UK: Commercial Commonhold Schemes

Ready, set...go!
Last Updated: 2 September 2004
Article by Ian Hyde and Susan Samuel

Originally published August 2004

The Government has announced that Commonhold schemes can be set up from 27 September 2004.

Developers will now be thinking about whether a Commonhold scheme will be suitable for their proposed developments.

Commonhold schemes will be far simpler to set up than conventional methods of long leasehold or freehold sales of part. Like the Sydney waterfront office/retail/restaurant development pictured above, Commonhold is flexible, not only in the residential context, but also in mixed - use developments, retail parks and industrial estates.

Will a Commonhold development be worthwhile investing my time and money in?

Commonhold is a new way for developers to create a scheme involving the joint ownership of property. It will take time for others in the property industry to adjust to the new way of owning and developing property. However, the structure and documents of Commonhold schemes will soon become familiar within the marketplace.

Consider also the popularity of Commonhold type schemes in other jurisdictions. The Australian equivalent of Commonhold has been in operation for over 30 years. Today, the number of Commonhold type schemes in New South Wales alone is 65,000, with on average 10 new schemes being created every day.

If you are thinking about creating a Commonhold scheme (or converting a conventional scheme to Commonhold), come and talk to us. We can use the flexibility of Commonhold to create a scheme which can meet your requirements.

Our Expertise

Ian Barker is a Property Partner specialising in commercial property development. Susan Samuel is a Property Associate, admitted to practice in both England and in her native jurisdiction of New South Wales. In New South Wales, Susan acted for property developers, property funds and lenders in creating and managing strata (the equivalent of Commonhold) schemes. Ian and Susan lead the Commonhold team at Pinsents.

‘The major benefit for developers is that when a Commonhold scheme is set up, all of the units are subject to standard terms - buyers can't tinker with them as they would with long leases.’

How Commonhold Works

Commonhold was first introduced to us by The Commonhold and Leasehold Reform Act 2002 (‘the Act’) in May 2002.

Commonhold gives property developers the ability to create new developments with freehold ownership of, what is in effect, air space! There will also be a proper permanent structure for dealing with the common parts.

When you create a Commonhold scheme, the property will be divided into individual Commonhold units, and common parts. All of the units and the common parts will be freehold.

The sole governing document of a Commonhold scheme will be the Commonhold Community Statement. All of the units and common parts will be subject to this. The Commonhold Community Statement will be drafted by the developer based on a template of mandatory provisions provided under the Commonhold Regulations. Current drafts of the regulations give the developer flexibility to add additional provisions if desired.

This will give developers the ability to set up the Commonhold scheme on terms which they require, and save time and money in unit sale costs by removing the need to negotiate a form of lease (and remove the ability of buyers to tinker with the terms).

Creating an Industrial Commonhold Estate
A developer of an 'A' grade industrial estate could put in place uniform obligations on all unit-holders to keep their buildings a certain colour or finish. It can require that landscaping and service roads be maintained to a high standard, and that any loading be restricted to specified areas. It will be down to the Commonhold Association (and not the developer) to manage the scheme in accordance with those obligations and the provisions of the Act.

To create a Commonhold scheme, the developer must set up the Commonhold Association, which will be a company limited by guarantee. The role of the Commonhold Association is equivalent to that of the management company under conventional schemes.

Owners of the Commonhold units will be members of the Commonhold Association. The Commonhold regulations will provide a prescribed standard form for the company's memorandum and articles.

In a new Commonhold development (not being a conversion of an existing leasehold development), until the first unit is sold, the Commonhold scheme will be in a transitional period. During this period, the developer controls the scheme and can de-register it if desired.

When the first unit is sold, the Commonhold scheme will come into full effect. The Commonhold Association will be registered as the proprietor of the freehold title to the common parts and the Commonhold Community Statement will come into force.

Control of the Commonhold Association
Developers of new Commonhold schemes may be concerned that once a majority of the units are sold, they will lose control of the Commonhold Association. However, the developer can include ‘Development Rights’ in the Commonhold Community Statement, which will allow the developer to generally complete and market the development. In Australia, developers concerned about the issue of control require buyers to irrevocably appoint the developer as proxy in respect of their Association voting rights, in the contract for sale. In this country, current drafts of the articles of the Commonhold Association enable unit owners to give a proxy in respect of their voting rights. We await the final form of these to confirm that the same arrangement can be used here.

Commonhold will open up property developments to small to medium investors and businesses looking to own the property they occupy. Owners of units will have comfort that they will have standard protections set down by law and that all other owners in the scheme (and the Commonhold Association) will be subject to these standard obligations.

Financing Commonhold Developments

Lenders will want to ensure that if their security needs to be enforced mid-way through construction of the development and/or the sale process, they will have control of the development to finish building and/or . sell off the remaining units. In conventional schemes, lenders may require that their charge remains over the whole of the estate until all units are sold.

In a Commonhold scheme, a lender's charge over the common parts will be extinguished when the transitional period ends and the Commonhold Association is registered as proprietor of the freehold title to the common parts. The lender's charge will remain over the title to each of the unsold units. Lenders wanting to retain control of a Commonhold development could require a developer to reserve to itself Development Rights at the outset. This will enable the lender to continue to exercise those rights (or transfer them to a buyer of the development) if the lender appoints an administrator or receiver to the development company.

Dealing with Car Spaces and Storage Areas in the Commonhold Plan

Selling part of a Commonhold unit (such as the carparking space or storage area) is a little more complex with Commonhold.

An owner wanting to sell off a car space that forms part of the unit will need to get the consent of the Commonhold Association. This will involve amending the Commonhold Community Statement, which will be costly and take considerable time. And, by creating an interest in part of a unit, they will be creating an interest which cannot be charged.

To avoid this, we advise that developers set up Commonhold schemes so that areas such as car spaces and storage rooms are given separate unit numbers. This will mean, however, that owners of garages and storage units will have additional voting rights, over and above their voting rights for the main Commonhold unit. This situation may not be desirable in a small Commonhold scheme with few members.

Interested?

Our standard Commonhold scheme documents will be ready in good time for developers, investors and tenants to realise the full benefits of the new legislation. Our team's international experience will ensure the effective and efficient day-to-day operation of your proposals, here in the UK. If you are interested in what Commonhold can achieve for you, please talk to us. We are very happy to discuss with you your Commonhold ideas, and concerns you may have.

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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