This booklet is not meant to describe or give a full interpretation of the law, as only the courts can do that. And it does not cover every case. If you are in any doubt about your rights and responsibilities, you should get advice from a solicitor who specialises in this area of the law.
What is commonhold?
Commonhold is an alternative to the long leasehold system. It allows you to own the freehold of individual flats, houses and non-residential units in a building or on an estate. Unlike leasehold, there is no limit on how long you can own the property for.
The rest of the building or estate which forms the commonhold is owned and managed jointly by the flat owners (referred to as unit-holders) through a commonhold association.
How commonhold works
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.
Once the commonhold is in place, the new law provides a formal framework of the rights and obligations that apply between the unit-holders, and between the unit-holders and the commonhold association.
The framework is relatively simple.
- The freehold estate in commonhold land is divided into units and common parts. A unit may be a flat, or it may be used for a business (such as an office or 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 unit-holder owns the freehold of a unit. This means there will be no restrictions on selling or transferring the units and forfeiture will not apply. (Forfeiture is where a lease can be ended and ownership of the property transfers back to the landlord.) However, you must use the property 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, in a commonhold of a block of flats, the common parts will include the actual structure of the building (the walls and roof, the lift and the stairs and so on), and shared areas such as the corridors and entrance hall, the car park and so on. The freehold of the common parts is owned by the commonhold association.
As a unit-holder, you are entitled to be a member of the commonhold association. Only unit-holders in the commonhold can be members of the association. All unit-holders can be members of the association, but there are special rules for joint owners.
The commonhold association is a limited company, registered at Companies House. It is run according to its articles of association, which are available for inspection at both Companies House and the Land Registry. The articles of association are prescribed by the Commonhold Regulations 2004(SI 2004 no 1829) as amended by the Commonhold (Amendment) Regulations 2009 (SI 2009 no 2363) (“the Commonhold regulations”). They set out the duties of the commonhold association.
The commonhold association must keep to the Commonhold and Leasehold Reform Act 2002 (the 2002 act), the Commonhold Regulations 2004 and the commonhold community statement (CCS). The CCS will define the physical extent of each unit and the common parts, and the percentages each unit-holder will contribute to the running costs of the building. It will also set out the duties and obligations of the commonhold association and of each unit-holder. This is similar to how the freeholder’s and leaseholder’s rights and obligations are set out in a lease, but the difference is that there will only be one document for the whole building, not one for each flat. The CCS will be registered along with the commonhold association’s title at the Land Registry.
The CCS allows a commonhold association to set a commonhold assessment, which is the estimate of the overall costs of managing, maintaining, repairing and insuring the building. There may also be one or more reserve funds. (In some commonholds the unit-holders pay extra fees which are paid into a reserve fund and kept until they are needed for large, but infrequent, work projects such as decorating the outside of a property or replacing the lift, boiler or roof. This means the cost of major work can be spread over a number of years.)
The commonhold association will ask you for payment in line with the percentage each unit-holder must pay under the CCS.
Although you will own a freehold flat, you will not have complete freedom to do anything you want in the property. You must keep to the rules set out in the CCS. These will be similar to the restrictions often contained in leases and may relate to, for example, letting, alterations and nuisance.
You will have the opportunity to actively take part in any decisions relating to how the building is run. In managing the building, the commonhold association’s role will be similar to the role of a landlord under a lease. The difference is that, as a unit-holder, you will be represented in that association and will be able to give your views on how the building should be managed, but this will also bring responsibilities. Commonhold is based on a group of unit-holders owning and managing the common (shared) asset (the building). Each unit-holder should be prepared to be involved in decision-making, and attend and vote at meetings of the commonhold association. This principle of ‘self-management’ means that you will not need, and do not have, many of the rights and protection that leaseholders have by law.
The commonhold association
The commonhold association owns and manages the common parts of the building or estate. All unit-holders belong to the commonhold association. This is a company limited by guarantee, which means that if the association collapses or is wound up, each member’s financial liability is limited to £1. There are no shares or share capital. Although the commonhold association is an ordinary company under company law, there are special rules it must keep to.
Forming and registering the commonhold association
It is important to understand that the way the commonhold association is formed and registered is governed by the rules and procedures of the Companies Act 2006 and, although the law relating to commonholds sets certain requirements that the commonhold association must meet, the association must be run as a company under company law. It must meet the requirements of the Registrar of Companies, including submitting confirmation statements to Companies House. A commonhold cannot be registered until the commonhold association has been formed, and the secretary and members will need to deal with the separate registration procedures and rules of both Companies House and the Land Registry.
The company: The aim of the company must be ‘to exercise the functions of a commonhold association in relation to specified commonhold land’ as set out in the Commonhold and Leasehold Reform Act 2002 at Section 34. This means it must be formed especially for a defined parcel of land (or parcels in a split-site commonhold). Because forming the commonhold association is a necessary part of the application to register the commonhold, the definition or description of the land which will form the commonhold must be included in both applications (to Companies House and the Land Registry). These descriptions do not have to be identical, but it must be clear that they refer to the same land. The description in the company registration is likely to be brief, whereas the CCS will describe the land in detail and will refer to a plan. The name of the company must end with ‘Commonhold Association Limited’ or, in Wales, ‘Cymdeithas Cydradd – Dolaliad Cyfyngedig’. Only commonhold associations can use this wording.
