What is commonhold?
Commonhold was introduced by the Commonhold and Leasehold Reform Act 2002 (the Act).
Commonhold is an alternative form of ownership to the freehold and long leasehold systems and is a form of collective freehold. It allows a person to own the freehold of individual flats, houses, and non-residential units in a building or on an estate which is owned by “unitholders”. Unlike leasehold, there is no limit on the length of the ownership of a commonhold.
How does commonhold work?
A commonhold can only be created out of freehold land, or a freehold building, and comes into effect when the land is registered at the Land Registry as a commonhold. A commonhold can be a new building or an existing building, or land which has not been built on.
The freehold estate in commonhold land is divided into units and common parts. The structure of the commonhold is as follows:
- A unit may be a flat, or it may be used for a business (such as an office or a shop) and could include a garage or a parking space. The Land Registry will create a registered title for each unit and one for the common parts.
- Each freehold unit is owned by a unitholder. This means there will be no restrictions on selling or transferring the units and forfeiture will not apply. The property must be used in line with the rules of the commonhold.
- The common parts are all the parts of the building that are not contained in a unit, for example, the communal and shared areas, such as the stairs. The freehold of the common parts is owned jointly by the unitholders through the commonhold association.
Once a commonhold is in place, the Act provides a formal framework of the rights and obligations that apply between the unitholders, and between the unitholders and the commonhold association. A unitholder is entitled to be a member of the commonhold association but there is no obligation on the unitholder to participate in the activities of the association. Only unitholders in the commonhold can be members of the association. All unitholders can be members of the association, but if a unit has joint owners, only one can be registered as a member of the association, and they must decide who to nominate. If they fail to nominate, the first name registered at the Land Registry of the unit will be registered as the member of the association. The rights and obligations of the commonhold association and its members are set out in the commonhold community statement.
The Commonhold Association (CA)
The CA will own and be responsible for the management of the common parts of the building or estate. A commonhold cannot be registered until the CA has been formed.
A CA will be registered as a company limited by guarantee and must be registered following the procedures and rules of both the Companies Act 2006 and the Land Registry. It cannot be registered at either Companies House or the Land Registry until the CA has been formed. The name of the company must end with “Commonhold Association Limited” or in Wales, “Cymdeithas Cydradd – Dolaliad Cyfyngedig”. The Company will be run according to its articles of association which are prescribed by the Commonhold Regulations 2004 as amended by the Commonhold (Amendment) Regulations 2009. The aim of the Company must be “to exercise the functions of a commonhold association in relation to specified commonhold land” and a register of members must be kept.
The commonhold association must have at least two directors, but the directors do not have to be members of the company, and so do not have to be unitholders.
Section 34 of the Act requires the aim of the CA to be “to exercise the functions of a commonhold association in relation to a specified commonhold land.” This means it must be formed especially for a defined parcel of land (or parcels in a split-site commonhold). There are separate rules that set out how a CA must be formed and structured, and rules for their meetings and voting systems.
The unitholders must contribute financially to the upkeep of the whole building and must keep to any restrictions and obligations that apply to how they use their unit and common parts, as set out in the commonhold community statement.
The Commonhold Community Statement (CCS)
The CCS is one single legally binding document which forms the rules governing the use and management of the building or estate and regulates the rights and responsibilities of the commonhold community.
Schedule 3 of the Commonhold Regulations 2004 sets out the prescribed CCS. The CCS:
- Identifies the units (how many there are and the extent) and the common parts, by referring to a plan;
- Sets out the percentage of the overall running costs of the commonhold that each unitholder must pay (per unit) under a commonhold assessment which is an estimate of the overall cost of managing, maintaining, repairing and insuring a building. The CA collects payment from each unitholder in accordance with their designated percentage and when added together the percentages must total 100%;
- Sets out the percentage of any separate charge for a reserve fund that each unitholder must pay (per unit) (a fund reserved for infrequent major works);
- Allocates the number of votes the holder of each unit will have. This can be based on an equal number of votes per unit; or may reflect the size of each unit. This is decided when the CCS is created;
- Sets out the rights and obligations the CA and of each unitholder; and,
- Sets the rules for how the commonhold will be run.
