Commonhold: The (not so) Simple Truth!
The introduction of an alternative system of home ownership and the management of blocks of flats came in the first part of the Commonhold and Leasehold Reform Act 2002. Whilst the purpose of the Act was to address the uneven balance between landlords and leaseholders, after 14 years of it being placed on the statutory books, it is still not showing any signs of taking off but why?
The answer is simple. Commonhold would remove freeholder landlords and there would be no lease by which to draw profits from long after a flat was purchased. Commonhold would also not be subjected to the same complex legislation as that of leasehold.
Buyers would own their flats on a freehold basis, and with their own title deeds which would grant them membership of a Commonhold Association. This Commonhold Association would be created by the formation of a private company limited by guarantee, incorporated under the Companies Act and registered at Companies House. It would be the company that owned the land, the structure and the common parts and would be funded by contributions from the unit-holders. These contributions would be set out in the Community Statement and collected via the Commonhold Assessment which would perform a service similar to that performed by service charges.
Not A New Concept
However, the idea of commonhold was not a new concept. In January 1984 the Law Commission presented their report entitled ‘ ‘Transfer of Land – Obsolete Restrictive Covenants’. This report recommended the creation of a new interest in land, to be called a ‘land obligation’ that would be able to subsist as a legal interest. It would embrace both negative and positive freehold covenants by imposing a burden on the owner of one piece of land, either for the benefit of the owner of another piece (neighbour obligation) or as part of a development scheme, in which case the owners of separate properties within the defined area would each have rights and obligations in relation to the others.
However, nothing much happened until July 1987 when the Law Commission published another report entitled ‘Commonhold – Freehold Flats and Freehold Ownership of other Interdependent Buildings.’
This proposed a Commonhold scheme to operate independently on the proposals for land obligations but which also had to complement them.These new land obligations would amount to a new interest in land and again would embrace both negative and positive freehold covenants. They were intended to include neighbour obligations (covenants between individuals) and development obligations (part of a development scheme). The benefit and the burden (if registered) would subsequently run by one simple rule.
The idea lay quietly for a while until the government returned to it by publishing in November 1990 a further Consultation Paper that repeated what the government saw as the inherent problem with leasehold, namely that the relationship of the freeholder and leaseholder was inevitably biased in favour of the freeholder and that was by its very nature a wasting asset. The consultation period on this Report came to an end in March 1991.
ENFRANCHSEMENT: A STEP TOWARDS COMMONHOLD?
However, by then a General Election was looming and the drafting of detailed commonhold legislation was proving to be very much more difficult than the government had originally thought. The Members of Parliament representing the powerful London leaseholder Boroughs of Kensington, Chelsea and Westminster also needed a government response which came from the Department of the Environment in their leaflet called ‘Enfranchisement of Long Leasehold Flats’. The proposal was that long leaseholder of blocks of flats should have the right to buy the freehold interest in the building, i.e. collective enfranchisement. The proposals were designed to to tackle the problems of bad management (again) and to provide a solution to the difficulty of selling diminishing lease terms.
It is however important to note that enfranchisement was at this stage, still seen as merely as a step towards commonhold.
There then followed another period of consultation with the government issuing revised proposals in March 1992 and the shift away from commonhold and back to enfranchisement as a solution to the problem of residential landlord and tenant was complete.
Backed by victory at the General Election at which the extension of ‘tenants rights’ had been a Manifesto commitment, the government stated its intention to introduce collective enfranchisement for flat leaseholders together with individual lease extensions for those leaseholders that failed to qualify for collective enfranchisement. It also stated its intent to extend enfranchisement rights for leasehold owners of houses.
THE SHIFT BACK AGAIN!
In 1993 the Lord Chancellors office, in conjunction with the Housing and Development Bill (later to become the Leasehold Reform, Housing and Urban Development Act 1993 which was at the time before Parliament), published a further booklet entitled Commonhold – The Way Ahead, Communal Ownership and Management. This time the Opposition supported the principle of the extension of enfranchisement but opposed the Bill.
The 1993 legislation was highly controversial, with most landlords viewing the principle of enfranchisement as ‘an infringement of long standing democratic principles’ and the leaseholders deeply disappointed by amendments made to the legislation as it progressed through Parliament.
Some held the view that relying on enfranchisement to solve leasehold problems did enormous damage to the whole debate on the question of commonhold!
RHONE V STEVENS JUDGEMENT
A significant ruling by the House of Lords in the case of Rhone v Stevens in 1994 upheld the rule in common law that the benefit of positive freehold covenants could run with the dominant land but the burden of a positive freehold covenant couldn’t.
A cottage attached to a large house was sold separately from the main house and the seller covenanted in the conveyance to repair the shared roof but before he could do so, both the main house and the cottage were sold.
The new owner of the cottage sought to enforce the covenant against the owner of the main house but because the burden of positive covenants do not run with the land they cannot be enforced against successors in title of the original covenantor. In this case the claimant argued that either the rule in Austerberry v Oldam Corporation 1885 should be changed or that the covenant could be enforced under the rule in Halsall v Brizell 1956.
