Commonhold
Commonhold
(CH) This is often seen as a magic pill, it’s appeal is in it’s apparent
simplicity that whether say 10 or 100 flats, it would hand outright ownership
of • units to home owners, the unitholders (UH), and • the “block” to
homeowners via a commonhold Company (CHA) as freehold estate in commonhold.
That
therefore is assumed to ensure fairness and accountability as each have a
common interest. How then does that differ from say -a freehold (FH)
transferred to a company owned by the residents group (RG) - flats owned on
leases of 999 or 9999 years, or Perpetuity minus a day “P-1” I would say “not a
lot”.
The following
is neither a condemnation of CH nor an argument for business as usual. I intend
to encourage supporters of CH, and those who want reform, to think about the
issues and see that what is being presented is not a magic pill, but at best
only a few ingredients, while ultimately confusing home ownership for everyone
involved. You may be tempted to think “ah, but”, or learned readers add “except
if”, however do wait until the end. For example, like the textbook example
above, the premise is simple, but except in the simplest of schemes, CH can
fall short at the first hurdle. It does not allow for houses on a development
to be included and can leave common areas- grounds and parking etc- in the
hands of the developer and their companies or buyers n.b. local authorities are
not going to go back to adoption. Even if we restrict ourselves to retirement
schemes, there is the vexed issue of staff and leisure accommodation.
The key
issues in reform are in two areas. The first is fairness, exploitation and
standards, and the second, in ownership, forfeiture and control. The first is a
subject on its own; however I will address elements that relate to how CH
addresses the second group.
Forfeiture – What is it Good For?
The most
emotive and frightening issue is of course forfeiture, the termination of the
lease which leads to a loss of the home. It is important to understand that
legislation protects owners so that breaches and disputes have to be determined
before a Court can even consider forfeiture and the Court has a number of
options to choose before that. The problem is that in terms of enforcement,
leases have been drafted on a forfeiture only basis and the terms of the lease,
and the potential windfall, has acted as a commercial basis (even an incentive)
to act when Courts rarely award full costs. It is still rare to find a lease
that allows for the alternatives and, crucially, allows those costs to be
recovered.
While that
does not eliminate or temper the very real stress and fear, the numbers of
forfeitures are as numerous as hen’s teeth. The real peril is therefore costs
(which can often be addressed by adding legal expenses cover to your home
insurance for modest premiums), and which in fact arise out of resolving the
dispute itself, rather than the cost of the forfeiture element of proceedings.
It is a common conflation that leads to the assumption that “no forfeiture = no
(or proportional) costs”.
Even if
forfeiture is eliminated, a dispute still has to be resolved and costs will
fall on the parties. Complicated cases will still lead to extraordinary costs.
Forfeiture is clearly anachronistic; however it is the final remedy to truly
unpleasant antisocial behaviour or individuals, or situations that are
irretrievable. As there is a gulf between criminal and unlawful behaviour,
landlords, whether a FH or RG, can face having to deal with the same problems
on a repeated basis.
If it has to be retained for specific and
limited purposes, and excludes say arrears, then perhaps it should be
restricted to the power of sale-proceeds less costs- by a Court appointed agent
independent of the landlord or managing agent.
Reform has to
look at how and why a CHA, RG, or FH would enforce the terms of the lease in a
forfeiture free world. Statutory amendment to legislation and leases would be
required to allow for the costs of options e.g. court orders and injunctions to
be recoverable, otherwise it would be impossible to enforce the terms of the
lease or unit agreement; it would be ruinous to do so.
Before
rejecting this notion, if it were an RG with either a FH or CH, they would
still be faced with resolving the dispute enforcing the lease terms and the
cost. In that they are no different to an investor. If the implication is that
they cannot recover costs, or is limited in how much it can therefore spend,
then recovery of service charges ( for these purposes that includes commonhold
unit charges) and enforcement of leases, or unit agreements, becomes a lottery
and a complainants’ charter.