A CA can add extra conditions that are relevant to the individual commonhold but must not amends or delete any prescribed condition. Any extra conditions must be clearly marked by a heading which includes the words “Additional conditions specific to this commonhold.”
The CCS will not be effective until it is registered at the Land Registry. It must be registered along with the title documents for the commonhold, so all current and potential unitholders will have full access to it. In a commonhold there are no separate leases for each flat – the CCS is a single document which applies to all units in the commonhold.
The CCS will be similar to a lease in that it defines the unit and the rights each unitholder benefits from and the obligations they must keep to. For example, a unitholder will have the right to access the common parts to reach their unit but may also have an obligation to allow the CA access to their unit in certain circumstances. A unitholder must observe the rules set out in the CCS. A unitholder has a right to actively take part in any decision relating to how the building is run.
Setting up a commonhold
The Land Registry Practice Guide 60 provides full guidance, details of fees and copies of all prescribed forms. The following rules apply when setting up a commonhold:
- The land must already be registered at the Land Registry as freehold with absolute title. Where the land is not registered, the land will need to be registered as absolute freehold title before the unitholders can apply to create a commonhold.
- A commonhold can only be created from the ground upwards. This means that a residential commonhold cannot be created above office or shop units in a building. The whole building, down to the ground, must be one single commonhold. There can only be one commonhold on a site, and it is not possible to register a commonhold on land which is already commonhold.
- It is possible for a commonhold to be made up of two or more sites, perhaps two pieces of land that are divided by a road or railway. As long as one CCS applies to all the separate parts, these parts make up one commonhold.
Registering a commonhold
A commonhold can be created from scratch, as a new building or estate and without unitholders, or by converting an existing building that is already occupied and with unitholders. In each case, the commonhold must be registered at the Land Registry with the following documents:
- The CA documents relating to the registration of the CA;
- The CCS;
- A formal declaration relating to any permission that is needed from people with an interest in the land; and
- A certificate by the directors of the CA.
The CCS sets out how disputes in the commonhold will be dealt with. It is important that procedures are in place to encourage and make it possible for the unitholders and the CA to settle disputes without the need for legal action through the courts.
The CCS provides the following three distinct procedures:
- The unitholder or tenant to enforce a right or duty against the CA: this involves the unitholder or tenant serving a complaint notice (through a Form 17) on the CA, setting out the complaint. The CA has 21 days to consider the issue before serving a reply notice (Form 18). The reply notice may set out the CA’s proposals for dealing with the complaint, or it may request further information. Following this procedure, the matter is usually settled.
- The CA to enforce a right or duty against a unitholder or tenant: this involves the CA serving a default notice on the unitholder or tenant (Form 19), setting out the complaint. The unitholder/tenant then has 21 days to respond by serving a reply. The CA must then decide the appropriate action to take but does not need to take any action if it reasonably thinks this is in the best interests of establishing or maintaining a good relationship between all the unitholders.
- The unitholder (or tenant) to ensure a right or duty against another unitholder (or tenant): this involves one unitholder or tenant serving a notice on the CA asking it to take action to deal with the problem (Form 21). The CA has 21 days to consider its response before serving a reply (Form 22). If the CA supports the complaint, it can start the standard enforcement procedure. If the CA does not support the complaint, it must decide whether to take the case further. If the CA does not respond in 21 days, the unitholder can serve a notice directly on the other unitholder, and the other unitholder must respond within 21 days. If the complaint is not resolved, then the unitholder can begin legal proceedings. The CA can refuse the unitholder the right to take action if it considers the issue petty, spiteful or trivial or made to cause nuisance, or that the other unitholder has not broken their obligations under the CCS. In this case, the unitholder can use other methods, such as mediation to settle the dispute, or they can start the dispute procedure against the CA.
The procedures are intended to be simple, effective, and informal, and are designed to achieve sensible settlements within, and for the benefit of, the commonhold community.
The dispute procedures do not need to be used in an emergency, or if the CA is taking action against a unitholder or tenant because they have not made a payment that is due.
Ending a commonhold
The commonhold depends on the CA continuing to exist, as it is the freehold owner of the common parts. A commonhold can be ended in two main ways:
- The CA is wound up because the company becomes insolvent; or
- The CA is voluntarily wound up following a decision by the members of the association.