What the devil is it?

Those who know what they are about – on the whole Australians and North Americans – call it strata title and condominium respectively.

What it is not is popular in England and Wales.

It was introduced as a method of property ownership by the Commonhold and Leasehold Reform Act 2002. The explanatory note to the 2002 Act is quite helpful in defining it in non-statutory terms.

The reasons for its lack of popularity – and the changes required for its success – were the subject of debate on 26 June 2014 at a meeting in Portcullis House.

This one-off post reviews the contributions made in that debate by Guy Fetherstonhaugh QC and Philip Rainey QC.

A criminally short summary of commonhold

A “commonhold development” is effectively a block of properties, whether purpose built or not – for example a block of flats, or a building containing flats, shops and offices. The flats, shops and offices are “units” within the development.

The common parts and facilities of the development are owned and managed by a “commonhold association”, which in leasehold-speak, is not dissimilar to an nominee purchaser in a collective enfranchisement.

The persons the leasehold world knows as lessees are known as “unit-holders” in the commonhold. Each unit-holder has two interests in the property of the commonhold;

1)    A direct interest in the unit or units that they own, and

2)    Membership of the commonhold association which owns the common parts.

Opinion is divided as to the exact number of commonhold units that now exist in England and Wales. Everyone agrees however that there are not many more than a handful – a baker’s dozen in Guy Fetherstonhaugh QC’s estimate. There are seventy sections in the 2002 Act devoted to commonhold and its workings. To date, the game can hardly be said to have been worth the candle.

Current failings of commonhold

It fell to Guy Fetherstonhaugh QC to outline the failings in the commonhold legislation as it stands.

It struck me that in many ways the perceived reasons for commonhold remaining grounded are in many ways reflections on the human condition.

Knowledge

It is not a well-known form of tenure. The current system is not perfect, but we all know what it is. It has its knobbly and controversial points, but there are ways of working around them. Why move to something new?

Flexibility

Commonhold also has its knobbly and controversial points, not least a lack of flexibility in mixed use developments and a clash of philosophy with shared ownership properties:

• Commonhold presupposes one single percentage contribution by all unit holders. This does not sit easily with the various service needs and costs centres which are an incident of mixed use developments;
• Shared ownership is premised on the granting of a long lease, ownership of which is “staircased” up to 100%. The existence of a lease is anathema to commonhold.

Security

Banks and building societies are reluctant to lend against commonhold, not least because the commonhold comes to an end if the commonhold association is liquidated. With that liquidation their security vanishes in the same way that a reed warbler’s eggs vanish from the nest on the hatching of a cuckoo chick.

Investment returns

Finally, there is the profitability issue. A lease is a wasting asset. In the leasehold world, a developer can sell both lease and ground rent investment. The ground rent investor will bide its time, awaiting the expiry of the lease – or a claim for an extension. Either way, the lease is, to adopt a phrase used at last week’s meeting, monetised – twice over.

Not so in commonhold. As a developer you have it. You sell it. It’s gone. Permanently.

The wind beneath my wings

Philip Rainey QC, a professed agnostic of the commonhold cause, suggested a four-pronged solution to the fledging process:

1) Legislative change;

2) The carrot;

3) The stick; and

4) A publicity drive.

Legislative change

Shared ownership leases

• Amendment of the Commonhold Regulations 2004 to exclude shared ownership leases from the prohibition against long leases in commonhold units;
• Exclusion of those leases from sections 18 to 30 of the Landlord and Tenant Act 1985, ie the sections regulating service charges. This so as to avoid commonhold units containing long leases having to prepare two sets of documentation, one of the commonholders, and one for the lessee;
• Exclusion of shared ownership leases from the power to enfranchise, extend the lease and/or exercise the right to manage the unit;
• Inclusion of the shared ownership lessee in the exercise of powers granted to the unit holders;
• Extinction of the lease once the shared ownership lessee had staircased up to 100% ownership of the lease, and
• Transfer of borrowing by the shared ownership lessee to the unit once 100% staircasing had been achieved – leaving the lease in place until it is sold and any charges redeemed.

There is, in Philip Rainey QC’s view, no need for an Act of Parliament to effect the changes: secondary legislation would be sufficient.

Mixed use developments

This issue is addressed simply by the addition of an “s” at the end of the word “percentage” in section 38(1) of the 2002 Act. In one stroke, a mixed use commonhold unit would be a more flexible friend so far as the commonhold assessment – aka the service charge in the leasehold context – is concerned.

Security and insolvency

So far as I understand, the insolvency provisions in sections 50 to 54 of the 2002 Act have not yet been called into active service, which means that very few – if any – people know whether the winding up of a commonhold really is likely to be problematic.

In any event, prevention tends to be better than a cure: the main objective of a commonhold unit is to prevent it failing.

It is one of the unhappy facts of property ownership that neighbours fall out – Conway v the Jam Factory (Freehold) [2013] UKUT 0592 (LC) is a case in point.

If a minority object to the management of a commonhold unit, and withhold their contributions to the commonhold assessment, the spectre of insolvency looms large.

Philip Rainey QC proposed that the introduction of a mechanism for the appointment of a manager of the commonhold would mitigate that risk.

That mechanism already exists – and has been extensively road-tested – in Part II of the Landlord and Tenant Act 1987.

If the spectre becomes a reality, why not provide for the appointment of an administrator of the commonhold? The Insolvency Act 1986 and its accompanying rules represent a complete code for the management of insolvencies, and there is no obvious reason why administration should not be an option open to the commonhold unit.

Finally, in the worst case scenario, section 51 of the 2002 Act provides for a succession order to be made in the event that a winding up petition is presented. Currently the following are entitled to apply for such an order:

• The insolvent commonhold association;
• One or more members of the insolvent commonhold association; or
• A provisional liquidator for the insolvent commonhold association appointed under section 135 of the Insolvency Act 1986.

Philip Rainey QC suggested that the list might be expanded to include the lending bank, which could then recover the costs of the commonhold rescue from the unit holders.

Converting to commonhold from an existing leasehold structure

In principle, a leasehold development can convert to commonhold. In practice however, and bearing in mind the diverse population of any block, it is tantamount to impossible: the consent of 100% of the lessees is required.

Some legislative change is needed: there is no need for 100% participation or agreement for the exercise of a right to collectively enfranchise or the right to manage. Philip Rainey QC’s proposal is for an “enfranchise to commonhold” right to be incorporated into the Leasehold Reform Housing and Urban Development Act 1993.

The carrot

Tax: a reduction in two of its forms, viz.:

1)    A reduction in SDLT on the first purchase of a commonhold unit, and

2)    A reduction CGT on the equivalent sales.

Enough said.

The stick

There will be howls of despair from ground rent investors here.

The suggestion is that there be:

1)    A reduction or abolition of the right to reserve the ground rents;

2)    An abolition of the grant of leases over flats.

Alternatively, section 2 of the Rent Charges Act 1977 could be amended to include a “chief rent” payable on commonhold units so that both leasehold and commonhold units produce an annual revenue.

One of the main reasons for investing in ground rents is the opportunity to derive income from lease renewals. Philip Rainey QC pointed out that developers are increasingly granting 999 year leases, which naturally have a minimal reversionary value.

The most straightforward method of eradicating reversionary value is to oblige developers granting leases of flats which are sold at a premium to grant leases of a length sufficient to reduce the reversionary value to next to nothing.

Finally – how about simply prohibiting the grant of leases in new developments?

The publicity drive

Legislative change, carrots and sticks are unlikely to suffice on their own: a “major publicity campaign by Government” would be a pre-requisite to the re-launch of commonhold.

Conclusion

Whether keen supporter or hesitant doubter, both silks were of the view that commonhold has the potential to be successful.

For Philip Rainey QC, we are yet to alight on the right formula for it in England and Wales.

For Guy Fetherstonhaugh QC, commonhold is “an important and worthwhile project” which merits the renewed effort that it will undoubtedly require to transform it into a widespread form of property ownership.

You can read a full report on the attendees and discussion at the meeting here.

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With thanks to Martin Boyd of the Leasehold Knowledge Partnership for organising the meeting.