The articles: The way a company is run is governed by its articles of association. For a commonhold association, many of the conditions in the arts are prescribed by the Commonhold Regulations and must be adopted. Companies can add to the articles, but none of the prescribed conditions can be adapted or deleted, other than in line with the regulations. This is to make sure that all commonholds in England and Wales are formed and run in line with a similar set of rules.
The prescribed articles are set out in the Commonhold Regulations 2004 (SI 2004 no 1829) as amended by the Commonhold (Amendment) Regulation 2009 (available from The Stationery Office or at www.legislation.gov.uk, or in Welsh at www.legislation.gov.uk/wsi).
A solicitor, a company agent or the person who wants to register the commonhold can form the commonhold association, and it is a relatively simple process.
Contact: The Registrar of Companies
4 Abbey Orchard Street
Phone: 0303 123 4500
Membership: Every unit-holder is entitled to become a member of the commonhold association and only unit-holders can be members. Under the Companies Act, the association must keep a register of its members and, when a unit changes hands, must register the new unit-holder as soon as it receives notification that the sale has been completed.
If a unit has joint owners, only one of them can be registered as the member of the association and they must decide between them which one to nominate. If joint owners fail to nominate anyone, by law the first name registered on the title deeds of the unit will be registered as the member of the association.
Officers of the company: The commonhold association will need at least two directors. The directors do not have to be members of the company, and so do not have to be unit-holders. This allows the commonhold association to appoint property professionals or other relevant experts to the board to bring in management or financial expertise. The rules for appointing the directors are set out in the prescribed articles of association for the commonhold association. The association must give Companies House the names of all its officers. (The officers of the company will have certain duties under company law, and it may be wise for the commonhold association to arrange directors’ and officers’ liability insurance.) The directors of the company can appoint a secretary of the commonhold association and set the employment terms, pay and conditions they consider appropriate. They can also remove the secretary if necessary.
The Commonhold regulations set out special rules for new-build commonholds (those registered without unit-holders), which allow the developer to appoint directors, and this must be allowed under the CCS. However, because the developer will probably prepare the CCS as part of their application to register the commonhold, this should not cause a problem. During the transitional period (the time between the commonhold being registered and the first unit being sold), the developer can choose and appoint up to two directors, as well as any appointed by the initial subscribers ie those people who originally set up the company.
At the first annual general meeting of the company after the end of the transitional period, all the directors must resign and a new board must be appointed. While the developer still owns more than a quarter of the unsold units, they can appoint one quarter of the directors. This allows the developer to influence, but not control, the way the commonhold is managed while they still have a significant financial interest in it.
Meetings: Like all companies, the commonhold association must hold an annual general meeting. It may also call other general meetings to pass resolutions or discuss issues relating to managing the commonhold. General meetings can be called by the board or by the members, in line with the articles of association.
The association does not have to arrange a special meeting to discuss and agree the budget (known as the ‘commonhold assessment’), although it may find it is good management practice to so do.
A quorum will apply to all general meetings. (A quorum is the minimum number of members that must be present for the meeting to go ahead.)
The prescribed articles of association set the quorum as 20% of the members, or two members (whichever is more). The association can change the quorum by passing a resolution, but it cannot be less than 20% (or two members).
Voting: The essential principle of commonhold is to manage the building democratically through the commonhold association, and the main way of doing this will be through an open vote, by a show of hands, at a meeting where each member will have one vote.
However, the prescribed articles of association also provide arrangements for formal polls. The chairman, at least two members of the association, or a member (or members) who represents 10% of the total voting rights can demand a poll. In a formal poll, votes are allocated for each unit in the CCS, and not all unit-holders will necessarily have an equal numbers of votes (see the commonhold community statement section below).
During the period before the commonhold is activated, and during any transitional period, each member has one vote in any poll.
There are arrangements in the articles of association for proxy voting (to allow a member who is unable to attend a meeting to ask someone else to vote on their behalf) and, if a unit has been repossessed, for any lender who has possession, or any receiver or trustee (if the unit-holder is bankrupt) to vote in certain circumstances.
The commonhold community statement (CCS)
The CCS is the most important document in the commonhold. It forms the rules which govern how the commonhold is used and managed. In a commonhold, the unit-holders 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 the common parts, as set out in the CCS.
The prescribed commonhold community statement is set out in schedule 3 to the Commonhold Regulations 2004 (SI 2004 no 1829). This is available from The Stationery Office or you can read it on their website at www.legislation.gov.uk. It is also available in Welsh at www.legislation.gov.uk/wsi.
In simple terms, the CCS provides the framework to manage the building or estate and to regulate the rights and responsibilities of the commonhold community, through one single document. The articles of association govern how the company (the commonhold association) is run, and the CCS governs how the commonhold itself (the building or estate) is run. The Commonhold Regulations apply to both documents.
- 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 unit-holder must pay (per unit) under the commonhold assessment;
- sets out the percentage of any separate charge for a reserve fund that each unit-holder must pay (per unit);
- allocates the number of votes the holder of each unit will have; and
- sets the rules for how the commonhold will be run.