Many schemes
have Resident’s management companies, who are a party to a lease and therefore
cannot forfeit, and face this issue every time they have to litigate. If the
lessee doesn’t have to pay, the company has to, and not all Articles or leases
allow recovery of that shortfall. Commonhold offers no better alternative or
solution to this and the CHA is in a similar situation as the RMC.
Ownership.
Leases are
criticised as they are not outright ownership and there is a degree of
interference with that, home life and financially. The principal objection is
that leases are reversionary; you have to hand the keys back in 99 years, or
become an assured tenant, or pay to stay- the lease extension. Given some of
the high ground rents and, in recent years, reviews doubling or increasing
every 10 years, not 25 or 33, and indexes setting the increase at points over
RPI, this is an expensive prospect. Legislation could require all new or
extended leases to be 999 or 9999 years, or even perpetuity less a day, a “P-1”
lease with a peppercorn every 100 years, it would eliminate the issue of
outright ownership and remove ground rents and lease extensions as a source of
resentment and interference. Some may argue that “it is still a lease” and that
there is still interference, but I would argue, as below, “so what? Commonhold
doesn’t change that”
Control - Leases or Unit Agreements
It is vital
to understand that whether it is a lease, commonhold unit agreement (UA),
strata title or other foreign variant, they are just contracts. They set out
what is owned and what is retained, rights over other areas, what services are
to be provided, at what standard and how they are paid for, as well as the responsibilities
to each other and other building users, and place obligations and restrictions
on use, right down to when to put the bins out.
After
forfeiture, term and rents are addressed, leases are therefore no different to
a unit agreement. Interference will still occur. The main areas of interference
and contention are service charges (and all their variants), consents for
assignment lettings & notices, legal and admin costs, and exit fees. The
CHA articles and assessment (AA) are bound to the UA in setting out the above,
and are left blank in the standard format, to be drafted on a scheme by scheme
basis. Before ground is broken, this will be done by the developer’s solicitor
and surveyors, unaware of the CHA’s wishes philosophy and approach.
While the
compulsory handover, on completion, of the block (be it CH or FH subject to P-1
leases) eliminates or moderates the desire for income generating clauses, it
carries the risk of widely drafted “bog standard” wording and cost matrices.
The developer, with no (substantial) future liability or interest, has no
incentive to take pains to do otherwise. The CHA or RG is left with the
practical implementation of sprawling drafting and the ensuing debate, and
disputes, over • who pays for what, to what standard and purpose, and how much,
as well as • what requirements should be fulfilled on assignment, sale or
letting, and as work will be done in some shape of form, what costs should be
incurred and how much. The CHA’s AA are therefore as open to the same shortcomings
concerns and defects (as well as success) as any lease, which are at the heart
of most disputes.
Perhaps after
public consultation, we need to look at the use of standard or model clauses
for both UA and leases for common issues such as alterations, nuisance,
assignment, under letting repair and improvement etc. In respect to complicated
or specific situations, and in the case of service provision and service charge
matrices, these might be prepared independently by a qualified surveyor, with
liability to future home owners, as well as the developer and CHA or RG. These
would help achieve an independent well drafted scheme for the unit owners
(especially as buyers), and block ownership, to assess and put into practice.
This will involve some statutory guidance and limitation on matters be it exit
fees or costs. These can be implemented without commonhold and, if made
mandatory in the case of lease variations, extensions and enfranchisement,
gradually improve matters for existing as well as new schemes. If we address
the shortcomings of these contracts to make them fair, clear and purposeful,
the underlying problem is of course now clear, even a good contract is open to
abuse or disagreement.
Commonhold is seen as the remedy, however as long as the
freehold is transferred on completion, is there a difference between the two
systems?
Residents are
now “in control”, free from a malign influence, or interests which run contrary
to those who live there. If agreement on issues is in theory more likely, is it
guaranteed?
