to a single member of the LVT. A written decision would result, without the need for a hearing. If one or more of the parties then wishes to appeal then a hearing would take place in front of the panel of 3 members. Appeal from the LVT would be to the Land's Tribunal. If the LVT is to deal with commonhold it should deal with all the practical issues of running the commonhold, rather than limiting its jurisdiction to just determining commonhold assessments. Thus it would include the interpretation of the commonhold community statement for example.
The issue of apathy is raised. It is suggested that a situation may arise whereby a commonhold association will not be able to function because the unit holders do not wish to participate or they are unwilling to accept the responsibilities. This is an issue that the respondent believes should be considered within a commonhold development.
Clause 12(2) provides that a commonhold community statement may not restrict the transfer of a unit. There are times when restrictions on transfer may be desirable e.g. age restrictions, restrictions on short-term leasing, restrictions on long term leasing.
Clause 16 provides that a commonhold community statement may not prevent or restrict a unit owner from creating an interest in his unit. If an easement is considered an "interest" then there may be situations where owners should not be permitted to grant easements on their units, if granting it e.g. would unreasonably overburden the common parts.
De-annexing property should also be permitted under clause 23, because the market conditions sometimes unexpectedly change.
It may be wise for the commonhold community statement to expressly require the association to levy service charges sufficient to maintain the premises or to state that it will levy "adequate" service charges. Clause 24 permits the association to the interest on past due service charges, but the association should also be permitted to recover reasonable legal fees and costs. If the association is not permitted to do so, the owners who are paying their bills on time will have to pay additional service charges to pay for these fees and costs. An association should be able to file a lien for unpaid service charges which can be foreclosed.
Requiring insurance proceeds to be used for the purpose of rebuilding the structure may not always be appropriate, as there may not be sufficient funds to rebuild the structure. Clause 50 (3) should not be in the draft Bill instead this could be addressed in the Regulations. It is confusing having insurance provisions in 3 different clauses, perhaps one section of the Bill could deal with insurance.
We are surprised that the draft Bill contains no provisions dealing specifically with the enforcement of the duty of each unit holder to meet his/her share of the commonhold association expenses. In the absence of a specific provision in the Bill, it seems that the commonhold association will be an unsecured creditor.
Detailed Regulations should be published in draft and consulted upon. A draft model form of the commonhold community statement ought also to be published.
We are concerned that if the commonhold associations do not have some control over the sale of units a useful mechanism for recovering arrears may be missed.
We have reservations concerning voting rights of unit holders. Unanimous votes are normally to be interpreted as the unanimous votes of those recording their votes rather than true unanimity. But it must be understood that there are a wide variety of reasons why the owner of a unit might not vote: absence, illness, death, undue influence or lack of understanding.
The society considers that there ought to be a fall back provision under which there could be an application to court to waive the concurrence of recalcitrant unit holders. This might perhaps be limited to overcoming opposition from the owners of a maximum of 5 or 10 per cent of the units. Such a fall back provision would permit tightening up of the unanimity requirement.
Developers with empty units will not be able to make them available to Registered Social Landlords (RSLs) and this will leave a very real distinction between properties which will remain in the private domain and those which will be available for RSL's tenants and leaseholders. This would create a two-tier system that cannot be desirable.
RSLs often buy into new developments to increase their shared ownership stock. Shared ownership stock is a system whereby a RSL buys the equity of the property and then sells a percentage of the equity to one of its applicants. The remainder of the equity of that property is retained by the RSL, but a residential long lease is granted to the applicant. However if leasehold interests are non-existent in a commonhold, the shared system will not be operable within a commonhold development and RSLs will be excluded from the partaking of new commonhold developments for shared ownership use.
Definition of 'the developer' in clause 44 could be improved. A suggestion is that a developer is defined as a person who makes an application under section 2 and where no person is occupying any part of the proposed commonhold land at the time of that application. However, to cover the situation of a development where part of the land remains occupied at the time of the section 2 application, then to qualify as a developer the consent of all those occupiers for the applicant to act as a developer would be needed.
As far as retirement developments are concerned, commonhold will not be a viable alternative to leasehold. The absence of ground rent and the fact that retired people do not want to play an active part in the management of their development indicates commonhold as less superior to leasehold title.
Commonhold should be introduced in such a way as to give the parties considerable freedom and allow a market to develop without undue restriction.
Paragraph 1 of Schedule 2 provides that commonholds may not be developed unless they are grounded. However since commonhold is a new tenure, as yet untried in this country, it seems sensible for legislation to provide maximum flexibility within the structure in order to ease and encourage its use. Ungrounded commonholds should be permitted where there is no requirement for rights of support or egress or ingress from adjoining property, as there should not be any problem as a result. Even where there might be issues such as rights of support, egress or ingress, we believe that the legislation should permit commonholds to be developed ungrounded for reasons of flexibility.
Secured lenders having security over long leases would prefer to see clause 4(ii)(f) amended so as to exclude the possibility of the court dispensing with need for consent of any mortgagee and also for the Bill to be amended so as to provide for any charge over a long leasehold interest (or the freehold interest) in the property to become a charge over the commonhold unit without the need for any consensual charge (with the same priority as the original charge).
The Bill refers to memorandum and articles of the commonhold association. The Company Law Review, being undertaken by the DTI, is proposing that these documents be replaced by a single constitution of the company. A "model" version of which will be the default to which all commonhold associations would revert to if no special modifications were required. Clearly such a model constitution would not be suitable for commonhold associations. Regard must be given to ensuring that associations are formed with the appropriate constitutions. Especially since the draft clauses we have seen on the company formation proposals provide that unless the provisions of the model constitution are expressly excluded then they are deemed to be included.
As a result of the consultation process, which ended on 20th October 2000, the feedback received was analysed and the Bill as introduced has benefited from the comments and advice of the many experts and the general public who took part in the consultation rocess.
Following the consultation exercise changes have been introduced into the Bill.
Ownership of units by the commonhold association: The original proposal was not to allow such ownership. Following consultation, the Government has decided to allow it, but not to allow the association to operate any voting right attaching to the unit.
Company vehicle for the commonhold association: The Government has settled on the model of the private company limited by guarantee, rather than either a company limited by shares or a unique company format developed especially for the Commonhold Association.
Charging of the common parts: The draft Bill did not allow for a commonhold association to borrow on the security of appropriate common parts. The Bill as published permits such borrowing with the safeguard of the requirement of a unanimous resolution of the association members.
Letting of residential commonhold: The Government has reconsidered its original intention to be very restrictive about letting of commonhold units, largely in response to those who told us about the significant percentage of flats, in particular, which are bought to let. The Bill as published allows for term lets of up to seven years renewable at a rack rent. It will not be possible to sell a lease at a premium.
Changes arising from further development: In the period since consultation, much further work has been done on the company aspects of the scheme and particularly the nature of membership of the association and the scheme for winding up commonholds.