Q1. What is commonhold?
Commonhold is a system of ownership of freehold properties in England and Wales introduced by Part 1 of the Commonhold and Leasehold Reform Act 2002 and the Commonhold Regulations 2004 made under it.
Q2. What is a commonhold?
A commonhold is an area of freehold land, consisting of units and common parts, registered as commonhold land at Land Registry.
Q3. Why is commonhold being introduced?
The introduction of commonhold is part of the Government's 2001 manifesto commitment to promote housing choice.
Q4. When will commonhold be possible?
It will become possible to create commonhold land with effect from 27 September 2004.
Q5. What kinds of development are likely to be commonhold?
Commonhold is intended to be used for freehold developments in multiple ownership which include reasonably extensive shared structures, such as the structure and exterior of a tower block, and facilities, such as roads, sewers, drains, lifts or reception areas. Typical examples might be a housing estate, a block of flats, a shopping centre, an office park or an industrial estate.
Q6. How is a commonhold divided?
A commonhold is divided into units and common parts. The extent and number of the units will be defined in the commonhold community statement, but there must be at least two units. Any part of the commonhold that is not included in a unit is part of the common parts. If, for example, an office block is a commonhold, each office suite might be a unit, whilst the structure and exterior of the building and the shared areas, such as the reception area, stairways, lifts and car parks, would be common parts.
Q7. Who owns a commonhold?
Once a commonhold is up and running (see below), each unit is owned by one or more unit-holders and has its own title number at Land Registry. The common parts will be owned by the commonhold association and will be registered under their own title number at Land Registry.
Q8. When is a commonhold "up and running"?
A commonhold is "up and running" when the commonhold community statement comes into force. Where a commonhold is set up by a developer, without unit-holders, this occurs when the first unit is sold to a prospective unit-holder. Where the unit-holders are identified at the time that the commonhold is set up, as on a conversion from leasehold (see questions 20 and 21), this occurs on the registration of the commonhold.
Q9. What special rules apply to commonhold land?
A commonhold will be governed by Part 1 of the Commonhold and Leasehold Reform Act 2002, the Commonhold Regulations 2004, the memorandum and articles of association of the commonhold association and the Commonhold Community Statement (CCS). Of these, the CCS is likely to be the most important document on a day-to-day basis. In the event of an inconsistency between the memorandum, and/or articles of association, and the CCS, the memorandum and articles of association will prevail.
Q10. Does commonhold land have to be registered?
Yes. Each commonhold must be registered at Land Registry following an application made in accordance with the Act and the Commonhold (Land Registration) Rules 2004. Full details of how to register a commonhold are available from Land Registry. See Practice Guide 60 which can be found on Land Registry's website: http://www.landreg.gov.uk/assets/library/documents/lrpg060.pdf
Q11. Who can set up a commonhold?
Anyone who is, or who is entitled to be, registered as the freehold proprietor of the land, may apply to Land Registry for registration of the land as commonhold. However, the consent of the owners of other interests in the land, such as mortgagees and lessees, must be obtained. In general, applications are expected to be made by developers for new buildings or on behalf of the existing leaseholders for conversion of an existing development to commonhold.
Q12. How is a commonhold set up?
There are two procedures for setting up a commonhold. The first is where there is an application for registration without unit-holders. Typically, this procedure is expected to be used for a new development. Alternatively, an application may be made for registration with unit-holders. This procedure is expected to be used mainly when the leasehold owners of an existing building want to collectively convert from leasehold (see questions 20 and 21).
Q13. How much will it cost to set up a commonhold?
As in leasehold developments, the cost will depend on a number of factors, such as the size, complexity, use and whether the registration involves a conversion or a new development. Unavoidable costs include registration fees payable to Companies House and Land Registry but these are relatively modest. The increased uniformity of the documentation may also help to keep costs down.
Q14. How long will it take to set up a commonhold?
It is not possible to gauge how long it will take to set up a commonhold. The time taken will depend on a number of factors including the size and complexity of the development and its documentation, the number of consents required and the time taken to obtain them.
Q15. Will a lawyer be required to help set up a commonhold?
In most cases it will desirable to seek legal advice on setting up a commonhold. Commonhold is a new way to own freehold land which may be more appropriate for some properties than others. Equally, although much of the documentation is standardised, additional voluntary clauses are likely to be necessary to reflect the individual character of the commonhold development. The development and the documentation must comply with the commonhold legislation (see question 9).
Q16. Is there an upper limit on the size of a commonhold?
No.
Q17. Does the setting up of a commonhold affect people with rights over the land?