The format and most of the content of the CCS is prescribed by the Commonhold regulations and every CCS must include certain requirements. A commonhold association can add extra conditions that are relevant to the individual commonhold but must not amend 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’ and added at the end of the relevant section or part of the CCS, or as an annex to the CCS. The CCS will not be effective until it is registered at the Land Registry.
The CCS is registered at the Land Registry along with the title documents for the commonhold, so all current and potential unit-holders will have full access to it. It is a document which creates legally binding rights and responsibilities. Owning a commonhold unit creates rights, obligations and responsibilities for the unit-holder, any tenants of the unit and the commonhold association. These are set out in the CCS. This is similar to a lease (owning a leasehold flat creates rights and obligations under the lease). 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 must contain the following information.
Definition of the commonhold: The CCS will include a plan, or plans, to show the overall extent of the commonhold and the location and extent of each commonhold unit, the common parts and any limited-use areas (areas which only a particular unit-holder or unit-holders can use, or which can be used by all unit-holders but only for a specific use). It will state the number of units and the rights of access both to and over the units and the common parts.
The CCS will be similar to a lease in that it defines the unit and the rights each unit-holder benefits from and the obligations they must keep to. For example, a unit-holder will have the right to access the common parts in order to reach their unit, but may also have an obligation to allow the commonhold association access to their unit in certain circumstances.
The plan will, of course, need to keep to the requirements of the Land Registry (see Registering a commonhold below).
Commonhold allocations: The CCS will show the percentage each unit has to contribute as its share of the overall costs of the commonhold and any reserve fund. These percentages are the commonhold allocations. When added together, the percentages that are allocated to each unit must total 100. Including these percentages in the CCS makes sure that every unit-holder is aware of their contributions and the contributions of the other unit-holders.
The CCS also states the number of votes each unit-holder will have in a poll. This may be based on an equal number of votes per unit, or may reflect the size of each unit, on the basis that a larger unit which pays a bigger contribution under the commonhold assessment should be entitled to a bigger say in how the building is managed. This will need to be decided when the CCS is drawn up.
The rules of the commonhold: This is the most important part of the CCS and gives both the commonhold association and the unit-holders the power to enforce the other’s obligations. The rules include specific conditions relating to the following.
- The commonhold association’s obligations to repair, maintain and insure the building.
- The commonhold assessment: Each year, the commonhold association must produce an estimate of the income it needs from the unit-holders to maintain, insure, manage and repair the building. When the association gives you notice, you must pay the percentage of this income that is allocated to your unit. The association can also produce emergency and other assessments if this is necessary due to special circumstances.
- Reserve fund: A reserve fund is a special fund to build up savings for an expected future expense, for example, to replace a lift or central boiler system, or repair the roof of a block of flats.
The CCS states that, during the first year in which the commonhold is registered, the directors of the commonhold association must formally consider arranging for a suitable professional to carry out a reserve study (an inspection of the common parts to advise the directors whether or not it is appropriate to establish or maintain a reserve fund) and must, in any case, carry out a reserve study at least every 10 years. The directors may decide to set up a reserve fund (or funds) or the members of the association (the unit-holders) may pass a resolution that says they must do so.
The CCS allows the association to set a charge which the unit-holders must pay when they receive notice from the association.
- Diverting rent: If you have not paid your contribution to the commonhold assessment or reserve fund and you let your unit, the CCS allows the commonhold association to say the tenant must pay their rent direct to the association in order to meet the conditions of the commonhold assessment. (This will also meet the obligations your tenant has under their tenancy agreement to pay rent to you.)
- Limits on leasing: Although you can let your flat, any leases granted, of seven years or less, must not be granted for a premium. This is a one off initial payment payable at the point of sale, in addition to any rent due under the lease).The ban on payment of a premium ensures that short leases are used only to enable a unit to be rented by a tenant with no financial stake in the unit.. (This restriction does not apply to non-residential units.)
- How any disputes will be dealt with (see below).
- Local rules: This is the term in the CCS for special rights and obligations that apply only to that particular commonhold. They can be added throughout the CCS, but only in the way that the regulations allow. There is a particular annex which must include the rate of interest that will be applied to late payments (if any), the rules on what the units and the common parts can be used for, the particular details of insured risks and the authorised uses and users of the limited-use areas. The format of the annex is set by law, but the content is not, and the association will draft the necessary rules.
- Development rights: In some cases the developer may want to maintain the right to develop the land or the commonhold in the future. This right will end once the developer has completed the building work and sold the last unit. If the developer has development rights, these will be set out in a final annex of the CCS.
As long as the CCS follows the prescribed structure, the association can make changes to it, for example, to the extent of individual units or to rights that apply to common parts, or can change any local rules. The procedure for making changes will be in line with the rules of the CCS, but all amendments to the CCS must be registered at the Land Registry and will not apply until the amended CCS is registered.
The commonhold unit
A commonhold unit is a part of the commonhold which is owned fully by a unit-holder on a freehold basis. It can be a house or flat, an office or other commercial property, or even a golf course or a piece of unbuilt land on a large commonhold estate. The definition of a unit may include a garage or a parking space which is located elsewhere in the commonhold, or these can be units in their own right, owned separately.
