Developers of blocks of flats or apartments may want to consider what form of ownership will be best for a later sale of the whole property. The traditional leasehold, or the relatively new concept of commonhold?
Commonhold came into force through the Commonhold and Leasehold Reform Act 2002. In essence, it is a variation of the current practice of selling a block of flats or apartments through a management company who then manage the individual flats or apartments. With commonhold, each unit would be bought by the commonholder (‘unit holder’) and owned in the same manner as a freehold title.
For commonhold to work, a Commonhold Association – similar to a management company – is set up. The difference is that the CA actually owns the common areas, such as hallways, roads, stairs etc, and can control service charges. The Commonhold Association will be a company and its members will be the flat or apartment owners. The Commonhold Association will run the site in a similar manner to a traditional management company, and once the last unit is sold the developer can walk away from the development.
So why deviate from the normal arrangement when it all seems relatively the same set up so far?
Commonhold is a form of freehold title; not a leasehold with a fixed term of years so the value of the unit will not decrease as a leasehold title does as it approaches the end of its term. The result of this is that the flats or apartments might be more attractive to potential buyers.
In addition, a commonhold development is regulated by statute, the Act of Parliament and additional Regulations, so it is not left to the developer to try to find a scheme that works, therefore there is more uniformity. This will be more appealing to Lenders as they will have familiarity with the process which again will help the value of the flats or apartments.
However, a developer will need to bear in mind the following:-
a) Commonhold must consist of the common parts plus at least two units. These can be entirely separate, linked, or units contained within a single structure.
b) Commonhold does not apply to certain types of land (eg places of worship, agricultural land).
c) The entire site must be sold as commonhold or not at all. Commonhold cannot work in tandem with Freehold, although a commonhold owner can lease out their property if they wish.
d) With commonhold you lose the right to collect rent from the flat owners.
It is entirely possible that government will in the future allow a management company to be set up outside of the Commonhold Association if a large enough percentage of the flat owners so wish, thus removing the management from the flat owner’s hands.
