Is commonhold back on the agenda?

“We have been told that there is insufficient incentive (financial or otherwise) for those involved in building homes and commercial property to change their practices and adopt a whole new system while the existing one… does the job.” (Reinvigorating commonhold: the alternative to leasehold ownership, Consultation Paper 241, Law Commission, December 2018.) Alongside its work on modernising residential leasehold law, the Law Commission has just reviewed the commonhold legislation and has made, in the above consultation paper, several proposals for improving the legislation. The point is often made that England and Wales are almost unique in having a residential leasehold system for the ownership and management of flats. Many other jurisdictions have “commonhold” type systems (strata title in Australia, for example). Such a system allows for freehold ownership of flats and other units. Commonhold was introduced by Part I of the Commonhold and Leasehold Reform Act 2002, which came into force two years later. It introduced into English and Welsh law a system under which flats, offices and other units could be held freehold coupled with a system of democratic management of the building. By allowing freehold ownership of units it abolished at a stroke the problems of using leasehold, with its limited time frame. Each commonhold must have a commonhold association (CA), a company limited by guarantee with a prescribed constitution where membership is limited to the owners of the units within the commonhold development. The CA owns the common parts and manages the development. Each commonhold must have a “commonhold community statement” (CCS), which contains the rules of commonhold, including the local rules for the particular commonhold. However, since the legislation’s enactment, fewer than 20 commonholds have been created (according to the consultation paper). What went wrong? The Law Commission addresses the issue of whether the shortcomings in the law governing commonhold has led to a lack of confidence in using it. In a lengthy paper (running to almost 480 pages) it begins with an analysis of the ways in which commonhold has advantages over the leasehold system. As part of its deliberations, the commission consulted widely with different professional and other groups and received evidence from existing commonholders. Converting to commonhold It addresses first the creation of new commonholds. What is the position of leaseholders who are considering converting to commonhold? As matters stand, such a conversion can take place only if it is supported by the freeholder, all the leaseholders and any lender. In practice, leaseholders must first acquire the freehold through enfranchisement and then, as freeholders, apply to convert to commonhold. The majority of consultees stated that this presents a barrier to conversions. The commission has recommended the introduction of a new, simpler, streamlined process that would allow leaseholders to enfranchise and then convert to commonhold using one procedure. What of the current requirement of unanimity? Two options are identified by the commission. Under the first, the threshold for support would be reduced to 50%, but the non-consenting leaseholders would be able to retain their leases; under the second option the threshold would be reduced to 80%, but non-consenting leaseholders would be required to take a commonhold unit. In these cases an order from the First-tier Tribunal (Property Chamber) (FTT) would be necessary to approve the conversion and the FTT would be required to check that the necessary consents have been obtained and that the terms of the commonhold community statement (that is, the rules of the commonhold) sufficiently protect the interests of the minority. This would be another new role for the FTT. New commonhold in mixed‑use developments On this issue, the commission examined matters that can arise with mixed-use developments and multi-block developments. Many criticise commonhold for its “one-size-fits-all” approach, which makes it difficult to use for mixed-use or multi-block developments. The commission considered various ways of mitigating this and considered that “layered commonholds” might make commonhold more flexible. This would allow for different parts of the development or (in some cases) the building to be organised into separate sub-associations/commonholds. Each such sub-commonhold would have its own commonhold association and would be responsible for its own costs and interests. All the sub-commonholds would be part of an umbrella association which would be responsible for overall management. However, the commission concluded that the inherent complexities would make this unsuitable for mixed-use or multi-block developments (a similar conclusion was made on using flying freeholds). Instead, the commission recommends using a management structure that contains “sections”, separating different interests without additional corporate bodies. Sections would allow for the grouping of units that have particular interests. The CCS would be suitably amended to create different membership classes. For example, a mixed-use development could be so structured as to include a section for offices, one for hotel and retail and other sections for residential units. It would all be under one commonhold