If the unit you own is a flat in a block, you will usually own the wall, ceiling and floor coverings and the space between them. You will not usually own the external walls. You will not own the structure of the building, the walls, and the floors as part of your unit. (This is the same as for a leasehold flat.) These will be included in the common parts, owned by the commonhold association. The common parts may also include limited-use areas, which are areas of the common parts which only a particular unit-holder or unit-holders can use, or which can be used by all unit-holders but only for a specific use.
The purpose of a limited-use area is to be able to include it within the ownership and management responsibility of the commonhold association, while still providing a special use to one or more unit-holders or to restrict it to a particular use regardless of who uses it. The most useful example is a balcony to a flat – this is likely to be part of the physical structure of the building so it is sensible that the commonhold association rather than the unit-holder is responsible for maintaining and repairing it. If the balcony is a limited-use area for the benefit of a particular unit, only the holder of that unit is allowed to use the balcony, but the commonhold association is responsible for maintaining it and the costs are shared by the members of the commonhold association. A similar arrangement could apply to an allocated car-parking space in a parking area.
Another limited-use area could be part of the building which the unit-holders would not normally need, or be allowed, to enter (such as a boiler room or lift motor room, which only certain people would need access to), or perhaps a caretaker’s flat or office which only the caretaker would be allowed to use.
An example of a limited-use area restricted to a certain use could be a shared dustbin area that is open to all unit-holders but only for the purpose of emptying their bins.
Setting up a commonhold
This note provides only an introduction to the registration process. Land Registry Practice Guide 60 provides full guidance, details of fees and copies of all prescribed forms.
By law, there are certain restrictions on the land on which the commonhold may be registered. (The term ‘land’ refers also to a building or buildings. The title relates to the land the building stands on, even though none of it may be visible.)
- The land must already be registered at the Land Registry as freehold with absolute title (so a freehold building or plot registered with only ‘possessory’ title cannot be a commonhold). In cases where land is not registered, for example, where the most recent change in ownership was before land needed to be registered, the land will need to be registered as absolute freehold title before the unit-holders can apply to create a commonhold.
The requirement that the land needs to be registered as freehold title makes it clear that a commonhold cannot be created out of leasehold land, regardless of how long is left on the lease. Commonhold creates a freehold interest of a unit and this cannot be done unless the land on which the commonhold is registered has full freehold title.
- The ‘grounded’ rule: 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. It is not possible to create, for example, two floors of commercial units as one commonhold, then two more floors of flats as a separate residential 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.
- Split-site commonholds: 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. However, in cases where the freeholders of the separate sites are not the same person, any commonhold unit must be situated entirely within one site (for example, if a garage is included as part of a commonhold unit, this must be on the same site as the flat).
Registering a commonhold
A commonhold can be created from scratch, as a new building or estate, or by converting an existing building that is already let on long leases or other tenancies. There are two separate but similar procedures for this:
- registration without unit-holders; and
- registration with unit-holders.
In each case, the following four sets of documents must be included with the application form and fee and sent to the Land Registry.
- The commonhold association documents: The full documents relating to the established and registered association – the articles of association and the certificate of incorporation showing it has been registered as a company at Companies House. The association must exist before the flat owners can apply to register the commonhold.
- The commonhold community statement (CCS): This will be registered as part of the commonhold title and must be sent to the Land Registry in its final form, not a draft which will be amended in the future. (If there are any changes after the CCS is submitted, the commonhold association will need to apply to register an amended CCS.)
- A formal declaration relating to any permission that is needed from people with an interest in the land.
- A certificate by the directors of the commonhold association stating that:
- the articles of association are in line with current regulations;
- the CCS is in line with any requirements that have to be met by law;
- the overall application for registration is in line with any requirements that have to be met by law; and
- the commonhold association has not traded and does not have any undischarged liability (ie that it has paid all of its debts).
Registration without unit-holders
This procedure applies where the proposed commonhold is a new development or a converted building, where the new unit-holders have not yet been identified.
The individual units will be sold off at a later stage, after the commonhold is registered. In this case, the developer will form and register the commonhold association and draft the CCS. In cases where the land the application relates to is owned by one or more people jointly with the developer, the developer will need the formal permission of each joint owner not involved in the application. The developer will also need permission from any person who holds a registered charge over (a legal right to) the land, or any part of the land, such as the mortgage provider.
Once the commonhold is registered, it will take the form of a number of separate freehold titles, the individual units (flats, commercial units or garages and so on) and the common parts. There will always be more individual titles than units in the building – each unit title plus the title to the common parts. At this stage, while the development is being built or the building is being converted, the units will be registered in the name of the developer. This is known as the transitional period.
The commonhold is not ‘activated’ until the first unit is sold, and this will also be the end of the transitional period. (The units can be sold after they are completed or ‘off the plan’. Like any other new-build development, the units do not need to physically exist when they are sold.) At that point the commonhold association will be registered as the owner of the common parts and the rights and duties of the CCS come into force. The original owner (the freeholder) will continue to be registered as the owner of the remaining commonhold units until they are sold, after which they will have no further interest unless they have continuing development rights under the CCS.
Once the ownership of the common parts has passed to the commonhold association, unless the developer has development rights under the CCS, they have no further connection with, or influence over, the way the building is managed. There is no situation where the developer can be the landlord – the commonhold association owns and manages the common parts of the building and unit-holders own the units on a freehold basis.
Registration with unit-holders
This procedure applies where an existing building, which is in use and occupied, is converted to commonhold. The process is more complicated than the process for registering a commonhold without unit-holders, as formal permission is needed from the current owners or tenants in the building.
As with the process for registering a commonhold without unit-holders, the procedure begins with forming the commonhold association, registering it as a company with Companies House and drafting the CCS. Any person who holds a legal right to the freehold will need to give permission for the commonhold to be formed and their consent is required because conversion will result in the freeholder losing his or her interest in the building.
Any lenders who have an interest secured over any of the land which will become commonhold must give consent. This category includes, for example, banks who have mortgages secured against leaseholders’ leases of their flats.Lender consent is required in this scenario as their security will be lost when the leases area extinguished on conversion. It is likely that mortgage lenders will only consent to the conversion if they are repaid in full before the conversion or are prepared to accept new charges or mortgages over the commonhold units after the conversion.
The rules concerning the permission that is needed from people with a leasehold interest in the building are more complicated, and it is important to understand the reasons for this.
Ending the existing leases: Once the commonhold is registered, any existing lease ends or is cancelled. The units in a commonhold are owned freehold, so there cannot be existing leases relating to them. This means that the leaseholders and anyone with a legal right to a lease must provide formal permission to end the lease. (It may be reasonable to assume that the leaseholder would only give this permission if they were registered as the owner of a unit in the commonhold.)
The rules relating to permission are as follows.
- Long leases which were originally granted for more than 21 years: These leases will end when the commonhold is registered and they are replaced with a commonhold unit.
- Leases which were originally granted for less than 21 years: These leases will also end when the commonhold is registered, but whether the leaseholder’s permission is needed depends on whether the person registering the commonhold is prepared to offer the leaseholder a replacement lease on the same terms as their original lease for the same number of years that are left on the original lease. Once the new lease is agreed, this must be entered on the Land Registry to protect the leaseholder. In cases such as these, there are two options relating to permission on the application for registration.
- If the leaseholder will receive a replacement lease, they do not need to give permission in the application to register the commonhold.
- If the leaseholder will not receive a replacement lease, they do need to give permission in the application to register commonhold.
In all cases, a county court has the power to rule that a leaseholder’s permission is not needed if, after all reasonable efforts, the leaseholder cannot be identified or found or has failed to respond to requests to provide permission.
Examples of the registration process
A newly built block of flats that is currently empty, where there are no existing leases and the new flat owners (unit-holders) are not yet known
- The application is likely to ask for permission from the following people.
- The freeholder (there might be more than one freeholder, for example, if the land in the application is jointly owned)
- Anyone who has a legal right to the land
- The developer (the freeholder) will apply for registration under section 7 of the Commonhold and Leasehold Reform Act 2002.(without unit-holders).
- Once the land is registered as a commonhold, it will be divided up into units and common parts. The units are likely to be the flats. The common parts will be made up of the structure of the building and the shared facilities, such as the corridors, lifts and stairways.
- Each unit and the common parts will be registered in the name of the developer.
- The commonhold will be activated when the first unit is sold. This is the end of transitional period.
- The new unit-holder will be registered as the owner of the unit and will become a member of the commonhold association.
- The commonhold association will be registered as the owner of the common parts.
- The rights and duties set out in the CCS will come into force.
- The developer will continue to be registered as the owner of the remaining units until they are all sold. Once all the units have been sold, the developer will no longer hold an interest in the property, unless they have development rights. These will be set out in the final annex of the CCS. Development rights will end once all the building work has been completed and the last unit has been sold.
An existing block of leasehold flats that is being converted to commonhold, where the existing leaseholders become unit-holders
- The application is likely to ask for permission from the following people.
- The freeholder (there might be more than one freeholder, for example, if the land in the application is jointly owned)
- Anyone who has a legal right to the freehold
- All leaseholders, including those with a sublease (but not including leaseholders with a lease of 21 years or less who have been offered an equivalent replacement lease)
- Anyone who has a legal right to any of the leases or subleases
- The freeholder will apply for registration (with unit holders) under section 9 of the Commonhold and Leasehold Reform Act 2002, naming each flat owner as a unit-holder. Only the leaseholders named in the application will be registered as unit-holders.
- Once the land is registered as a commonhold:
- each unit will be registered in the name of the unit-holders, who will become registered members of the commonhold association;
- the common parts will be registered in the name of the commonhold association;
- all existing leases will end; and
- the rights and duties set out in the CCS will come into force.
Managing a commonhold
In many ways managing a commonhold block or estate is very similar to managing a leasehold.
The building will need to be insured, maintained and cleaned, and occasionally major repairs will be necessary. The commonhold association will need to collect charges from the unit-holders to pay for all this, and disputes will need to be dealt with. The overall responsibility for controlling and managing the commonhold lies with the commonhold association’s board of directors although, in most cases, a professional managing agent will manage the commonhold more effectively.
However, there are certain major differences between commonholds and leaseholds.
The major advantage of commonhold is the very high level of standardisation of documents and forms. Managers dealing with commonholds know that most of the documents they will have to deal with will be in a standard format and will contain standard wording, as most of the commonhold association’s constitution and the CCS are set out in the Commonhold Regulations. This means that managers will not have the problems of dealing with differing leases or with inadequate company structures. The regulations also provide a complete range of forms, with prescribed content and layout, to cover the events and disputes that are most likely to arise when managing a commonhold (these are listed in appendix 2). Managers must use the forms in the appropriate circumstances.