Both arguments failed because;
- The House of Lords was unwilling to make such a radical change in law which had been followed for over a hundred years and;
- The covenant to repair the roof was not part of a mutual obligation compared to the covenant to pay for upkeep of roads and sea walls in the Halsall case.
The Halsall case did not state that any burden in a deed could be enforced if any benefit was to be enjoyed – it said that the burden of a specific covenant can be enforced if the benefit of that corresponding covenant is to be enjoyed.
Lord Templeman explained that equity “has no power to enforce positive covenants against successors in title of the land.
To enforce such a positive covenant would be to enforce a personal obligation against a person who has not covenanted”.
Accordingly equity views a negative covenant as merely depriving an owner of rights that would otherwise have existed.
It views positive covenants as being outside the policing of equity because to compel a subsequent owner to comply with such a covenant would contradict the common law rule as to enforcement of privity of contract.
Lord Templeman went on to say that “enforcement of a positive covenant lies in contract; a positive covenant compels an owner to exercise his rights. Enforcement of a negative covenant lies in property; a negative covenant deprives the owner of a right over property.”
The House was aware that the Halsall case does illustrate a defect in the enforcement of covenants and that the law should be changed.
However, it preferred to leave that to Parliament.
This decision did not assist in moving Commonhold forward but the wheels kept turning and in 1995 the Labour Government produced its policy document ‘An End to Feudalism’ which highlighted some of the genuine areas of concern. It again stressed the need for commonhold, although as a replacement for the leasehold system rather than working alongside it. However, politically the emphasis remained on the extension of enfranchisement, rather than the introduction of a new form of land tenure.
COMMONHOLD AND LEASEHOLD REFORM BILL
A further Consultation Paper and Draft Bill in 1996 had all party support as well as general support within the property industry for the principle of commonhold, but unfortunately parliamentary time could not be found to introduce the legislation and the focus reverted once more to collective enfranchisement.
Following the 1997 General Election the new Labour government started serious work on the preparation of a Commonhold Bill with the issuing of a consultation paper in November 1998 entitled ‘Residential Leasehold Reform in England and Wales – A Consultation Paper’ which invited views on the broad principle of a wide range of information.
This paper attracted considerable public interest with over 900 organisations and individuals responding, among them, The Landowners Group.
In 2001 the introduction of the Commonhold and Leasehold Billl led many to believe that a real attempt had been made to learn as much as possible from commonhold laws already operating in different countries and jurisdictions because of wide consultation resulting in the publication in August 2002 of a further draft Bill and Consultation Paper.
The leasehold pressure group Campaign Against Residential Leasehold (C.A.R.L) wanted 5 things to be included in the Bill:
- The introduction of Commonhold, which it got;
- The abolition of residential leasehold, which it didn’t get;
- The automatic right to transfer from leasehold to commonhold, which it didn’t get;
- The transfer of tenure at a fair price, which is not covered by the Bill;
- Special measures for people unable to transfer, which are not in the Bill.
The Liberal Democrat Members fared only slightly better in that they got the right for leaseholders to choose their own insurance and recognition of estate management schemes.
What they didn’t get however was the abolition of marriage value, abolition of forfeiture and the 100% consent requirement for existing properties to convert to commonhold.
So, out of 10 requests only 3 were actually granted! Not that it really mattered because as the Bill reached its Report stage in the House of Lords, announcement came of a general election and the Bill was lost.
Consultation resumed after the elections and the returning Labour Government, after a long consultation period, introduced a statutory scheme of ‘commonhold’ embodied in its Commonhold and Leasehold Reform Act 2002.
Placed on the Statute Books!
Commonhold was finally placed onto the statute books in September 2004 as a mortgeable alternative to leasehold. That same year the Land Registration Fee (Amendment) Order 2004 set the fees for Commonhold applications to the Land Registry and the Commonhold Regulations set out the requirements for the setting up and operation of a commonhold development.
QUESTIONS IN THE HOUSE OF LORDS
After all that effort 2005 saw just 6 commonholds leading Baroness Gardner of Parkes in 2007 to ask the House what provisions had been made to build Commonhold properties on the Olympic site.
Lord Best (who is now on the Olympic and Paralympic Legacy Committee) asked whether developers and house builders did not offer Commonhold because they can charge a ground rent if they sell a lease which they cannot do if they sell it on a much better commonhold basis even though there could be counterbalances in that commmonhold could be very much more attractive to buyers of property which could be reflected in the premiums.
Lord Thomas of Gresford asked that if Lord Hunt wanted to make commonhold more attractive then why didn’t the Government not use incentives, such as abolishing stamp duty on the units but Lord Hunt would not talk about tax matters. He did say that one of the areas they would look at as part of the consultation is whether more incentives could be identified to encourage the development of the definitely much more desirable concept of commonhold.
