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Commonhold Ownership - The Basics
All property in England and Wales is owned on either a freehold basis or a leasehold basis. Flats are almost universally sold as leasehold property. In 2002 commonhold was introduced to enable the freehold ownership of flats. However, since 2002 fewer than 20 commonholds have been created. So what exactly is it?
Freehold is ownership that lasts forever and generally gives fairly extensive control of the property. Leasehold provides time-limited ownership (e.g. a 99 year lease) and control of the property is shared with, and limited by, the freehold owner. Commonhold is another type of ownership but is relatively unknown.
Commonhold is a co-operative form of ownership:
- Under the commonhold structure, the freehold of an individual property, referred to as a "unit" (such as a flat), is owned by a "unit owner". The unit forms part of a building or development. For example, a unit may be a flat within a block of flats or an office within an office block.
- Anyone who buys a unit in a commonhold will become a member of a company which owns and manages the common parts. This company is called the "commonhold association". Unit owners, as members of the commonhold association, can vote on decisions which affect the commonhold.
- The commonhold association will have at least two directors who carry out the management functions of the commonhold.
- Each commonhold has a "commonhold community statement" ("CCS"). This document defines the physical boundaries of the commonhold units and sets out the rights and obligations of the unit owners and the commonhold association. For example, the CCS sets out unit owners' voting rights and their requirement to contribute towards the costs of the commonhold (referred to as "commonhold contributions").
- Each commonhold must adopt "articles of association". In the commonhold context, these are the rules which govern how the commonhold association operates and how management decisions about the commonhold can be made. These will include certain prescribed terms which by law are included in every CCS and articles of association.
What are the advantages of commonhold over leasehold?
The potential advantages of commonhold are:
- Freehold ownership - Commonhold enables units to be owned forever and therefore removes the disadvantage of having a lease as a wasting asset and the need for lease extensions.
- Self-management by the flat owners - Commonhold gives control of the block to the unit owners. The opinion of the unit owners is therefore the key consideration when making management decisions which may not have been in the interest of a landlord wanting to minimise costs on an investment.
- Standardisation - The main rights and obligations will be contained in the prescribed CCS and will apply to all commonholds.
- Flexibility to accommodate change - As part of the CCS is prescribed by law the Government can respond relatively easily to changing concerns e.g. improve fire safety measures (or other health and safety measures) and encourage "green" energy initiatives. It is also easier for unit owners to amend the rules of the commonhold. Currently, unit owners can agree to vary certain rules about how their building is run with anything over 50% support. In contrast, varying the terms of all leases in a building is extremely difficult.
- No risk of forfeiture - Where a leaseholder breaches the terms of the lease, forfeiture enables the landlord to bring the lease to an end and take back the property. The landlord is not required to pay any money to the leaseholder even when the property is worth more than the debt owed. There is no forfeiture within commonhold.
Commonhold ownership is currently being reviewed by the Law Commission. Stay tuned for articles on the proposed changes.
Whether you are a landlord or a tenant, Pinney Talfourd can provide clear advice on all aspects of commonhold. The Property Litigation Team have provided practical and robust advice to its commercial property clients in many cases over the years and our experience of these situations can be invaluable.
Pinney Talfourd are experts in advising on leases. Contact our Property Litigation Team for more information and an initial assessment of the lease.
This article was written by Stephen Eccles, Partner in the Property Litigation Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of March 2019.