No landlord and tenant relationship
The commonhold association, made up of the unit-holders, is responsible for managing the commonhold. There is no separate third-party landlord, and management decisions are made by the board of the association (who answer to the members). As there is no landlord or tenant, there is no need for the extensive legal rights and protection that are available to leaseholders through the various Landlord and Tenant and Leasehold Reform Acts. This means that, as a unit-holder, you do not have the right to challenge management and other costs at the First-tier Tribunal (Property Chamber) (in England) or the Leasehold Valuation Tribunal (in Wales), and the commonhold association does not have to formally consult you over proposed work or contracts. All disputes are dealt with through the commonhold association’s internal procedures. The overall idea of commonhold is based on ‘management by agreement’, with all unit-holders able to take part in the decision-making process through their membership of the commonhold association.
The relevant national tribunal have no control over any matter relating to owning or managing a commonhold unit (although they may be involved in some disputes relating to tenants of a commonhold unit-holder).
This is the budget that is needed to manage the commonhold or to carry out repairs or special work. It has to be collected as a contribution from each unit-holder (like service charges under a lease). The board of the commonhold association make the assessment and will send you a notice, using the prescribed form (Form 1), telling you how much you must pay. You then have one month to appeal to the association if you disagree with the amount you are being asked to pay.
At the end of the one-month period, the directors must consider any appeals they have received before issuing the demand for payment to each unit-holder (Form 2). This will tell you how much you must pay and the date the payment is due. (This will be at least 14 days after the date of the demand.)
If urgent work is needed, the association can ask the board to make an emergency commonhold assessment (Form 3). In this case, just the demand for payment is issued, and there is no period allowed for appeals.
If the association decides to create a reserve fund, the arrangements for telling you how much the charges are and how you can appeal, and for sending you a demand for payment, are similar to those for the commonhold assessment (Forms 4 and 5).
Recovering unpaid charges
As the units are held on a freehold basis, you cannot be threatened with losing your lease and ownership of your flat (forfeiture), and the association cannot prevent you from selling your flat if you do not pay the charges that are due under the commonhold assessment. However, the association can use all normal debt-recovery procedures if you do not pay the commonhold assessments, reserve fund charges or interest.
To recover your debts, including interest on the outstanding amount at the rate shown in the CCS, the commonhold association must take normal action against you through the court. If you have let the flat, the commonhold association can instruct your tenant to make their rent payments to it in order to settlement the amount you owe (Form 6).
The court can judge that the association must register a charging order on the unit, but this will not take priority over other legal rights and mortgages that are already registered. After the charging order has been made, the association may also be able to apply for an order forcing you to sell the flat.
If you sell your flat before settling your debt, the CCS allows the association to give the new owner a notice instructing them to pay the amount you owe. They must then pay within 14 days of the notice. If they don’t, interest will be added to the amount you owe. The intention is to encourage you to pay before selling the flat, as it is unlikely that anyone will be prepared to buy it if this would mean repaying your debt (see Buying a commonhold unit below).
If the new unit-holder pays your debt, the CCS automatically gives them the right to recover this amount from you.
Recovering debts is very important in a commonhold, to make sure the association is able to meet its financial liabilities. The association may have no significant assets apart from the common parts. There is no share capital and in serious situations where the association does not have enough money, the remaining unit-holders would have to make up the shortfall.
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 unit-holders and the commonhold association to settle disputes without the need for legal action through the courts.
The CCS provides the following three distinct procedures.
- For a unit-holder or tenant to enforce a right or duty against the commonhold association
- For the commonhold association to enforce a right or duty against a unit-holder or tenant
- For a unit-holder or tenant to enforce a right or duty against another unit-holder or tenant
The procedures are based on standard notices that are prescribed under the regulations, and encourage the people involved to consider using other methods to settle a dispute, such as mediation, arbitration and conciliation, before following the procedures set out below. There may, in future, also be a commonhold ombudsman who will be able to investigate and settle disputes. If other methods are not a realistic option for settling a dispute or have failed to achieve a result, you (or the association) can start the dispute procedures.
The dispute procedures do not need to be used in an emergency or if the association is taking action against you because you have not made a payment that is due.
- Unit-holder (or tenant) against the commonhold association: You (or your tenant) can serve a complaint notice (Form 17) on the association, setting out your complaint. The association has 21 days to consider the issue before serving a reply notice (Form 18). The reply notice may set out the association’s proposals for dealing with your complaint, or may ask you for more information.
In most cases this should settle the matter but, if you are not satisfied, after again considering other ways of settling the dispute, you can start legal action.
- Commonhold association against unit-holder (or tenant): The procedure is very similar to the one above and uses prescribed forms. The association serves a default notice on you (Form 19), setting out its complaint against you. You then have 21 days to respond by serving a reply to a default notice. The association must then decide the appropriate action to take. By law, the association does not need to take any action if it reasonably thinks that this is in the best interests of establishing or maintaining a good relationship between all the unit-holders. This means the association must put the best interests of the community first, and consider the most appropriate action for the whole commonhold.