With the exception of mortgages over land that is included in the common parts and leases in relation to both of which special rules apply, the setting up of a commonhold does not affect pre-existing rights. For example, people with the benefit of restrictive covenants or easements over the land will continue to have those rights. However, an applicant for registration of a commonhold will have to obtain the consent to the creation of the commonhold of all existing freeholders and mortgagees of the land. Anyone approached for consent should take appropriate independent advice.
Q18. What will happen to a lease after a property is registered as a commonhold?
If an application has been made to convert an existing leasehold development to commonhold, all leases will be extinguished on the completion of the registration. Lessees, whose consent was not required, will be entitled to compensation. Where an application is made for registration without unit-holders, pre-existing leases will be extinguished when the first unit is sold. Compensation will again be payable to the lessees whose consent was not required. Anyone approached for consent should take appropriate advice.
Q19. Should I give consent to the creation of a commonhold?
Whether any person should give consent to the creation of a commonhold over land in which he or she has an interest will depend on the circumstances of the case. Independent advice should be taken.
Q20. Will it be possible to convert an existing building to a commonhold development?
Yes. It will be possible to convert an existing building from leasehold to commonhold but certain criteria will need to be met. In particular, it will be necessary to obtain the agreement of the freeholder, all of the existing leaseholders (other than those with leases granted for no more than 21 years who are entitled to a new lease on broadly the same terms in the commonhold) and any mortgagees.
Q21. Is there a right for existing leaseholders to convert to commonhold?
No. A group of leaseholders cannot force the landlord to convert the existing development into a commonhold. However, under the current landlord and tenant legislation, leaseholders of a building have the right to collectively enfranchise, that is, to acquire the freehold. Where the landlord is unwilling to consent, the purchase of the freehold will be a preliminary and necessary step, before commonhold is possible. Once the leaseholders have jointly become the freeholder, they can then convert the property into a commonhold, provided the necessary conditions and requirements are met.
Q22. What is a commonhold association?
A commonhold association is a private company limited by guarantee incorporated under the Companies Acts. It will be registered at Companies House. The guarantee is one pound per member. There are no shares.
Q23. What is the function of a commonhold association?
The association exists to own the common parts of the commonhold and to carry out the functions of a commonhold association in relation to a commonhold. In effect, it combines the functions of a landlord owning the common parts, a management company providing services and resident's association determining policy and settling disputes.
Q24. Who are the members of a commonhold association?
Until a commonhold is up and running (see question 8), only the original subscribers to the memorandum of association and the developer may be members. Thereafter, only unit-holders may become members. Each unit will provide one member, irrespective of the number of owners.
Q25. Who runs the commonhold association?
As with other companies, the board of directors will be responsible for the management of the company.
Q26. Who may be a director of a commonhold association?
There are no special restrictions on membership of the board of directors. A person who is not a unit-holder or a member of the commonhold association may therefore be appointed as a director. This will enable the commonhold association to appoint persons with special expertise if necessary.
Q27. Do the directors have special responsibilities?
The directors are subject to the same obligations as directors of companies generally. They are also subject to some specific commonhold obligations. It is recommended that anyone considering accepting appointment as a director of a commonhold association should take appropriate independent advice.
Q28. Must the commonhold association insure its directors against liability incurred in the course of their duties?
It is for the commonhold association to decide whether or not to take out insurance cover. It is recommended that appropriate independent advice be taken.
Q29. What voting rights do members have?
The number of votes allocated to a member in respect of his or her unit will be specified in the commonhold community statement. In many cases, one vote per member per unit may be appropriate. In others, the voting allocation can be structured so as to reflect the size of units or such other factors as may be appropriate. For instance, in a mixed-use development, the owner of a supermarket unit might be allocated 20 votes compared to the owner of one of the twenty residential flats above it, who has just 1 vote. When a member has more than one unit, he or she has the total number of votes allocated in respect of all those units. The allocation of votes may be amended but not so as to give a significantly disproportionate allocation to a member.
Q30. What is the liability of a member for the debts of the commonhold association?
The liability of each member is limited. Each guarantees to pay £1.00 of the debts of the commonhold association on its winding up.
Q31. How can I find out about the commonhold association?
The commonhold association will be registered at Companies House. Copies of its memorandum and articles of association will also be available from Land Registry.
Q32. How do I find out who the members of the commonhold association are?
The commonhold association will maintain a register of its members. Under company law the register must be made available for inspection and copying subject to payment of charges.
Q33. Does a commonhold have to file annual reports and accounts at Companies House?
The same requirements apply to commonhold associations as to other companies.
Q34. Will all commonhold associations have the same memorandum and articles of association?
No. Although, the content of the memorandum and articles of association of a commonhold association will be largely prescribed, individual associations will be able to add further provisions in accordance with the regulations.
Q35. How can I tell which provisions of the memorandum and articles of association have been added?
The regulations require that all additions be clearly identified as provisions specific to the commonhold in question.
Q36. Can the memorandum and articles of association be amended?
Yes but only to the extent permitted by the regulations. In any case, no amendment will be effective until the amended document is registered at Land Registry.
Q37. What is a Commonhold Community Statement?
The commonhold community statement is the key commonhold document. It defines the extent of the units, the common parts and their respective permitted uses. It sets out the percentages that each unit will contribute to the running costs of the building and the voting rights of the members of the commonhold association. The statement will also specify the rights and duties of the commonhold association, the unit-holders and their tenants.
Q38. Can the commonhold community statement be amended?
Provisions prescribed by Regulations cannot be amended but material added that is particular to the commonhold, known as local rules, can be. In most cases, an ordinary resolution will suffice to effect an amendment of the local rules. However, in some cases, such as an alteration to the permitted use of a unit, the consent of the unit-holder is required. In other cases, such as where an alteration of the allocated voting rights or the allocated percentage of the commonhold assessment is proposed, amendment that results in a significantly disproportionate allocation is not permitted.
Q39. What if a commonhold community statement is inconsistent with the Act, Regulations or the memorandum and articles of association of the commonhold association?
A provision in the commonhold community statement is only effective in so far as it is consistent with the Act and Regulations. It is similarly ineffective if it is inconsistent with a provision of the memorandum and articles of association.
Q40. How does a commonhold community statement differ from a lease?
The commonhold community statement may contain many provisions similar to those contained in a lease. However, whilst there may be many individual leases for a leasehold development there will be only one commonhold community statement for each commonhold. Unlike leases, the format and content of commonhold community statements are largely prescribed by regulation.
Q41. How can I find out about the rules of a commonhold community?
The rules of a commonhold community will be primarily set out in its commonhold community statement. This is registered at Land Registry and available for public inspection on payment of the appropriate fee.
Q42. Will the terms of every commonhold community statement be the same?
The provisions of the commonhold community statement are, as a result of the Regulations, largely standardised, but there is scope to insert additional provisions, known as "local rules". These fall into two categories: individual details that are required to be added, such as the name of the commonhold and voting rights, and additional material added voluntarily, such as rules about behaviour. The local rules will reflect local priorities and determine and preserve the character of the commonhold.
Q43. How will the rules of the commonhold be enforced?
The commonhold association, unit-holders and their tenants will have the right to enforce the rules in accordance with the dispute resolution procedures set out in the commonhold community statement. These procedures are intended to resolve disputes without recourse to the courts and place a strong emphasis on alternative dispute resolution procedures. However, in emergencies and for money claims, the claimant can go direct to court to enforce an obligation.
Q44. What are the dispute resolution procedures?
There are three procedures prescribed by the regulations. They relate respectively to complaints made by the commonhold association against a unit-holder or tenant and vice versa and, thirdly, as between unit-holder or tenant and another unit-holder or tenant. All involve the use of standard form notices and consideration of the complaint by the directors of the commonhold association.
Q45. Must the rules always be enforced?
The directors of the commonhold association have a duty to manage the development in such a way as to allow unit-holders to exercise their rights and to enjoy the ownership of their units. But, in the case of default by a unit-holder or tenant, they may decide to take no further action if they think that this is in the interest of maintaining harmony within the commonhold.
Q46. Is there a commonhold ombudsman?
Section 42 of the Commonhold and Leasehold Reform Act 2002 allows regulations to provide that a commonhold association shall be a member of an approved ombudsman scheme. The model commonhold community statement takes into account the possibility of the commonhold association being a member of an approved ombudsman scheme should such a requirement be introduced. However, no ombudsman scheme has yet been approved.
Q47. What is the purpose of the commonhold assessment?
The commonhold community statement sets out the method by which the commonhold association will collect funds from the unit-holders to pay its expenses, such as those payable for the upkeep of the fabric of any buildings, the provision of services to the unit-holders or for the administration of the commonhold association. The commonhold assessment performs a similar function to that of a service charge within leasehold developments, but is not subject to the same complex legislation.
Q48. How much will the commonhold assessment be?
This will depend upon the circumstances of the individual commonhold and the wishes of its commonhold community. The directors of the commonhold association are under an obligation in the commonhold community statement to make an annual estimate of the amount to be raised from unit-holders to cover the association's expenses. In addition to this annual estimate, the directors may ask for additional payments throughout the year to cover unforeseen expenses and emergencies.
Q49. Does the commonhold assessment have to be approved by the members?
No. The directors must seek the views of unit-holders on their proposals and must take them into account before issuing demands, but there is no standard requirement of a general meeting. As in any other limited company, the directors may call such a meeting if they wish and the members may require one. The directors need not seek views in emergencies.
