UK: Commonhold: Freeholds for Sale!

Last Updated: 20 May 2002
Article by Barry Brice

The UK property market is regarded as one of the most mature and sophisticated in the world. However, in one respect we have lagged well behind other countries, that being the ability to transfer the freehold of a unit within a property where the unit is dependent upon the maintenance of other parts of the property. A good example of this is a flat within a block where each flat owner will need the structure of the building and its common parts to be maintained.

The problem is not limited to blocks of flats. It applies to all properties where there is a dependence on the maintenance of other property; for example, retail units in a shopping arcade or retail park, units on an office park, and floors within office blocks

The reason there has been a difficulty in selling freeholds in such situations is that under English land law the obligation to perform positive covenants entered into upon the transfer of a freehold does not pass automatically to subsequent owners when the freehold is sold on. A positive covenant is simply an obligation to do something, such as in the case of a flat owner an obligation to contribute to a service charge incurred for the maintenance of the structure of the block and the common parts.

Conversely, if a leasehold interest is created the obligation to perform positive covenants will pass as the leasehold interest is sold on. This is why flats are sold by way of the grant of long-term leases rather than freehold.

The Commonhold and Leasehold Reform Act came into being upon 1 May 2002 and introduced the concept of commonhold to overcome the problem. In a commonhold development it will be possible for units to be sold freehold and for positive obligations to be enforced by and against owners of inter-dependent properties and also their successors in title.

In the case of a new development, it can be set up by the developer as commonhold at the outset. An existing development can be converted to a commonhold development with the consent of all those holding an interest.

The new legislation is lengthy and detailed. In essence, however, the legal structure of a commonhold development will be relatively simple. Each separate property in a commonhold development will be called a "unit" and each owner will be called a "unit-holder". A commonhold association will be created. This is a private company limited by guarantee whose membership will be restricted to all the unit-holders within the development. Commonhold associations will have standard sets of memoranda and articles of association that will be prescribed by the Lord Chancellor from time to time.

All the unit-holders in a development will have two interests in the property of the commonhold; a freehold interest in the units they own and membership of the commonhold association which will own the communal parts.

A commonhold development must be registered at HM Land Registry, which will require a copy of the memorandum and articles of the commonhold association and a commonhold community statement to be presented. The statement will contain the rules of the particular commonhold. There will obviously be a need for flexibility in these rules to allow for the nature of the particular property. What this will mean is that when freeholds in a commonhold development are transferred the new owner will automatically be bound by the obligations set out in the rules. However, the new Act does stipulate certain matters which must be covered by a commonhold community statement, including requiring the commonhold association to establish and maintain funds to finance the repair and maintenance of the common parts.

The new Act appears to be well drafted and to cover comprehensively relevant legal issues likely to arise in practice. This is not really surprising since the draftsmen of the legislation have had a long time to do their work. The Act essentially follows proposals which were published as long ago as 1987. Also, we have been able to follow the example of other jurisdictions such as states in Australia, the USA and Hong Kong, where the equivalent of commonhold has been in place as a concept for many years. A kind of commonhold was introduced in New South Wales as long ago as 1961.

Perhaps the big question is the extent to which the property industry will adopt the new available structure. One can see that it will be popular in the case of blocks of flats, but what about commercial properties? Richard Lambert of the British Property Federation has expressed the view that given the potential demand and investment value, it is unlikely that commonhold will ever be used for prime commercial property, but is likely to appeal to niche markets. In the USA, commercial commonhold appeals particularly to smaller medium sized professional practices and partnerships (lawyers, surveyors, doctors etc). Many of the office buildings around the United Nations Headquarters in New York are commonholds, enabling national delegations to the UN to locate close to their central focus. Similarly, in Hong Kong there are a large number of commonhold office blocks located just outside the central business district.

In some situations commonhold could maximise a developer's return. Currently, in the case of office developments for example, developers will tend to retain ownership of the entire block rather than sell off floors on long leaseholds. The new Act makes the sale of an office block floor by floor a more attractive option and potentially a more profitable one.

What is certain is the new Act introduces a degree of choice and flexibility which we did not have previously. We have caught up with other parts of the world, and not before time.

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.

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