FID Trust International

A commonhold association is a private limited by guarantee company incorporated under the Companies Acts:

  1. It will be registered at Companies House.
  2. The liability of each member is limited. Each guarantees to pay £1.00 of the debts of the commonhold association on its winding up. There are no shares.
  3. 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.
  4. Copies of its memorandum and articles of association will also be available from Land Registry. In any case, no amendment will be effective until the amended document is registered at Land Registry.
  5. The same requirements apply to commonhold associations as to other companies limited by guarantee.

In England and Wales, the only practical way to become the long term owner of a flat in a mansion block, a shop in a shopping centre, an office in a tower block or a unit on a commercial or industrial estate has been to become a tenant under a long lease. Freehold ownership has not been a realistic option. From 27 September 2004, when the new commonhold laws come into force, commonhold will provide a freehold alternative to long leasehold ownership of residential and commercial properties within a development.

Commonhold is a new kind of freehold ownership. It combines aspects of company law with a special kind of ownership of registered land. It is similar to successful systems that have been in use for interdependent properties elsewhere in the world for many years: for example, condominium ownership in the United States and strata titles in Australia.

Commonholds will face the same issues of collective property management as leasehold developments do now: repair, insurance, use, anti-social behaviour, transfers, lettings and so on. The key difference is that communal control of the development as a whole will be delivered through, and by, a limited company known as a commonhold association, not a landlord.

Commonholds will also differ from leaseholds in the uniformity and accessibility of the governing documents: principally, the commonhold community statement and the memorandum and articles of association of the commonhold association. The format and content of these documents will be largely prescribed by regulations. In leasehold, by contrast, every lease is a separately negotiated document with its own terms and format. So, in a 20-unit industrial estate there would probably be 20 leases in a leasehold development, but only one commonhold community statement.

Take up of commonhold is voluntary. Whether commonhold or leasehold will be more appropriate in a particular case will be for those involved to decide.

Once created, the key features of commonholds are that:

  1. they combine private ownership of an individual freehold property (a unit) with participation in the affairs of the commonhold community through the medium of a commonhold association that owns the parts of the commonhold that are not included in any unit (the common parts);
  2. each unit will provide a member of the commonhold association;
  3. the commonhold association is a limited company with standardised powers and rules;
  4. the day to day management of the commonhold association is in the hands of its directors;
  5. the affairs of the commonhold will be democratically controlled and, once the commonhold is up and running, only the owners of commonhold units can be members of the commonhold association;
  6. commonhold units may be let but leases of residential units:
    • will generally be limited to no more than 7 years; and
    • cannot be granted for a capital sum;
  7. the rules of the community, the rights and duties of the property owners and the procedures for settling disputes are specified in a single, publicly accessible document known as a commonhold community statement (CCS);
  8. common dispute resolution procedures aim to resolve commonhold disputes without litigation;
  9. prospective tenants of premises in a commonhold must be told of the commonhold status of the land and given a copy of the commonhold’s rules;
  10. tenants will be bound by the terms of the CCS and will have to use the dispute resolution procedures specified in it for commonhold disputes; and
  11. there are special rules relating to the termination of a commonhold.

The format and contents of the CCS are largely prescribed by regulations but, to allow the CCS to reflect the particular circumstances of the commonhold, local rules may be added. The CCS may be amended by the members of the commonhold association but fundamental terms such as voting rights and allocation of communal expenditure are strongly protected.

The local rules will be critical in determining and preserving the intended character of the commonhold. Using text and detailed plans they will define:

  1. the identity of the commonhold and the commonhold association;
  2. the units and the rights that benefit or affect them;
  3. the restrictions imposed on the use of a unit or the common parts;
  4. the obligations imposed on unit-holders to repair, maintain and insure their units;
  5. the voting rights of members; and
  6. the proportion of the general expenses to be borne by each unit.

The prescribed contents of the CCS include provisions relating to:

  1. the setting and collection of the bills to unit-holders for the running costs and future repair and maintenance, known respectively as the commonhold assessment and reserve fund levies;
  2. the diversion of rent from a tenant to the commonhold association to pay arrears of commonhold assessment and reserve fund levies;
  3. the liability of a new unit-holder for the arrears of the former unit-holder;
  4. the duty of the commonhold association to repair, maintain and insure the common parts;
  5. restrictions on alterations to the common parts;
  6. the transfer and leasing of units;
  7. the keeping of registers of unit-holders and tenants; and
  8. the resolution of commonhold disputes.

Extensive use is made of prescribed forms for financial matters, information about transfers and lettings, and dispute resolution procedures.

Commonhold documentation is intended to be more uniform and simpler to understand than leasehold documentation but it still creates legally binding rights and duties. Anyone proposing to develop, own or occupy premises in a commonhold should take independent legal advice as to the implications of doing so.

The main advantages of commonhold over long leasehold ownership

  1. leases are wasting assets, commonhold ownership is not - it is freehold;
  2. leases only relate to individual properties, whereas the commonhold community statement relates to the whole of the commonhold;
  3. leases come in all shapes and sizes and are often drafted defectively, whilst commonhold documentation will be largely standardised and clearly written;
  4. 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.

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:

  1. the individual properties will be freehold and therefore will not be wasting assets which reduce in value over time;
  2. there is no third party landlord;
  3. there is only one set of documents for the entire development and they will be substantially standardised;
  4. 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.

Please contact us by telephone 0207 439 3400 (0044 207 439 3400 – International) or E-mail if you wish to incorporate Commonhold Association Company in the United Kingdom.