association. The CCS would designate responsibility for common parts. These observations led the commission to provisionally propose that the use of sections would be an appropriate management structure to make commonhold work better for both mixed-use and multi-blocks. Development rights Some of the criticism of the existing legislation has been directed at the provisions in the 2002 Act relating to development rights. The commission concluded that they limit flexibility while not providing certainty for purchasers, stating “development rights were intended to cover smaller-scale developments, rather than today’s modern developments”. It proposes that revised statutory development rights should apply automatically so as to avoid being expressly reserved in the CCS. A developer should be able to appoint directors only in proportion to the number of units it will retain. Commonhold associations The current position under the 2002 Act seemed to find favour with the commission, though it recommends revisions to the current provisions dealing with insolvency. The insolvency of a commonhold association would have a disastrous effect on the commonhold concerned. The commission seeks views on whether such an insolvency could be avoided by using routes available under company insolvency law. For example, if the company is insolvent, it can use a company voluntary arrangement (CVA) to pay creditors over a fixed period. If creditors agree, the limited company can continue trading. It also seeks views on whether, on an insolvency, a successor company could be appointed, on the appropriate areas of discretion for a court to impose conditions and whether additional sums could be demanded from unit holders. The commonhold community statement The commission seeks views on whether there should be restrictions on which local rules can be adopted. Should the CCS prohibit holiday lets, for example, or insist on payments on a sale or sub-sale? What of amendments to the CCS rules? Here the commission proposes that there should be a right for a unit holder to challenge a decision adverse to their interests in the FTT. Management and maintenance issues It has been reported that there may be difficulties in persuading people to become directors. The commission recommends a procedure for electing directors by allowing for election at a general meeting and also by co-option by the existing directors. Moreover, should it prove difficult to find a director, any commonhold member should have the right to apply to the FTT for an appointment to be made. To avoid a situation where an investor or group of investors behave unfairly, it should be possible for application to be made for other directors to be appointed, in some cases under court or tribunal supervision. Other management matters addressed are insurance and maintenance of common parts, rights of entry, consents to alterations and whether long-term contracts are in practice causing problems. Financing the commonhold Commonhold unit holders must contribute to the costs and the expenses of running the commonhold. Under the commission’s proposals, proposed contributions by unit holders would have to be approved by a general meeting and passed by a written procedure. It should also become compulsory for each commonhold to have a reserve fund. Residential leases The banning of granting long leases causes many practical problems: how is the demand of shared ownership leases (often a requirement when planning permission is granted) to be satisfied? The commission recommends that granting a shared ownership lease of a unit should be considered. A shared ownership unit holder should be able to vote at general meetings, except on a decision to terminate the commonhold, where the vote should be shared with the other owner of the unit (in practice often a social landlord). Dispute resolution The commission supports the policy of using mediation whenever practical when disputes arise within a commonhold. Where disputes are unresolved, the commission recommends that jurisdiction to determine commonhold disputes should lie with the FTT. For unpaid contributions (where mediation is not required before taking action) the commission recommends that the CA should have the power to obtain a statutory charge over unpaid contributions. Termination The commission reviewed the provisions in the 2002 Act. It concluded that a voluntary termination should be possible if either support is unanimous, or there is the support of 80% of the available votes plus the approval of the court. An assessment The consultation paper is very thorough and clear to read. It is also very long (the Aldridge Report published by the commission in 1987, which led to the 2002 legislation, ran to fewer than 100 pages). There is likely to be broad agreement with the analysis and proposals in this new consultation paper. But is improved commonhold legislation of itself the whole answer? Will commonhold ever replace leasehold without significant fiscal and other inducements, such as a “sunset clause”, setting a year after which all new developments will have to be built and managed on a commonhold basis? Details of the consultation can be found at: www.lawcom.gov.uk/project/commonhold/ The closing date for responses is 10 March 2019 James Driscoll is a solicitor and a co-author of Commonhold: Law and Practice