House of Lords - Explanatory Note
Commonhold and Leasehold Reform Bill - continued          House of Lords

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     Commonhold can only be created out of registered freehold land. The essence of its creation is a further registration process to be carried out by HM Land Registry. When the commonhold is fully effective, the Registry will have entries on the appropriate register which will show the individual ownership of units within the development and the ownership of the common parts by the commonhold association, with necessary cross references. Clauses 2-5 set out the commonhold registration process.

Clause 2: Application

     Subsection 2(1) requires the Registrar to register a freehold estate as an estate in commonhold land provided that the applicant is the registered freeholder of the land which is to become commonhold land and that no part of the land which is the subject of the application is already registered as commonhold. The first requirement is to ensure that the applicant has the necessary authority to make the significant change to the nature of the land holding that commonhold represents. The second requirement is to ensure that the land is not already part of a commonhold regime. If it were so, it would be or be about to become either a unit or common parts, and as appears later in the Bill, there are rules governing adding to or subtracting from a commonhold which would be inconsistent with a freeholder purporting to create a new commonhold out of existing commonhold land. Subsection 2(2) specifies the documents which must accompany the application by reference to Schedule 1, which is covered later in these notes. Subsection 2(3) defines a registered freeholder for these purposes as either the person appearing on the Land Register as the freehold owner or as someone entitled to be so registered, having made an application, for instance an owner of unregistered land applying for first registration.

Clause 3: Consent

     As part of the essence of commonhold is that all those involved as unit-holders should have an equality of interest, it is important to ensure that there is full participation by all those who may be involved in a conversion from a leasehold situation. Also, because of the distinct difference between commonhold and other forms of tenure, everyone with a registered interest in any land which it is intended to register as commonhold should consent to the change. Subsection 3(1) specifies five classes of person from whom it will be necessary to obtain consent. Paragraph (a) will include, for instance, the owner of a lease on a flat in a block which is converting to commonhold from leasehold; paragraph (b) will include people who have other registered interests, such as easements, over the land; paragraph (c) will include mortgagees; paragraph (d) refers to people who have entered cautions on the register against dealings with all or any of the land under application. (A caution on the register, usually entered by a creditor of the registered owner, in effect gives the cautioner a right to know when the registered owner proposes to deal with the property, so that he has an opportunity to assert his interest); paragraph (e) allows for other classes of person to be included in the list of those whose consent must be obtained.

     Subsection 3(2) provides for the making of regulations governing consents, including forms, duration etc. In particular they may make provision for a court to dispense with consents in circumstances which the regulations would specify, and subsection 3(3) provides that such an order may either be an absolute dispensation or may, alternatively, be conditional on some specified action or circumstance prescribed by the court. The court may also make any other provisions which seem appropriate, which might include, for instance, in the right circumstances, an order for compensation.

Clause 4: Land which may not be commonhold

     Clause 4 applies Schedule 2, which lists types of land which may not, for a variety of reasons, be registered as commonhold. The three broad categories are:

    (i)     developments in which it is intended to create a commonhold in land above ground level where the 'grounded' part of the structure is not part of the same commonhold application, the most obvious example of which would be flats developed over shops, where the shops continue to be let on standard commercial leases;
    (ii)     specified sorts of agricultural land; and
    (iii)     land the freehold title to which is contingent on some specified future circumstance (see Schedule 2).

Clause 5: Registered details

     Subsection 5(1) prescribes the documents which must be submitted to the Registrar and be kept in his custody and be mentioned in the register, and which will form an integral part of the information held by him for the use of those who wish to search for information in relation to a commonhold. Of particular importance are the commonhold community statement (see clauses 30-32) and the memorandum and articles of association of the commonhold association (see clause 33 and Schedule 3). Subsection 5(2) permits the Registrar to keep in his custody and to mention in the register any other document which is submitted to him if he sees fit to. This might include, but not be restricted to, such things as consents and certificates required at the application stage (see clause 3 and Schedule 1 paragraph 7). Subsection 5(3) provides that, during the transitional period between the registration of the commonhold by the applicant and the sale of the first unit, the Schedule of unit-holders need not be filed with the Register. This is because, at that stage the applicant/developer would still be the registered owner of the whole freehold and so there would be no unit-holders.

Clause 6: Registration in error

     Clause 6 provides that, where registration of a commonhold has been carried out but the application was not in accordance with or was in contravention of Part I of the Bill, the Registrar may not deal with it by rectification under the terms of the Land Registration Act but the court may make a declaration that the registration ought not to have been carried out. It may then go on to make provision either to require the land to cease to be commonhold land or to put right the defects. So far as possible, it is expected that the courts will strive to maintain the commonhold in existence by directing appropriate people to do or refrain from doing the things which have resulted in the declaration.

Effect of registration

     Clauses 7, 8, 9 and 10 make provision for the effect of registration in different development circumstances, distinguishing broadly between developments without occupiers, whether built afresh or re-developed whilst vacant, and those with existing occupiers.

Clause 7: Registration without unit-holders

     Clause 7 makes provision for the registration of a development without unit owners in occupation. Subsection 7(1) applies the section when the land is registered as commonhold following an application under clause 2 and there is no statement under clause 9(1)(b) (see note to clause 9). Subsection 17(2) provides that, in these circumstances, the applicant shall continue to be registered as the owner of the whole freehold and that the provisions of the commonhold community statement should not yet have any effect except where modifications of the document are specifically provided for under the terms of regulations made under clause 8(2)(b). Subsection 7(3) provides that, when a person buys the first unit, the Registrar must register the commonhold association as the owner of the common parts without the need for an application for that registration to be made, and will also bring the commonhold community statement into effect, thus beginning the management of the commonhold as such. Subsection 7(3) also provides that all leases of all or any part of the land being registered shall cease to exist (shall be extinguished). Subsection 7(4) defines the types of lease to which the clause applies.

Clause 8: Transitional period

     Clause 8 recognises that there will inevitably be a period during which it will be necessary to make decisions in relation to the land and the management of the development, between the time that the land is registered as commonhold and the time that commonhold is, so to speak, perfected by the sale of the first unit to a unit-holder under 7(3). Subsections 8(2) and (3) together make provision for regulations to disapply or modify the effect of any provision of Part I of the Bill, or any subordinate legislation made under it, or any provision of a commonhold community statement or memorandum and articles of a commonhold association. As pointed out in the introduction, part of the essence of commonhold will be standardisation of documents and rules and regulations, but whilst the transitional period has effect, it would be unworkable to insist that the applicant operate under the full panoply of commonhold regulation. Subsection 8(4) allows the applicant to apply for the registration of the land as commonhold to be undone, and subsection 8(5) ensures that all those from whom it was necessary to obtain consents in order to register also consent to the de-registration. Subsections 8(4) and (5) are chiefly to allow developers to respond to commercial circumstances. Subsection 8(6) provides for references in the Bill to a commonhold association exercising functions in relation to commonhold land to apply also to land which is in a transitional period as defined by the earlier subsections of this clause.

Clause 9: Registration with unit-holders

     Clause 9 provides that, where an application to register under clause 2 has been successful and is accompanied by a request that clause 9 should apply, the Registrar will register the commonhold association as owner of the common parts without need for an application, and the commonhold community statement will come into effect. This has the effect of ensuring that, where there are already people living in the development which is converting to commonhold and the Registrar has the necessary consents, the commonhold is set up at once and there is no transitional period.

Clause 10: Extinguished lease: liability

     Clause 10 provides for the case of a leaseholder in an existing development who has sub-let property which is to become a commonhold unit following the giving of his consent to conversion. In the event that the inferior leaseholder should suffer loss by the extinguishment of their interest under this Part of the Bill and is not one of those required to consent to the conversion, the consenting superior leaseholder will be liable for the loss.

Commonhold unit

     Clauses 11, 14, 15, 16, 17, 18, 19, 20, 21 and clause 23 define the units which will be owned by unit-holders and which form the core of the commonhold development. Amongst others there are provisions covering definition, use, transfer, leasing and other transactions.

Clause 11: Definition

     Subsection 11(2) requires the commonhold community statement to define the extent of a commonhold unit and requires also that there must be at least two such units in the development because there can be no commonality or, indeed, common parts requiring the operation of the commonhold scheme unless there are interdependent units. Subsection 11(3) sets out the matters that the commonhold community statement must deal with for this purpose, including the provision of plans, and in particular allows for the unit to consist of one or more areas of land, whether or not contiguous, and subsection 11(4) makes it clear that a commonhold unit need not contain any part of a building.