Control - What if we can’t agree
Whatever the
ownership, disagreements disputes or uncertainty will arise between unit
owner(s) and block ownership. Even at its simplest, priorities differ on •
expenses with first time buyers wanting a minimum spend and stay for short
periods, • in retirement homes, those on the home stretch are often less
willing to use funds than those beginning retirement • the complexities of
communal living from pets to noise or new carpet colour The perceived advantage
is that it is “our dispute” rather than one with an external owner. The company
is owned by residents and though Articles may vary, directors are broadly
accountable to the owners.
On the face
of it there is therefore no difference between CH and an RG owning the FH.
Outside the prism of a particular group of landlords and agents, practitioners
and residents can reference successes as well as examples of • the “dreaded
committee” or “the wrath of the chair” • mismanagement- intentional and
misguided • bribery, favouritism, collusion, bullying and exclusion • the
damage done by inertia or plain daft ideas
The most
common problem (affordability aside) is operating like a company and ignoring
the contracts that they have with the individual owners, the leases, and the statutory
rights and controls they operate within. The belief is that as a company,
majority votes for example override the lease by banning subletting , exempt
them from consultation under “section 20”, or refusing access to accounting
records as shareholders have no such right.
Directors
boards and committees can be brought to book and even replaced, but the
procedures vary and are complex, needing precision (before you even get to the
issues at hand) to form both into workable, lawful and enforceable notices and
resolutions. It is easy to unite against the “landlord in Luton ”,
but quite another to take on your neighbours. There is an implied or expected
trust, or, at the other extreme, fear, in that relationship which is not easily
overcome. Even if the merit of the issue is clear, it is another step to
convince others of the need to act and retain their interest. These groups are
often entrenched and protective of their position and the discomfort of flat 1,
or even a handful of you, “vs. the evil mare in no 22” can be daunting and
affect your sense of security and home. Those who have not had direct
experience of this are foolish to dismiss or underestimate it. Very often they
become that problem, and fail to appreciate the duty to work with those of a different
perspective or weaker disposition.
The reverse
is also true with those in control having to resolve “insurgent activity in
block C”, or facing the very difficult decision of having to take legal action
against a person(s), even if their personal or financial situation is
difficult. It is in the issue of control, costs and rights that a very worrying
disparity arises in CH vs. FH.
Control -Remedies
Where there
is disagreement, most decisions are reached by the director’s decisions or a
majority vote. Beyond that the CHA and owners can only go to mediation or the
Court, although the Law makes reference to an undefined Ombudsman service. This
might look at procedural and minor issues but would likely lack the scope
expertise or funding to deal with more comprehensive issues, as to do so, it
would have to become a fully fledged tribunal. CHA and owners have to
understand that they are in a new framework outside “landlord and tenant”
unlike a FH owned by an RG.
There it, and
owners split, or in dispute, or needing independent determination, say on a
large and extensive project, have the benefit of independent determination via
the Tribunal ( flawed as it might be) within a comprehensive body of law.
Key
protections are also lost in CH eg
• No
objective requirement that charges are fair and reasonable
• No
consultation on major works nor independent determination
• No
requirement to hold “service charges” on trust protecting them from the
companies insolvency
The structure
of the CHA is therefore likely operating inside the “unfair terms” protections,
company law and the supply of goods and services legislation. They and owners
face a bewildering choice of ADR, an Ombudsman and the Court, with no real body
of law (in the context of property) to guide them as to remedies.
Even if the
FTT had its jurisdiction extended to the CH for these disputes, it would not be
on “landlord and tenant” law. This is a particular problem for the individual
or the small group who have now lost the right to seek comprehensive determination
on an objective basis where the AA or Assessment are changed and set by a
majority decision. This can not only change obligations, but shares and
apportionment of expenses, and in a significant departure from leaseholds,
unilaterally change the terms that affect the individual unit agreement. While
the alteration of leases is possible, the leaseholder has significantly more
rights to seek changes, and protect themselves from change, while under CH, the
presumption is that the CHA can make changes.
