Commonhold: Freeholds for Sale!

The UK property market is regarded as one of the most mature and sophisticated in the world. However, in one respect we have lagged well behind other countries, that being the ability to transfer the freehold of a unit within a property where the unit is dependent upon the maintenance of other parts of the property. A good example of this is a flat within a block where each flat owner will need the structure of the building and its common parts to be maintained.

The problem is not limited to blocks of flats. It applies to all properties where there is a dependence on the maintenance of other property; for example, retail units in a shopping arcade or retail park, units on an office park, and floors within office blocks

The reason there has been a difficulty in selling freeholds in such situations is that under English land law the obligation to perform positive covenants entered into upon the transfer of a freehold does not pass automatically to subsequent owners when the freehold is sold on. A positive covenant is simply an obligation to do something, such as in the case of a flat owner an obligation to contribute to a service charge incurred for the maintenance of the structure of the block and the common parts.

Conversely, if a leasehold interest is created the obligation to perform positive covenants will pass as the leasehold interest is sold on. This is why flats are sold by way of the grant of long-term leases rather than freehold.

The Commonhold and Leasehold Reform Act came into being upon 1 May 2002 and introduced the concept of commonhold to overcome the problem. In a commonhold development it will be possible for units to be sold freehold and for positive obligations to be enforced by and against owners of inter-dependent properties and also their successors in title.

In the case of a new development, it can be set up by the developer as commonhold at the outset. An existing development can be converted to a commonhold development with the consent of all those holding an interest.

The new legislation is lengthy and detailed. In essence, however, the legal structure of a commonhold development will be relatively simple. Each separate property in a commonhold development will be called a "unit" and each owner will be called a "unit-holder". A commonhold association will be created. This is a private company limited by guarantee whose membership will be restricted to all the unit-holders within the development. Commonhold...