Clause 12: Unit-holder

     Clause 12 provides a definition of the unit-holder designed to ensure that, where there is a gap between the completion of the sale or other transfer of the unit and the registration of that transfer at the Land Registry, the person to whom the unit has been transferred is the person who is the unit-holder. This is because, for that time, the person whose name appears on the register will still be the previous unit-holder. However, from the moment of transfer, the new owner is the person entitled to be registered, and this clause thus provides a definition which covers the gap.

Clause 13: Joint unit holders

     Clause 13 defines joint unit-holders and distinguishes between circumstances in which rights and responsibilities are joint and those in which they are both joint and individual. Lists of these circumstances are provided in subsections 13(2) and 13(3).

Clause 14: Use and maintenance

     Subsection 14(1) places a requirement on the commonhold community statement to make the necessary provisions and regulations governing the use of commonhold units. This will be the place in which the statement will specify whether, for instance, the unit is to be residential only (see subsection 17(5)). Subsection 14(2) requires the statement to impose obligations to insure, maintain and repair each unit, but subsection 14(3) gives the flexibility of allowing each of those responsibilities to be imposed on either the unit-holder or on the commonhold association. For instance, the statement could require the unit-holder to take out an insurance policy on the fabric of a flat whilst making the commonhold association responsible for insuring and maintaining a balcony. It could also require a unit holder to be responsible for the decoration of the inside of window units whilst making the commonhold association responsible for decoration of the outside of the same units.

Clause 15: Transfer

     Subsection 15(1) defines the word 'transfer' for the purposes of the rest of the clause as a transfer of the unit-holders freehold to someone else, whether or not any payment is made, and regardless of whether there are any terms applied to the transfer or that the transfer takes place as the result of a legal requirement. Subsection 15(2) provides that the commonhold community statement can neither stop a unit owner from transferring their unit nor place restrictions on his right to do so. To ensure that the commonhold association always knows who owns a particular unit and thus also who its members are, an incoming unit-holder is required to inform the association of the transfer. The form of the notice required under subsection 15(3) and any time limit to be applied is to be laid down in regulations, as is provision for dealing with failure to comply with the requirements (subsection 15(4)).

Clause 16: Transfer: effect

     Clause 16 sets out how the transfer of a unit will affect 'new unit-holder' and 'former unit-holder' (as defined in subsection 16(4)) in certain respects. Subsection 16(1) provides that transfer will not affect the existence of certain impositions or benefits related to the land created either by the commonhold community statement or by any action of the former unit-holder which was in accordance with clause 20. The new unit-holder will have the same rights and responsibilities after transfer as the former unit-holder had before that date. Subsections 16(2) and (4) provides that a former unit holder cannot be held responsible for any obligation arising after the date of transfer arising either out of the commonhold community statement or out of any action of his in conformity with clause 20, and by the same token will not be entitled to any benefit accruing from the same sources after the same date. Subsection 16(3) provides that the rule in subsection 16(2) cannot be displaced by agreement, but has no effect on rights and obligations arising before the date of transfer. This means, in effect, that no contract for sale or other transfer document can contain a clause purporting to tie a former unit-holder to the unit beyond the transfer date. This aims to ensure that the current unit-holder is always the person with the full range of benefits and obligations relating to their unit, and that no-one has a greater interest in the unit than do they.

Clause 17: Leasing: residential

     Clause 17 places one of the few restrictions that the commonhold scheme requires on the ability of a unit-holder to treat his unit as though freehold. It is Government policy that residential commonhold units should not be let for long unbroken periods. This is to avoid the possibility of repeating the difficulties which exist in leasehold blocks now. The intention is that regulations made under subsection 17(1) should set down both that no premium should be payable for a lease, which should be at a rack rent, and also that the maximum period for a single term lease should be restricted to seven years. Subsection 17(1) announces the restriction on granting leases unless the terms satisfy certain conditions, and subsection 17(2) sets out the matters which would form the basis of those conditions. Subsection 17(3) provides that, if a lease is granted which contravenes the prescribed terms, it shall be of no effect, and subsection 17(4) allows recourse to the courts by any party to such an ineffective lease, giving the court powers to order that the ineffective lease should take effect, to order the return or payment of money by way of compensation, and to make any other provision which it thinks fit. Subsection 17(5) requires that a residential unit should be so described in the commonhold community statement.

