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Commonhold - Lupton Fawcett LLP

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					Commonhold - a new hope for businesses

A new type of property ownership has recently been brought into existence which may at last
enable businesses of all types to get their landlord off their backs. Called commonhold, this cures
a very longstanding defect in English law that hampered freehold ownership of property which is
above or below other property – for example an office suite on the third floor of an office block or
a shop with a flat above it.

Until now, for technical reasons, the only really satisfactory way to split ownership of these
properties to grant a long lease. By its very nature, a lease will eventually run out. This results in
the value of a leased property eroding over time and the landlord (or his grandchildren), having
been paid once for the property, eventually getting it back – free- to sell again! Typically once
there are only 50 or so years left to run on a lease it becomes difficult to get a mortgage on the
leasehold                                                                                    interest.

Further problems are frequently encountered with leases: usually the landlord remains
responsible to maintaining the main structure of the buildings and the areas which are used
jointly, with maintenance costs being reimbursed by the leaseholders through a service charge.
However if the landlord is not actively involved with the building it is quite often difficult to get
the landlord to carry out the necessary works. Other times, landlords have not bothered to seek
to obtain value for money in carrying out repairs – it is easy to spend other people’s money!

With the new law, ownership of the building and its different parts is organised in a radical new
way. The shop or the office suite (called a “unit”) is sold to a “unit holder”. The unit holders own
their unit in perpetuity as in a freehold, so there is no longer the problem of the lease running out,
and no ground rent to pay.

The main structure of the building and the areas which are jointly used are transferred to a
“commonhold association” – which is a management company which is owned by the unit
holders. The commonhold association is responsible for maintaining the shared areas, which
means the costs are shared by the unit holders. This should ensure that necessary works are
carried out promptly and, equally importantly, cost effectively because there is no longer the
issue of spending other people’s money.

The new law has only just come into force, so it is too early to say how popular commonhold will
become. Because the old leasehold system has not been abolished, there will be a period of time
when the more traditional types in the property industry will take the view “if it isn’t broken, why
fix it?” However, if property developers can charge a slightly higher price for a commonhold unit
than for a long lease of the same unit - because it is a better product - then their tune will soon
change.

To start with, setting up a commonhold legal structure, rather than a more traditional long
leasehold structure, will probably cost the developer a little more in legal fees. Unless the scheme
is very low value, the increased prices achieved should more than offset those fees. Once they
become more commonplace and lawyers are more familiar and comfortable with commonhold,
those fees should return to lower levels.
The Law Society has just updated its rules to regulate how solicitors may deal with commonhold
properties; this in turn will mean that mortgage lenders can now modify their requirements, so
units will become mortgageable. Surveyors and valuers will no doubt be able to adapt their
expertise to value units.

It is, at least in theory, possible to convert an existing development into a commonhold scheme.
The rules are very complex and only the very determined should consider embarking on such a
move and only if they are pretty sure that everyone having an interest in the development will
agree and is interested in getting involved. New developments, where the developer is suitably
interested, are much more likely to be commonhold schemes.

Commonhold is available for both commercial and residential schemes; however the Government
has decreed that a residential unit holder is not allowed to grant a lease of his unit for more than 7
years. Thus you will be able to rent it out for a relatively short period of time, but you won’t be
able to introduce the existing problematic long leasehold system to flats through the back door.
These restrictions do not apply to commercial units.

To paraphrase Robert Plant, “this is an article of hope”; a business now has the chance to own the
property it occupies without having to deal with its landlord or to pay ever increasing rents or to
have major arguments over service charges. The owners of a small business might even buy the
unit in their pension scheme and then rent it out to the business, so the capital growth would be
tax-free.

Please note that the article above is not advice to any person and may not be taken as a definitive statement of
the law in general or in any particular case. Neither the author nor Lupton Fawcett accepts any responsibility for
anything that any person does or does not do as a result of reading it.

				
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posted:5/21/2010
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