UK: Want To Live Like Commonhold People? The Law Commission Consults

Last Updated: 2 March 2018
Article by Emma Broad and Laura Gowing

As residential leasehold ownership comes under increasing scrutiny (see update), the Law Commission has just kick-started an attempt to reinvigorate commonhold as a viable alternative. Developers, homeowners and funders should all take note as this may mark the start of a process that could see commonhold becoming the structure of choice for certain multi-unit developments, both residential and commercial.

The call for evidence

Historically flats in England and Wales have been sold almost exclusively on a leasehold basis. There are various legal reasons for this, most notably the fact that the law makes it difficult to pass positive obligations (such as ones to pay money or to repair) between buyers and sellers of freehold property but relatively easy between buyers and sellers of leasehold property. The passing of positive covenants is particularly important in multi-owned buildings given the structural interdependency of the individual units (for example, in relation to rights of support).

Leasehold, however, has its own flaws. A leaseholder has no automatic interest in the freehold of the property. For blocks of flats and other multi-owned properties this often means that the freeholder (landlord) controls the management of the block rather than the owners of the individual units. Further, while a freehold interest lasts forever, a leasehold interest is, by its very nature, time limited. While it is common to have long leasehold interests of 99 or 125 years, they are still diminishing assets which will eventually expire or have to be extended (often at a notable cost to the leaseholder).

It was because of the problems with both freeholds and leaseholds that commonhold was introduced by the Commonhold and Leasehold Reform Act 2002 as a means of standardising and regulating rights and obligations in blocks of flats and other multi-owned properties. Each unit within a commonhold is a freehold property which is held by a unit holder. The common parts of the building that do not form part of the individual units are owned and managed by an association made up of the unit owners, rather than a separate landlord who may have competing interests. The commonhold community statement then sets out the rights and obligations of the unit holders and the commonhold association. Those rights and obligations run with the unit and not the individual owner. In this way commonhold seeks to combine the advantages of freehold and leasehold while avoiding some of the pitfalls.

Unfortunately, commonhold has been far from a runaway success. Figures indicate that fewer than 20 commonholds have been created since it was introduced in 2002, and that the majority of lenders currently refuse to lend on commonhold (partly due to uncertainty surrounding enforcement).

Accordingly on 22 February 2018 the Law Commission issued a call for evidence inviting views on the aspects of the law that need to be improved in order to make commonhold more acceptable. The Law Commission wants to know why commonhold has not been more successful. Specifically it wants to identify the legal barriers to wider acceptance of commonhold as an alternative to leasehold.

The call for evidence focuses on three broad categories of potential legal issues surrounding the current scheme of commonhold.

1. Issues in the process of creating or converting to commonhold

To convert an existing scheme into a commonhold requires the consent of the freeholder, all leaseholders with terms over 21 years and any mortgagees of the whole or part of the property. The paper suggests this is one possible barrier to the take-up of commonhold. The Law Commission would like to know if stakeholders are aware of any other barriers.

2. Issues which may make commonhold unattractive to homeowners

The paper suggests a number of potential problems which could make commonhold unattractive to homeowners including: 

  • the application of company law to commonhold associations – company law is seen by some as being unnecessarily complicated given that both the members and directors of the associations will generally be individual homeowners; 
  • concerns about whether or not the right balance has been struck within the current regime between:

    • granting flexibility to developers and protecting the end consumers; and
    • the terms which must apply to all commonholds and those which can be changed; and
  • concerns about the costs associated with commonholds, the dispute resolution procedures and what happens in the event of termination or insolvency of the commonhold association.

It is likely that there are other issues deterring homeowners – the Law Commission is keen to hear about these.

3. Issues which may make commonhold unattractive across the wider property sector

One particular concern identified under this heading is the lack of flexibility in the commonhold model. Mixed-use, multi-owned developments are increasingly popular. However, under the current regime only one uniform commonhold structure can apply to any such scheme. The paper suggests that one way to make commonhold more attractive would be to introduce "layers" within a commonhold. For example, while there would need to be an overarching scheme, there could be sub-layers specifically tailored to, say, the retail element and the residential elements. This would offer greater flexibility in the way in which commonhold applies. 

There are also concerns that commonhold is currently incompatible with shared ownership leases which are used to deliver affordable housing.

The government's role

The paper explains that the government will tackle separately the wider issues which could affect the success of commonhold, including lack of consumer awareness and the difficulty obtaining finance.

Comment

It seems that residential leasehold is falling out of favour with the political establishment. It has received a bad press in the media and is therefore likely to undergo significant reform over the next few years. While commonhold has, it is fair to say, not been popular with developers, funders or homeowners, the government and the Law Commission think that, if properly reformed, it may hold the answer to how to deal, at a legal level, with multi-owned properties. This is understandable – other jurisdictions have successfully developed their own structures to allow flats to be owned on a freehold basis (such as "strata title" in Australia and "condominium" in America) so there is no reason to think that, with the right legislation and incentives, England and Wales could not follow suit.

Although most likely to be applied in a residential or mixed-use development context, the call for evidence suggests that commonhold could apply equally to commercial retail parks or office blocks. Accordingly there is a good reason for all stakeholders to take a special interest in the subject as this is likely to be the start of an extensive journey of reform which could well see the decline of long leasehold interests.

The call for evidence closes on 19 April 2018 and will be followed up later this year with a full consultation paper from the Law Commission.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions