Calling All Developers – Are You Commonhold Ready?

Pankaj Patel is TBC’s commercial and property lawyer who combines his wide legal skills with many years’ of entrepreneurial experience.

The concept of Commonhold has been around since 2002 but there has been very little take up by developers.  However, now that there has been escalating criticism of leasehold properties, the time may now have arrived. It’s not that novel; it’s the way that flats or units are sold in Australia and in USA.  That’s why they are called a Unit or Condominium. Instead of owning a leasehold flat, you purchase a freehold flat.

Leaseholders are granted a lease by the freeholder to occupy a flat for a fixed number of years. Leaseholders encounter problems, including:

· being required by the lease to pay ground rent, which increases alarmingly over time;

· as the lease gradually gets shorter, its market value slips, and there are problems selling it; buyers are unable to obtain a mortgage, as lenders are averse to lending against short leases;

· having to comply with restrictions in the lease such as not being able to keep any pet at all. This may sound de minimis (a trifle), but pets have become popular now people are spending a lot of time at home.

Government reforms are expected to include legislation: –

· enabling leaseholders to extend their leases to 990 years, for a fee payable to the freeholder;

· requiring ground rents to be zero in newly extended 990-year leases and new leases;

· encouraging Commonhold ownership instead of leasehold.

Commonhold is a form of ownership for multi-occupancy developments, such as a house divided into flats. In a Commonhold structure, each flat owner: –

· is called a ‘unit holder’, and owns the freehold of their flat (their flat is called a ‘unit’); there is no ground rent and their interest is not limited to a fixed number of years.

· is also a member of a ‘Commonhold Association’, which is special form of limited company, which is the freehold owner and manager of the ‘common parts’ of the development.

Thus, as one of the members of the Commonhold Association, a unit holder has a ‘communal stake’ in the management of their development, unlike a leasehold.

Commonholds have been available for over a decade, but very few have been formed for various reasons. The Government reforms are expected to make the Commonhold structure popular, and perhaps even compulsory.

The Government reforms, together with adroit marketing by a developer, may result in units in a Commonhold development achieving a higher market price on sale, than a leasehold.

A higher market price may be attractive to developers, representing an accelerated receipt of a lump sum in payment for giving up the freehold.

We shall be following the Government reforms as they take shape in the coming months.

If you have a query please contact Pankaj.

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