An owner or
CHA is therefore presented with a title, the UA, and an AA that can be as good
or as bad as any lease, and a controlling group as bad or good as any other,
and floundering in an undeveloped area of law. All Ch dies is shift many of the
same problems in FH to a new arena.
Control - The Myth of Costs
n the furore
over landlords recovering their legal fees, it is often forgotten that costs
fall on the landlord, in this case it would be the CHA or RG, and/or on an
owner, whether unit holder or leaseholder. While RG ownership might preclude
disproportionate or opportunistic actions, it would be reckless to assume that
the CHA, RG or owners will not find themselves “in Court” and therefore costs,
in any situation, are a sting in the tail. As costs have to be paid, as an
owner you may have to pay costs or seek costs in the judgement, and, as rule of
thumb, County Court actions rarely award generous costs. You may therefore win
but be out of pocket, and, as a member of the CHA, you meet a share of the resulting
losses or costs, or the CHA or RG faces insolvency. In the worst cases owners
might find themselves in higher courts seeking removal and prosecution of
directors, at enormous cost, rather then the comparatively cheaper and more
focused venue of the FTT, seeking appointment of a manager.
The CHA is
not limited by the protections of CLRA or Section 20c, which could lead to
costs at the same scale or level where higher courts award them in full on
leasehold matters. While few find themselves in that scale of costs, they do
encounter low level fees. Even a simple arrears case can cost £1000 with the
prospect of £200 or £300 being recovered in the judgement. In CH this cost can
be charged to the owner, even if they win and if the agreement allows, or the company
bears the cost. Neither they nor the owner has the ability to bar or restrict
recovery under section 20C or determine a reasonable amount under CLRA via the
FTT. There is therefore no real difference offered by commonhold which removes
rights while retaining a cost burden that still has to be apportioned. The
gravy train for the lawyers might be on new tracks, but it “keeps on rollin’”.
I would therefore argue that for a home owner,
a “P-1” lease out of a jointly owned freehold, reformed as above, even under
current arrangements and law, is a far better solution than a two track system
of flat ownership. Moreover it retains rights and remedies, many of them
individual, which commonhold removes and precludes in favour of majority rule
on a commercial basis. This is all predicated on handing the developer a P45 on
completion; is that possible?
Mainstreaming Commonhold
As the
developer has to leave on completion that will require legislation, however
that can be achieved by requiring that on a freehold scheme, making commonhold
unnecessary. Is it therefore desirable necessary or effective?
There are two
broad areas of difficulty, the effect on tenure and management, and the
financial implications.
Mainstreaming Commonhold - Managing the managing
The transfer
can be effected in the example of a simple uncomplicated scheme but the
mandatory use of commonhold would lead to exemptions. Landed estates and the
Crown will often be exempt due to statutory rights and the existing complicated
structures and restrictions on their land. Social housing landlords (SHL) and
their partners, common in London
There is real
risk that flat ownership will deteriorate into 3 classes, commonhold, leases, and
the social housing leaseholder. Mixed sites with houses or bungalows are still
outside the legislation and buildings with staff of accommodation and offices,
commercial parts or hotel apartment blocks, as well as social housing, parking
structures, and recreation areas can lead to schemes with multiple interests
and management roles.
As much
development involves brownfield sites and planning requires mixed use and
ownership, the simple standalone blocks are few in number. If you consider a
scheme of two blocks and houses, with parking and unadopted areas you could
have block A commonhold, block B freehold with social housing tenants and
leaseholders, and freehold houses. The developer will be able to retain control
of, or sell, the unadopted areas and all will be required to contribute to the
upkeep outside of Landlord and Tenant law.