- Unit-holder (or tenant) against unit-holder (or tenant): This procedure is a little more complicated as the action is not simply between the unit-holders but also through the commonhold association. If you have a complaint against another unit-holder (or your tenant), you can serve a notice on the commonhold association asking it to take action to deal with the problem (Form 21). Again, the association has 21 days to consider its response before serving its reply (Form 22). If the association supports your complaint, it can then start the standard enforcement procedure above. If the association does not support your complaint, or considers that taking no action is the best thing to do in the interests of the whole commonhold, it must decide whether to allow you to take the case further. If the association does not respond within 21 days, or decides that you can take up the issue direct with the other unit-holder, you can serve a notice directly on the other unit-holder (Form 23). The other unit-holder must then send you their reply (Form 24) within 21 days. If you are not satisfied with the other unit-holder’s response, after considering other methods of settling the dispute, you can start legal proceedings. However, the commonhold association can refuse you the right to take action against the other unit-holder if it considers the issue petty, spiteful or trivial or made simply to cause a nuisance, or that the other unit-holder has not broken their obligations or duties under the CCS. In this case, you can use other methods, such as mediation, to settle the dispute or start legal action, or you could start the dispute procedure against the association.
The procedures are intended to be simple, effective and informal, and are designed to achieve sensible settlements within, and for the overall benefit of, the commonhold community.
Restrictions on leasing
. The commonhold association cannot prevent you from letting your flat. You own the freehold and can do whatever you want with the flat as long as this is within the law. But you must tell the commonhold association within 14 days of granting the tenancy (Form 14) and give it a copy of the agreement. You must give the potential leaseholder a copy of the CCS and a notice telling them that they must keep to it (Form 13). (The leaseholder’s obligations under the CCS do not include paying the commonhold assessment as you will continue to be responsible for that.)
The leaseholder must follow most of the rules and meet most of the obligations of the CCS as though they were the unit-holder, and the association may take action against them under the dispute procedures if they fail to do so.
The association has the right to ask for information about any tenancy that applies to your flat by giving notice to you and the leaseholder (Form 8).
Buying a commonhold unit
If you are thinking of buying a commonhold unit, the procedures should be simpler than for a leasehold flat. There is no reducing term (the length of time left on a lease) or ground rent to worry about, and a lot of the documents you will need are readily available through the Land Registry and Companies House. However, all the documents will still need to be checked carefully and, in most cases, you should ask a solicitor for professional advice on the following.
- Commonhold association: You should check that the association is properly registered as a company limited by guarantee at Companies House and that its articles of association are registered at the Land Registry and are written in line with the regulations. You should examine any extra articles and clauses and consider how these might affect how the unit will be managed. The details registered at Companies House will show the names of the directors and the secretary of the association. If the commonhold has existed for a number of years, you will also be able to check the state of its finances from the annual accounts it has filed at Companies House and whether the confirmation statements have been made. You should also ask for details of the most recent commonhold assessment, the reserve funds and any plans for future spending.
- Commonhold community statement (CCS): You should examine this in the same way as you would examine a lease, to find out how the building is managed and what rules there are relating to how the units and the common parts can be used. As with the articles of association, you should check that the CCS is in line with the regulations. It is important to check the title documents for the unit against the CCS to confirm the extent of the unit, the area of the common parts, and any limited-use areas (such as a balcony) which benefit or affect the unit. The CCS will include details of the percentage allocated to the unit for the purpose of the commonhold assessment, any reserve fund charge, and how votes are allocated for decisions relating to the commonhold. If the commonhold is a new development, it is also sensible to check if the developer has any development rights under the CCS which could affect the unit, for example, are they allowed to build alongside the commonhold building or estate?
- Joint owners: If you are buying the unit jointly with another person, only one of you can be registered as the member of the commonhold association. You should decide between you and formally tell the association which of you will be the member. If you do not tell the association which of you will be the member, you should take care when making the application to the Land Registry to register as unit-holders because, if you have not told the association otherwise, the first name registered on the title deeds will be entitled to be the member.
- Outstanding debts: You must check whether the current unit-holder (the seller) owes the commonhold association any money relating to the unit you are buying. Ask them for a commonhold unit information certificate (Form 9), which the commonhold association will fill in. This sets out the debts the unit-holder owes to the association on the date of the assessment, relating to the commonhold assessment, the reserve fund and any interest on late payments. Since you will buy the unit under the conditions of the CCS, you may have to pay the commonhold association for any outstanding debts when you become the new unit-holder if the association decides to exercise its right to ask you to do this. Hopefully this should make sure the current unit-holder pays the debt before selling the unit, as it is unlikely that anyone would agree to buy it if this would mean having to pay someone else’s debt. If there are outstanding debts, you should also confirm that there is no legal right registered on the unit, as this could cause concerns to a lender. If there is a legal right to the unit, you should try to agree with the seller that they will pay the debt out of the money made from the sale, so the legal right will be removed.
- Notification of ownership: After you have bought a unit, you will be entitled to be registered at the Land Registry as the unit-holder and to become a member of the commonhold association. You must formally tell the association that you are the new unit-holder (Form 10) and register the transfer of ownership at the Land Registry.
