Ending a commonhold

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.

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.