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Why did commonhold fail? The Law Commission issues call for evidence asking for the industry’s views

The Law Commission has issued a call for evidence on commonhold law to understand why commonhold as a form of ownership has proved to be so unattractive to the property market.

This aligns with the government’s announcement in December 2017 to look at whether and how it can reinvigorate commonhold law, following the widely publicised criticisms of leasehold, and reflects one of the Law Commission’s projects announced in its 13th programme of reform launched in December last year.

Commonhold – a false dawn

Introduced in 2002, commonhold was set to become a new form of property ownership that would address the difficulties faced by leaseholders and other landowners.  Similar systems have operated successfully in a number of other countries including Australia and the USA.    However, the take up rates in England and Wales have been low.  There are currently only 20 commonhold developments in England and Wales.

Commonhold allows an individual to own a freehold “unit”, such as a unit on an industrial estate or a residential flat.  Property ownership can be divided vertically or horizontally.  Each unit holder is a member of the Commonhold Association (CA), a limited company, which owns and manages the common parts.  The CA determines the financial contribution to be paid by each unit holder for the management of those common parts.

An attractive proposition to property owners?

There are a number of benefits to commonhold over straightforward freehold or leasehold ownership, which include:

  • Freehold ownership – interests in the units are held on a freehold basis, so there is no depreciating leasehold asset;
  • Common objectives – the objectives of the unit holders and the CA should be aligned.  The unit owners can actively participate in decisions on repair and maintenance rather than having these decisions imposed by a landlord;
  • Standardised documents – commonholds have standard rules and regulations and so there is no discrepancy between each unit’s rights and obligations.  In addition conveyancing should be simpler and cheaper;
  • There is a simple procedure for adding or removing land from commonhold.

It is often the case that on a sale and purchase transaction, where the asset itself is relatively straightforward, issues can arise from the management of the estate which causes delays.  These can range from lost share certificates and defective restrictions on title to purchasers being unable to appoint directors to the management company.  Commonhold ownership would remove those issues at a stroke.

Concerns in the property market

Despite the clear benefits, commonhold has not established itself within the property market.    There has generally been a low take up rate by property developers, who have been unwilling to take the risk on untested structures and procedures.  In addition, there has been a reluctance for mortgage lenders to lend on commonhold properties, with one contributing factor being a nervousness of the effects of liquidation of the CA.

The Law Commission’s call for evidence is open until 19 April 2018.  They will then examine how to make the existing commonhold system a more attractive and workable alternative to current ownership structures.  The purpose of this call for evidence is to obtain views and evidence which will guide a future consultation on the detail. Whilst at this stage, the Law Commission is not making proposals for reform, could this herald the first step of a new dawn?

We are planning to respond to the call for evidence, and so if you have any views please feel free to let us know via the contacts page on this blog.  Details of the call for evidence can be found here.