Ending a commonhold
It is worth remembering at this point that the commonhold depends on the commonhold association continuing to exist, as it is the freehold owner of the common parts. As the association is a limited company, run under company law, it is vital that the secretary correctly completes and provides all necessary confirmation statements and other documents to the Registrar of Companies to avoid the company being struck off. Similarly, the directors must not allow the association to become insolvent, or at risk of being wound up.
Although it is probably unlikely, by law a commonhold association can end a commonhold and, in the appropriate circumstances, restart it.
Ending a commonhold involves both the 2002 act and insolvency legislation, and any commonhold association that is considering ending a commonhold should get professional advice before going ahead. The following paragraphs only provide basic guidance. In general, a commonhold cannot be ended unless at least 80% of its members vote in favour of this or a court makes an order for it to end. There are two main ways to end a commonhold.
- The commonhold association is wound up because the company becomes insolvent: It seems unlikely that a commonhold association could allow itself to become insolvent as it is able to raise funds through a commonhold assessment.
However, the 2002 act provides specific procedures for such a case and, because there must be a commonhold association for the commonhold to exist, also provides arrangements for a replacement association to take over and manage the common parts of the commonhold.
If the commonhold association becomes insolvent, the Insolvency Act 1986 will apply. This allows a court to make an order to wind up the company. A liquidator will be appointed and will tell the Land Registry about the situation and send them a copy of the order and any directions issued by the court.
What may happen is that the insolvent commonhold association, one or more of its members or the liquidator will apply to the court for a succession order. This would transfer the freehold of the common parts of the commonhold to a replacement commonhold association. The new association must be fully formed in line with the prescribed articles of association, and registered as a company at Companies House.
The court will grant the application for a succession order unless it thinks there are circumstances which make it inappropriate to do so. If the court grants the application, ownership of the common parts will transfer to the replacement association, which will then take over managing the commonhold as a new commonhold association. It may be that the court will only make the succession order if enough assets are transferred to the liquidator to pay off anyone the original association owes money to (its creditors), but that is for the court to decide.
The legislation specifically allows any reserve fund to be released to the association’s creditors if a commonhold is ended (the fund does not have to be a trust fund as in leasehold legislation). This means that all, or most, of the savings that have built up in the reserve fund can be used to settle the insolvent association’s debts – they simply become assets that are available for the liquidator to use to pay off its debts. The new commonhold association will have to take steps very soon after taking over managing the commonhold to rebuild the reserve fund by issuing new reserve fund charges.
- The commonhold association is voluntarily wound up following a decision by the members of the association: The commonhold association may want to wind itself up voluntarily. Since this will also end the commonhold, it is difficult to think of a reason why this would happen, other than following a decision by all the members to sell the site. The commonhold can only be wound up voluntarily if all the members agree to this, or if 80% of members agree and a court makes an order approving the application to end the commonhold association.
The association cannot be voluntarily wound up unless the directors first make a declaration of solvency. They must declare all the association’s debts are paid, or that the association has enough money in the bank or in the reserve fund to settle all its accounts. If the value of the association’s assets is not higher than the value of its debts, the association cannot be wound up.
Following the declaration of solvency, the association must agree a termination statement, setting out clearly the proposals for transferring ownership of the commonhold land and how the assets of the commonhold association, including cash in the reserve fund, will be shared amongst its members. Clearly, the commonhold association’s members must agree on these details before ending the association.
The association must then ask its members to support a resolution to wind up the association. There are two ways this can be achieved.
- 100% of the members vote in favour of the resolution. The resolution must be agreed by all the members, not just all the members who are present at the meeting where the vote is taken. If this is achieved, the association will appoint a liquidator who will make an application to the Land Registry to end the commonhold association. The liquidator must make the application within six months of the resolution.
- 80% of the members vote in favour of the resolution. The association must appoint a liquidator who will apply for a court order to decide the conditions on which they can make an application to the Land Registry to end the commonhold association. The liquidator must include a statement of these conditions with their application to the Land Registry.
Note: the assets of the commonhold association will be treated differently depending on which method is used to end the association. This is not covered by this guide, and you should speak to a professional adviser if you need more details on this.
List of forms
Form 1 – Notice of proposed commonhold assessment
Form 2 – Request for payment of commonhold assessment
Form 3 – Request for payment of emergency commonhold assessment
Form 4 – Notice of proposed reserve fund levy
Form 5 – Request for payment of reserve fund levy
Form 6 – Notice to tenant for diversion of rent
Form 7 – Notice to sub-tenant for diversion of rent
Form 8 – Notice requesting further details about a tenancy
Form 9 – Commonhold unit information certificate
Form 10 – Notice of transfer of a commonhold unit
Form 11 – Notice of transfer of part of a commonhold
Form 12 – Notice of vesting of a commonhold unit by operation of law
Form 13 – Notice to a prospective tenant
Form 14 – Notice of grant of a tenancy in a commonhold unit
Form 15 – Notice to a prospective assignee
Form 16 – Notice of assignment of a tenancy in a commonhold unit
Form 17 – Complaint notice against commonhold association
Form 18 – Reply to a complaint notice against commonhold association
Form 19 – Default notice
Form 20 – Reply to default notice
Form 21 – Request for action
Form 22 – Reply to request for action
Form 23 – Complaint notice against unit-holder or tenant
Form 24 – Reply to complaint notice against unit-holder or tenant