Common hold
does not require that the estate be transferred to them as well. If it did, it
would affect many schemes with social housing and shared ownership units as
those SHL will not wish to surrender or share control. In many cases planning
law requires their integration door to door, not block by block, so isolating
the SHL with a head lease for their block is not always possible. They are then
required to be involved in a CHA which would ill fit their organisations
resources and priorities, and owners, used to making quick decisions, will
rapidly tire of the SHL’s inertia, fractured decision making, and lack of a
single senior contact with the experience and authority to participate. These
landlords control considerable amount of land and this is a key issue for the
trend of redeveloping urban spaces.
The CHA would
be faced with confusing obligations with SHL commonhold units subject to long
shared ownership leases. The service charges, raised by the CHA, are in many
cases outside landlord and tenant, but the leasehold flat owner, who will
reimburse the SHL unit holder, enjoys that protection. In the case of
qualifying works and agreements, the leaseholder has the right to be consulted
but the CHA does not always have to consult.
It puts the intermediate landlord, the SHL, in
a pickle. For example, if
• the SHL has a head lease and we say that the
road needs relaying or the play area new swings and surfaces or
• the exterior
of the SHL block, held in the common hold estate, needs redecorating,
the CHA acts
like a company and are not always required to follow “section 20”.
The owners of
the SHL units have no rights to be consulted but the owners of the shared ownership
leasehold flats still have that right. They could claim that many charges are
capped at £250 or £100.
If the CHA
chooses or is required to consult under existing or new legislation, what then
is the point of CH!? They might as well be freeholders who have granted leases
and operate within those rights. Those familiar with Daejan and Phillips vs
Francis can see the potential for litigation on costs and recovery. On existing
decisions on appurtenant premises, the Courts have been less than authoritative
on directing landlords on how to cooperate on management and costs after
division of such unadopted areas.
Freehold
houses could be included in commonhold title, but that would be a further
confusion for the house buyer choosing freehold, leasehold or commonhold and
three different schemes for service charge contributions to unadopted and
shared areas.
It presents
the CHA with more obligations under estate rent charges transfer deeds and or a
deed of covenant. If the estate is freehold, it can be transferred to the
freeholder and be subject to P-1 leases for all units. Houses are therefore
included in the scheme with the attendant rights and participation for the
scheme as a whole, as well as having leases which are seen as outright
ownership documents. The blocks can either combine their resources or follow
separate courses with either carefully structured service charge matrices or
head leases for either block.
The same can
be extended to commercial and other areas. If we persist with CH, freehold in
commonhold estate, it is pointless to confuse this by granting some residential
units as commonhold units, others on lease, and houses as transfers of part!
Most importantly the developer is free to grant themselves a lease to their
areas defeating the principal expectation of commonhold being the means to
exclude them.
The central
problem is the CH or FH requires verticality, the separation of units on a
vertical basis, and where individual units or rights interfere with that, a
relationship comes into existence. As leaseholders and unit holders, and non
residential and commercial unit owners, have different legislative rights
controls and obligations that makes for a confusing mix. Freehold ownership,
subject to leases, can comprehensively address that and structure and assign
responsibility. Therefore in a Commonhold world, it fractures what might be necessarily
complicated arrangements under a freehold, into a jigsaw with missing pieces.
Putting aside the above problems, it has further consequences for community and
social cohesion when SHL leaseholders and tenants already feel “second class”.
Mainstreaming Commonhold Unhooking the developer
These issues
are of particular relevance when it comes to sacking the builder, as we need to
look at the developer’s investment above and beyond the sale of flats. Existing
commonhold legislation allows for a leaseback or unit ownership of their
interests which would be inconsistent with the desire behind CH to expunge the
developer. They are entitled to compensation and that creates two problems.
Firstly, for the new scheme, the developer may provide areas such as an office
flat parking and leisure facilities which can be income producing.
Commonhold
does not preclude that, he merely takes a lease back out of the CH before any
units are sold and the lease dictates payment terms. New legislation is
therefore required and owners might find themselves paying a premium in
addition to, or part of, the flat price in order to make it viable for the
developer to release ownership of those areas. In simple terms if he can sell
100 flats, or 99 and house manager’s flat, then he will want to be paid for the
flat. Otherwise he just sticks a desk in the hall and employs 4 staff, 24/7, on
the service charge, and sells the flat. This also applies to the choice of
providing common lounges and leisure areas, pools and gyms, and not flats, or
not renting car spaces and including them in flat titles.