Clause 18: Leasing: non-residential

     Clause 18 provides that commercial leases for appropriate units are subject to the terms of the commonhold community statement.

Clause 19: Leasing: supplementary

     Subsection 19(1) provides that either or both of regulations and the commonhold community statement should be able to impose obligations on the tenant of a unit and subsection 19(2) says specifically that a tenant might be required under the regulations to pay to the commonhold association or another unit-holder sums which are due to be paid by the tenant's landlord unit-holder, or by another tenant of the unit under the terms of commonhold community statement. The regulations may provide (subsection 19(3)) that sums to be paid by a tenant under clause 19(2) can be set off against amounts owed by him to his landlord unit-holder or some other person and for amounts paid under clause 19(2) to be recovered from the unit-holder or another tenant of the unit. Subsection 19(4) gives power to vary rules of law, whether common law or statute law, about leases in order to bring them into line with the requirements of commonhold. Subsection 19(5) is a general regulation-making power.

Clause 20: Other transactions

     Subsection 20(1) forbids any provision of a commonhold community statement from preventing or restricting a unit-owner's exercise of his right to create, transfer or grant an interest or charge over his unit, for instance, in appropriate circumstances, granting a right of way, or borrowing on a mortgage and so charging the unit as security. Subsection 20(3) however requires that no interest can be created unless the commonhold association is either a party to it or consents in writing. By subsection 20(6), the subsection 20(3) requirement does not apply to the creation of charges, so the unit-holder's right to charge the unit are restricted only so far as provided in the Bill itself or in any subordinate legislation made under it. Subsection 20(4) provides that, where a commonhold association is to act under subsection 20(3) it must only act following a unanimous vote of the members in favour. (See clause 35 in relation to voting). Subsection 20(5) renders void any agreement, however made, which is in contravention of subsection 20(3), so a unit-holder who purports to act where in fact there is no unanimous consent of the association members is unable to make an instrument or agreement that will have effect. Subsection 20(2) makes clause 20 subject to the provisions of clauses 17 and 19 about leasing. Clause 20 only deals with matters that would appear on the register.

Clause 21: Part units

     Clause 21 prohibits interests or charges in or over part-units. The intention is to preserve the integrity of the unit, and also to ensure that no event takes place that would require a change to the commonhold community statement which is not in the control of the commonhold association; in the event that a mortgagee were able to foreclose on part of a unit, it would be necessary to amend the statement as to the extent of the unit, and that requires the consent of the association members. Subsection 21(1) sets out the prohibition and subsection 21(3) makes it subject to clause 58, which deals with compulsory purchase.

Clause 22: Changing size of unit

     Clause 22 provides that, where for whatever reason, it is desired to change the size of a commonhold unit, for instance because an existing unit-holder has a garage in a block of garages which is, nonetheless designated as part of his unit, and the commonhold association wishes to demolish the garages for some purpose, the unit-holder's consent must be sought.

Clause 23: Changing size of unit: charge

     Clause 23 is intended to ensure that where a unit is subject to a registered charge and the commonhold community statement is amended such as to change its extent either by enlarging or diminishing, the owner of the charge consents in writing before the change is made. This is because, as there cannot be a charge over part of a commonhold unit, the clause provides that where land is taken out of the charged unit, the charge in relation to that part is automatically extinguished, and in the case where land is added, the existing charge is extended to cover it. Consent is required as the charge is in effect the property of a third party and that party's rights must be protected. Subsection 23(1) defines when the clause will apply, subsection 23(2) provides for the seeking of written consent in advance of the planned change, subsection 23(3) provides for a court to dispense with the need for consent, subsection 23(4) provides for automatic extinguishment where appropriate and subsection 23(5) for automatic extension, and subsection 23(6) provides for the making of regulations which would require notice to be given to the Registrar and requiring the Registrar to register changes arising from subsections 23(4) and (5).

