The arrival of the new ‘commonhold’ law should have obvious appeal for the social rented sector and represents a radical new approach to property development

It was a long time coming but, at LAST, “Commonhold” came into force on 27 September. Now it is possible, for the first time, for new property developments such as a block of flats, or another interdependent building, to be developed on a freehold rather than a leasehold basis with a new statutory scheme for the management of the common parts of the development.

Commonhold can be used for new residential developments such blocks of flats, or for an estate with flats and houses, as well as purely commercial developments, such as an office block, or for a new mixed-use development. (Residential leaseholders can also opt to convert to a commonhold.)

Commonhold is based on the experience of Australia and the US where similar schemes have operated successfully for decades. The Law Commission recommended its adoption in 1987. Under part one of the Commonhold and Leasehold Reform Act 2002, and the very detailed regulations made under that piece of legislation, commonhold is now available for new developments.

Different to leasehold

Under a commonhold, flats (called “units”) in a block, for example, will be owned freehold and the owner entitled to be a member of a Commonhold Association (CA) that owns and manages the commonhold. Once a new commonhold development has been completed and the last unit sold, only unit-owners can be members of the CA.

In other words, owning a commonhold flat is quite different to owning a leasehold flat. One has freehold ownership, not a time-limited lease, and one also is a member or owner of the CA, which has the common parts and manages the commonhold.

Another difference from leasehold ownership is that the documentation for every commonhold is prescribed by regulations. No commonhold can be set up without a CA, a company limited by guarantee with a constitution that is prescribed in the regulations. And each commonhold must have Commonhold Community Statement (CCS). This describes the property in the commonhold and contains the rules of the development. The basic form of this document has also been prescribed by regulations, though, obviously, it allows for the addition of the specific rules of the particular development, such as the size of the unit holders’ contribution to the costs of managing the commonhold, and rules on how units can be used.

Additional clauses can be added (such as rights allowing a developer to complete a new development) provided that they are clearly stated to be additional provisions affecting that commonhold. In this way, the legislation introduces standardised documentation in common form, unlike leasehold developments where, in practice, there is a wide divergence in drafting styles (and also many poorly drafted leases).

A social landlord will now be able to let commonhold flats on rented tenancies, but, as yet, this does not include traditional shared-ownership schemes

The other fundamental difference lies in the management of the development. Unlike leasehold developments, where there is a landlord, commonhold is managed by the CA on behalf of its members, who are the unit owners. Commonhold management will be conducted on a non-adversarial basis with a statutory policy on using conciliation, mediation or arbitration, rather than litigation. Indeed the act provides for the appointment of a commonhold ombudsman.

Many will see commonhold has having a far simpler system for the setting of budgets, and the application of the rules of the commonhold, than leaseholds. None of the recently enacted new and complex rules governing leasehold management introduced by part two of the 2002 act would apply to a commonhold.

With these features of freehold ownership, standardised documentation and a simpler form of management, commonhold has an obvious appeal for the social rented sector. A social landlord, for example, could let commonhold flats on rented tenancies.

Shared- ownership excluded

There is, however, one matter at least which remains to be clarified: residential commonhold flats (or houses) can only be let in the short term. This rules out shared-ownership schemes in the traditional form for the time being. However, the department for constitutional affairs (which has responsibility for commonhold) is to draft additional regulations that will allow for shared ownership. Pending this, some social landlords may consider other ways of delivering low-cost home ownership, such as through a co-ownership model.

Another factor for social landlords is the right to buy. Although this only applies only to flats and houses, the definition of a house in the housing legislation has been amended by the 2002 act so as to treat commonhold units as “houses”. As a result, a social rented tenant living in a commonhold unit will be able to exercise the right to buy the freehold to the commonhold unit whether it is a flat or a house.