For other income streams such as ground rents
and future reversions these are due as a consequence of the history of
leasehold and its purpose to lease land over time. I am of the view that, in
the context of a home, they are lawful but contrived.
Leases of 999
years at a peppercorn rent with the FH handed over to residents had become
common practice until the late 90’s in new builds until the trend was reversed.
In part, this was not simply the players in the market, but a reaction to
protections such as section 81 on forfeiture and the developing taste for
litigation, making freehold ownership a dangerous prospect.
While
commonhold removes reversions and ground rents, this can be achieved by legalisation
as above on P-1 leases. When there are other areas are offices hotels etc the
CHA finds itself the reversioner and party to a head lease of those areas
granted as a lease out of the commonhold. While that might transfer obligations
to the head lessor, compliance and cooperation becomes a heavy burden for the
CHA, especially, as explained in the residential context above, the CHA retains
obligations for shared areas or expenses. Commercial landlords and their agents
can be as hardnosed well funded and litigious as any of the “landlord in Luton ” ilk. Secondly it is of little assistance to
established schemes, even in the simplest, whether it is about amending leases
or forced conversion to commonhold.
If legislation enabled that, there is the argument
for compensation. Many will take comfort in the idea of the assets underpinning
loans by some landlords being wiped out. However in mixed use schemes that is
not always possible (or might give rise to the complications outlined earlier).
It has to be borne in mind that these income streams and reversionary interests
underpin the balance sheets of more than “the villains”. This includes even
handed landlords and landed estates not to mention SHLs.
That asset
value is often the difference in liquidity and insolvency. Some may be able to
absorb the change if they have a diverse portfolio, or through government
subsidy, however it also applies to RGs with freeholds. Members often have
loaned the company money to purchase the freehold and expect repayment having
made up for non participants who will eventually buy lease extensions. In many
cases these companies, where not all leases are amended or extended, require
ground rent income to pay basic company expenses which the older leases were
never prepared to anticipate as part of service charge.
Unhooking
them would be disastrous and plainly unfair, and for the other players I cannot
see how legislation can differentiate between the good bad and indifferent
landlords.
Conclusion
CH has
existed since 2002, however buyers owners developers and lenders have not
flocked to it. While vested interests have been quoted as the principal cause,
they do not form the majority of new builds, and only a small proportion of
leasehold properties. ]
Of those that
have enfranchised, few have embraced it as their new management and ownership
model. Even if it is compulsory, buyers struggle to understand the principles
of community living costs and rules without having to first compare leasehold
and commonhold, and how their scheme is owned and managed, when buying a home,
especially if houses are to be included.
Readers will
want to break down what I have said and comment, however that rather makes my
underlying point that we have an imperfect system of freehold and leases which
can be made to work, rather than starting over with what, in the market, will
be a parallel “third way” which is ill suited to many schemes and developments.
Commonhold is
therefore deceptive and appears to address the desire for ownership and
independence within a shared structure without doing so. All it does is grant
eternal ownership of the flat, which can be achieved by the P-1 lease. Owners
and block ownership are still bound by a contract that operates in a legal
framework. The potential for disputes or disagreement does not disappear.
Developers can still retain an interest in flats and shared areas via
leasebacks.
The answer is
that having looked at and changed leases, we need to look at first principles
by shredding the current code of practice, and the 3rd edition draft. It needs
to be far more comprehensive on conduct, fairness and transparency, and address
specific issues e.g. tendering, costs and relationships to third parties,
commissions and commercial arrangements, to what can be reasonably expected on
consents and notices. This must apply to any landlord be they a FH or and RG,
agent or owner and would significantly improve the context in which these
disputes and disagreements arise.
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