Common parts

     Clauses 24-29 cover the same ground for the common parts as the previous section did for the individual units. The common parts may include conduits for the delivery of services and are, in effect, any part of the development not delineated in the commonhold community statement and the plans as units.

Clause 24: Definition

     Clause 24 defines common parts as all those parts of the commonhold land which are not, for the time being, defined in the commonhold community statement as units. In effect, they will include hallways, stairwells, lift shafts, landscaping, gardens etc, though the status of a particular type of land in any particular commonhold development will be defined in the commonhold community statement for that development. Subsection 24(2) introduces the concept of the limited use area. This will remain part of the common parts but may be limited to the use of a single unit-holder, for instance in the case of a balcony the only access to which is through the unit in question, or to a group of unit-holders, for instance the use by them of a garden associated with a particular group of units they occupy. This is expected to be a useful concept when dealing, for instance, with parking spaces, as opposed to garages, where the commonhold association may wish to take responsibility for maintenance but to allocate particular spaces to particular unit-holders. Subsection 24(3) provides that the commonhold community statement may make special provisions which affect only limited use areas and also which make different provisions for different such areas.

Clause 25: Use and maintenance

     Clause 25 requires that the commonhold community statement must make provision for the regulation of the use of the common parts, in effect to set out the rules and regulations for corporate living in the development, and must also provide for the association to insure, repair and maintain the common parts.

Clause 26: Transactions

     Clause 26 forbids the commonhold community statement from restricting the right of the commonhold association to transfer its interest in any part of the common parts, i.e. to sell part of the common parts, or to create any interest over any part of the common parts, such as a right of way.

Clause 27: Charges: general prohibition

     Clause 27 imposes, subject to clause 28, the general prohibition on charging of common parts. Subsections 27 (2) and (3) provide for the extinguishing both of charges in existence when the commonhold association comes into being, so far as they apply to the common parts and of charges on any part of common parts which are added at a later stage.

Clause 28: New legal mortgages

     Clause 28 provides the exception to the general rule in clause 27 allowing a commonhold association to borrow on the security of common parts providing it obtains, in advance, a unanimous resolution of members.

Clause 29: Addition to common parts

     Clause 29 makes the necessary provision to achieve the registration of the commonhold association as the owner of common parts when new land is added to them. This is achieved on the submission of an amended commonhold community statement by the commonhold association under clause 32, the Registrar registering the interest without the need for a separate application.

Commonhold community statement

     Clauses 30-32 set out the provisions governing the commonhold community statement, which combines the functions of describing the physical attributes of the development and containing the rules and regulations by which the commonhold will be conducted. Although it is intended that there should be a significant degree of standardisation between the statements of all commonholds, there must inevitably be a degree of flexibility to take into account the different nature of, for instance, an existing block of long leasehold flats in an urban environment converting to commonhold and a development of detached houses together with a small block of flats with shops and other services provided.

Clause 30: Form and content: general

     Clause 30 sets out at some length the core provisions to be made by the statement. Subsection 30(1) makes it clear that, in relation to the commonhold land in question, the statement makes provision both in respect of the commonhold association and the unit-holders. Subsection 30(2) requires the statement to be in a form to be prescribed and subsection 30(3) gives the power for the statement to confer rights or impose duties on both the commonhold association and on unit-holders. Subsection 30(3) also confers the power to regulate the taking of decisions in connection with the commonhold land, but subsection 30(4) makes these powers subject to any provision of Part I of the Bill and to the memorandum and articles of the commonhold association. Subsection 30(5) lists examples of duties which the statement might impose, and subsection 30(6) provides that, where there is a duty to pay money, whether under subsection 30(5) or otherwise, that duty can be extended to the payment of interest if payment is late. Subsection 30(7) provides that easements, rights duties privileges etc may be created by the statement with no need for further formalities. It is often the case that such formalities would otherwise include the preparation and execution of a deed; that will not be necessary in the case of such grants or impositions arising from a statement. Subsection 30(8) provides that the statement may not make provision for the loss of any interest in land, to be contingent on any future event. Subsection 30(9) provides that any provision written into a statement that is contrary to the regulations governing the prescribed form and content (see clause 31), to any provision of Part I of the Bill or with the memorandum and articles of association of the commonhold association, will be of no effect.

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Prepared: 22 December 2000