Lord Hunt also said that it was clear that more talking to developers and other companies was needed to encourage them to think of Commonhold as a positive option. He would pass the point made by Lord Best about the Olympic site to the relevant people in the LDA but it must be for them to make those decisions.
LEASEHOLD LIFE ASKS HER OWN QUESTIONS!
On the 17th July 2008 Leasehold Life received a reply from Mr Charles Stewart, Policy Manager of the Land Law Team in response to an e-mail sent on 7th July.
It reads as follows:
“Thanks for your mail of 7th July to my colleague Paul Hughes about the proposed Commonhold Consultation Paper. I regret that publication of the paper has been delayed. Work though is continuing and we hope to publish a paper for public consumption later this year”.
“I note that you consider most of the advantages of commonhold lie with purchasers – in particular owner-occupiers – rather than developers or lenders. We do of course agree that commonhold offers definite advantages over leasehold for those buying flats.These include the ability to purchase the freehold, freedom from landlords, ground rents and leases, as well as democratic control over their own affairs”.
“But if there are advantages for buyers, those advantages will be reflected in the saleability of the properties, something that is clearly of advantage to developers.
Lenders interests also coincide with buyers’ to some extent and already many lenders are willing to lend on commonhold”.
“Nonetheless, these advantages will remain largely theoretical until commonhold is more widely used. One of the main objectives of the consultation paper will be to ensure developers and lenders are aware of commonhold and understand its potential. The paper will therefore focus on reasons why developers and lenders may not already be considering the use of commonhold”.
“I am grateful for your continued interest in commonhold and I can assure you that you will receive a copy of the consultation paper when it is published”.
Suffice to say this never went any further.
ALAS POOR COMMONHOLD
On 16th August 2010, Leasehold Life had her comments on Commonhold published on the Nearly Legal blog which can be read here.
COMMONHOLD FUNDING ADVICE
Under the Freedom of Information Act 2000 Leasehold Life was able to obtain some information from LEASE on the funding of commonhold advice. Until the 2010/11 financial year, they received annual grant-in-aid funding from the Ministry of Justice (or its predecessor, HM Court Service) in order to provide free advice on the law on commonhold:
Financial Year Amount
ADVANTAGES & DISADVANTAGES OF COMMONHOLD OVER LONG LEASEHOLD
Many people have compared commonhold to a Residents Management Company owning the freehold with little difference but the main advantages of commonhold over long leasehold ownership (but not enfranchised blocks) are that:
- A commonhold is a self-managing community with clearly defined procedures to settle its affairs;
- Commonhold documentation will be largely standardised, clearly written and the same for every commonhold property (with provisions to allow for variations within each commonhold to be written) – consequently this will reduce the need to have recourse to professional advisers to interpret the rights and duties of the participants in the community;
- The owner will have direct freehold ownership of an individual property (unit),
- The owner will have indirect ownership of the common parts of the development through membership of the company (the commonhold association), which owns and manages the common parts and facilities;
- Commonhold is not a wasting asset because there is no lease;
- Because there is no lease therefore there is no right to forfeiture;
- With mainly prescriptive documentation, there is less likelihood of the lender taking security over a property with a defective title;
- Relatively standard documentation will help to speed up the lending process;
- The Community Association cannot be wound up by the members without the consent of the lenders and upon winding up of the CA, the lender’s loan will be repaid;
- In contrast to a leasehold service charge, there is no overriding legal requirement of reasonableness in relation to the amount of the commonhold assessment;
- There are no detailed statutory procedures for obtaining estimates of proposed expenditure;
- There is a standard use of informal and formal dispute resolution procedures including, possibly, an ombudsman scheme;
- The community statement is likely to be of great interest to potential purchasers of units, as this creates obligations that are binding on them. More importantly, it also creates obligations that are binding on their successors in title;
- In commonhold the buyer takes the unit free of ground rents so saves this cost;
- Developer sells unit by reference to the Commonhold Community Statement;
- Unit holder sells unit by reference to standard documents;
- In a large development where the leaseholders have bought the freehold and granted themselves 999 year leases, management would be simpler through commonhold.
- Leasehold is likely to be simpler for very small developments where the establishment of a commonhold association would be unnecessary;
- In some cases it may be that a multiplicity of leases with individual forms may be preferred to the simplicity of a single commonhold community statement;
- If a developer wants to retain an income stream from a property, leasehold may well be chosen, as unit holders will not pay ground rents;
- There may be occupiers who would prefer to have a statutorily regulated service.
Now, for the first time in 14 years, discussions have been held at Westminster about Commonhold, in the form of a roundtable, hosted by Leasehold Knowledge Partnership MP patrons Jim Fitzpatrick (Labour) and Sir Peter Bottomley (Conservative). The roundtable was addressed by Professor James Driscoll, an authority in landlord and tenant law who also sits as a judge in the property tribunal and the full article can be read here.