Commonhold Schemes in Commercial Property

Last updated: 10 October 2019

Estimated reading time: 7 minutes

Commonhold is a form of land ownership in England and Wales but it is very rarely used. It is most likely to be applicable to ownership of houses and residential flats or apartments but can also be appropriate for mixed use and commercial developments.

Here we consider the following:

  1. What is commonhold in commercial property?
  2. Is it the same as freehold?
  3. Advantages and disadvantages of commercial commonhold property
  4.  Commercial tenants and the right to manage
  5. Making commercial property into a commonhold

What is commonhold in commercial property?

Commonhold is a type of freehold ownership, combining the freehold ownership of single property with a bigger development. The members of the development are involved, through the formation of a company, limited by guarantee.

Commonhold land can be registered as commonhold land at the Land Registry.

Commonhold is a relatively modern concept, having been created in 2004 as a new form of land ownership in England and Wales. To date, they are very rarely used and many mortgage lenders will not lend money against commonhold properties.

The key purpose of commonhold is to make sure that the owners of each unit belonging to a particular development are able to exert some control over the wider development – without having to involve a third party (such as a landlord).

Commonholds:

  • are generally suitable for housing, mixed use and commercial developments; and
  • can be used for both new developments, but also an existing leasehold development can be, with the correct procedure being followed, changed to a commonhold.

Commonholds are not mandatory; they are a part of a voluntary code. Developers are free to sell newly built units on long leases if they so wish, which is generally the accepted method at the moment.

For many years in countries such as the USA and Australia, a successful system has been in place for schemes of common ownership of land. Following the introduction of new laws in 2004, England and Wales now have the statutory framework for similar commonhold ownership. Currently, however, they are not proving particularly popular. This may be down to the process for creating commonholds and also the availability of funding for such projects.

A commonhold is made up of:

  • units; and
  • common parts

The ‘units’ are the individual parts of the estate – for examples the offices, shops, flats. These are owned by the ‘unit holders’ as freehold.

The common parts are the areas that do not form part of the unit, but which are common to the development – for example car parking, outdoor areas, stairs and shared facilities.

Is it the same as freehold?

Commonhold is a type of freehold ownership. Individual units are held on a freehold basis, but shared areas of the development are not part of the units – they are separately held.

The law provides that land is determined to be commonhold if each of the following apply:

  • The freehold in the land is registered at the Land Registry as a freeholder estate in commonhold land;
  • The land is detailed in the articles of association of the company; and
  • A common hold community statement (as we refer to below) includes rights and duties of the commonhold association and unit holders.

Each unit-holder will receive title documents for their own unit and also for the title of the common parts.

There are certain types of land that are specifically excluded from being commonholds. These include:

  • Agricultural land
  • Flying freeholds (being a freehold title that is only over one floor, such as the first floor of a flat); and
  • Certain specific contingent estates (for example schools, places of worship and so on).

Advantages and disadvantages of commercial commonhold property

Advantages Disadvantages
Commonhold was devised to address what were otherwise the unsatisfactory options of owning property that included shared facilities (under the lease system, with common areas in the control of a third party). Currently, commonhold properties are not particularly popular and interested parties may encounter some difficulties in obtaining funding and obtaining appropriate advice.

Commonhold avoids parties having to enter into long leases (which are always becoming shorter and essentially depreciating in value) and brings collective control to those interested in the overall property. Long leases may not be attractive because, amongst other things:

  • capital value usually reduces as the term reduces;
  • each property requires its own lease, so a property that includes multiple tenants may have many leases, all of which may vary – this can be challenging when considering a scheme of management across the entire development; and
  • management under leasehold properties can vary and is often impacted by the quality of a managing agent instructed by a landlord.
It is planned that an ombudsman service will be established to give potential awards for redress in the event of disputes. Currently, however, regulations are not in place for such a service.
Documentation associated with commonholds (for example the commonhold community statement and articles of association of the company which is the commonhold associate) are largely standard documents. They are, therefore, less likely to contain individual drafting errors. Furthermore, for each commonhold, there will be fewer documents.  
Disputes in respect of commonholds can ordinarily be resolved though conciliation and mediation.  

 Commercial tenants and the right to manage

Legislation provides a right for tenants to obtain their landlord’s management functions by transferring them to a company set up by them. This is known as a ‘Right to Manage Company’ (RTM).

The RTM can be ‘part-commercial’ but the non-residential part must not exceed 25% of the total floor area (but excluding the common parts).

The intention of this mechanism is to empower tenants to take responsibility for the wider site which they occupy and potentially remove bad or disinterested landlords.

Landlords’ consent is not required, and the process is straightforward. A tenant can simply send a formal notice to the landlord. Once the relevant RTM company has been set up, the management will transfer to the RTM company. Notably, the landlord is entitled to be a member of the RTM.

Taking over management of the site will transfer significant responsibilities to the RTM, so it is important that this step is only taken if it has been well considered.

There is a process for the landlord to submit a counter notice either admitting the entitlement of the RTM to acquire the management rights or alleging that the RTM does not have entitlement (together with reasons why).

In order for the RTM to acquire the rights, the property must meet certain conditions and there is a requirement for a minimum number of tenants to take part.

The position can be complicated where there are commercial units and the RTM comes into effect, with the landlord retaining management of the commercial units. Although the RTM may not manage the specific commercial unit, the fact that it has management responsibility of the wider site will have some impact on those commercial units. The landlord should be able to exercise votes in respect of these commercial units. The amount of voting power apportioned to the commercial units should be proportional to the internal floor areas (excluding the common parts).

Making commercial property into a commonhold

It is possible to start any new development of commercial property as a commonhold from the outset. Equally, an existing commercial property held as a freehold or leasehold can become a commonhold development. In making a commercial property into a commonhold, there are various component parts that need to be considered:

Part Considerations
Commonhold community statement:

The commonhold is overseen by a commonhold association in line with a ‘commonhold community statement’ (CCS). The purpose of this statement is to detail:

  • a description of the property and specifically the proportion which is within the commonhold; and
  • any rights affecting the property and the commonhold – including those relating to the commonhold association, the unit holders and any tenants of unit holders.

A dispute resolution process should normally also be contained in the CCS.

The CCS may impose duties on the commonhold association and/or on the unit-holder (providing it complies with its legal requirements). Examples of the duties that may be included are to:

  • pay money
  • grant access
  • give notice
  • undertake works
  • refrain from:
    • entering into specific transactions in relation to a commonhold unit
    • causing nuisance
    • undertaking certain works
    • specified behaviour
  • indemnify the commonhold association or a unit holder relating to the costs arising from a breach of any statutory requirements
Articles of association

As referred to above, a limited liability company is formed (usually a company limited by guarantee). This company will act as the commonhold association. As with any other limited company, it must be registered at Companies House and will have in place a constitution, known as the ‘articles of association’.

The articles of association must be in the form provided for within the schedule to the legislation (or in a form which gives the same effect).

Registration at the Land Registry: Once the commonhold association has been formed, it will need to be registered at the Land Registry. This will mean that the company details and the CCS will be publicly available.

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