Q50. Will the commonhold assessment be reasonable?
A commonhold is a self-managing community with clearly defined procedures to settle its affairs. In contrast to a leasehold service charge, there is therefore no overriding legal requirement of reasonableness in relation to the amount of the commonhold assessment. Nor are there detailed statutory procedures for obtaining estimates of proposed expenditure.
Q51. What are reserve fund levies?
The commonhold community statement also gives the commonhold association the ability to set up reserve funds to finance the repair and maintenance of the common parts or units. It sets out the method by which the unit-holders will contribute to the reserve fund, which is similar to the procedure for the collection of commonhold assessment monies.
Q52. Does a commonhold have to have a reserve fund?
No, but the directors of the commonhold association will be under a duty to carry out a reserve study every 10 years for the purpose of ascertaining whether or not a reserve fund should be established. The directors are encouraged to carry out a reserve study at the time the commonhold is first established.
Q53. Can units be sold without the permission of the commonhold association?
Yes. The only restriction on the unit-holders power to sell the freehold of the unit relate to sales of part only of the unit. In such cases, the consent of the commonhold association is required, to preserve the overall integrity of the commonhold and the commonhold community statement.
Q54. Should I take legal advice before buying a commonhold unit?
A commonhold unit is a freehold property and likely to be quite valuable. Broadly the same conveyancing procedure will apply as to other freehold properties, with additional steps to take account of the special commonhold nature of the property. In most cases, people preparing to buy a commonhold unit should take legal advice before doing so.
Q55. Will there be any restrictions on the use of a unit?
The commonhold community statement may make provision restricting the use of a unit.
Q56. Why have restrictions been imposed in relation to the leasing of residential commonhold units?
Subject to limited exceptions, leases of residential commonhold units may only be granted for terms of up to 7 years. Additionally, no premium (a capital sum) may be charged. The restriction on the length of the term was imposed to prevent the problems of long residential leases, particularly that of absentee landlords, appearing in commonholds. The intention is that the unit-holder, not a tenant, should have the real financial interest in the commonhold. This will encourage participation in the affairs of the community. The prohibition on premiums will make it more likely that there will be a market rent payable. This will be available to the commonhold association under diversion of rent procedures should the unit-holder fail to pay the commonhold assessment or reserve fund levy.
Q57. Are there any restrictions on leasing non-residential commonhold units?
No.
Q58. Will the limit on the term of leases of residential commonhold units restrict the availability of shared ownership leases and Islamic Home Finance products?
The restriction on the length of leases of residential commonhold units to 7 years inhibits shared ownership leases and the use of some Islamic Home Finance products. We are considering whether a special exception might be created for these purposes.
Q59. Can a commonhold be terminated?
Yes. The Act sets out special procedures applicable to the ending of a commonhold. If the members wish to end their commonhold, or the commonhold association is otherwise threatened with liquidation, it is recommended that expert independent advice be taken immediately.
Q60. What are the benefits of commonhold?
In many ways a commonhold development will probably not be substantially different from a well-run leasehold development where the landlord is a company that is collectively owned by the tenants. However, with commonhold: · the individual properties will be freehold and therefore will not be wasting assets which reduce in value over time; · there is no third party landlord; · there is only one set of documents for the entire development and they will be substantially standardised; · the documentation is transparent as it will be readily accessible from Land Registry on payment of the appropriate fee. Overall, the uniformity of appearance and content of commonhold documents should simplify the management of commonhold properties and make the understanding of the rights and responsibilities of being an owner and the giving of advice easier.
Q61. How does commonhold compare with leasehold?
The main advantages of commonhold over long leasehold ownership are that: · leases are wasting assets, commonhold ownership is not - it is freehold; · leases only relate to individual properties, whereas the commonhold community statement relates to the whole of the commonhold; · leases come in all shapes and sizes and are often drafted defectively, whilst commonhold documentation will be largely standardised and clearly written; · leases, particularly residential leases, are also subject to a significant amount of statutory regulation, especially in relation to service charges. The commonhold "service charge", known as the commonhold assessment, will not be subject to these restrictions. Although it has advantages, commonhold is new and untried, whereas leasehold is long established and familiar. Leasehold is likely to be simpler for very small developments where the establishment of a commonhold association would be unnecessary. In some cases, it may be that a multiplicity of leases with individual forms may be preferred to the simplicity of a single commonhold community statement. Likewise, if a developer wants to retain an income stream from a property, leasehold may well be chosen, as unit-holders will not pay ground rents. Equally, there may be occupiers who would prefer to have a statutorily regulated service charge than an unregulated commonhold assessment. It will be for those involved to decide which form of ownership best suits their development.