A tale of two systems

As the old joke has it, when asked for directions to a particular place, the countryman replies, “Well, I wouldn’t be starting from here”. So too with methods of holding long-term interests in blocks of flats and other properties with shared common parts.

Let us suppose an event leading to selective amnesia, with the result that no-one has any idea how to hold such property, although everyone is generally aware of the rights and responsibilities (to maintain, insure, access, alienate and use properly) that need to be catered for. The government commissions two law students to compete to invent a cogent system for dealing with the problem.


System A

The first law student devises a system with the following elements. Each building has an overall owner (“L”). L sells a contractual right to occupy parts of the building for limited terms of years to people (“T1”, “T2”, etc). The contracts are long and complex, and may all be different. Typically, they will require all Ts to pay L a small sum each year, in addition to the premium on sale, and to pay L for maintaining and insuring the building. L will seek to make a profit on those services, and may quite lawfully reap a secret profit by arranging block policies and discounts which it does not pass on to Ts. L may also try to make it difficult for Ts to assign their properties. L will reserve the right to terminate the contracts (and thus take over T’s property) if T is in breach – but Ts have no right to L’s property if L is in breach. At the end of their contracts, Ts will have to purchase a fresh right to continue in occupation. Essentially, L’s interest in the building is entirely financial: the reason for its ownership is to make money out of Ts.

The law student responsible for devising this first system knows that it will be open to abuse as a result of the conflict of interest between the positions of L and Ts – but he is sure that Parliament will provide an answer to that, in the shape of a series of laws of bewildering complexity that do nothing to resolve the conflict, make life difficult and expensive for all concerned, and profit only the lawyers and tribunals who administer the frequent disputes between L and Ts.


System B

The second law student devises a system with the following elements. Each unit of accommodation in the property is sold outright – in perpetuity – to a series of unit holders (“U”), who collectively also own a share, through an association (“A”) of the common parts in the property. The rights and obligations between A and Us are regulated through a simple document, the terms of which are standardised, with additional clauses being added as necessary on a bespoke basis. A looks after the maintenance and insurance of the property, and Us contribute their requisite proportion. Since A is composed entirely and only of Us, there is less potential for conflict – and disputes are ironed out early through a cooperative resolution system.


The assessment

The government assessor gives two out of 10 to the first student. The system would work, but inefficiently, at the cost of deteriorating relationships between the holders of the various interests in the property, extensive and expensive administration, and a waste of parliamentary time in devising legislative fixers for the many problems that emerge.

The government assessor gives nine out of 10 to the second student. Her proposal is greatly admired – but she drops her one mark because she has not thought of a way to deal with certain problems such as insolvency of the association, shared ownership and dispute resolution.

The decision made is that the first system should be rejected, and the second should be accepted, with a recommendation that urgent steps be taken to resolve the few problems identified.


Memory regained

At this point, everyone regains their memories, and finds that, weirdly, system A – leasehold – is the property-owning vehicle of choice; while the far superior system B – commonhold – is available, but used by only a handful of people (about 150, at the last count). People buying flats purchase long leases, because their solicitors are too cautious to recommend commonhold, which has been on the statute book for 12 years, but has not been adopted by the domestic market with any enthusiasm (although it is widely used overseas). If their clients are sophisticated enough to appreciate the defects with leasehold, the solicitors mention the possibility of enfranchisement or the right to manage, but counsel their clients that these are not perfect solutions.

Having gone to the trouble of commissioning the investigation, however, the government assessor is reluctant to allow the status quo to continue. All that is needed is for the second law student to craft legislative solutions to the problems that have been identified with commonhold (and there is a large measure of agreement as to what they are).

The government’s attention to this issue over the last few years has been disappointing. In 2005, in answer to a question from the indefatigable Baroness Gardner of Parkes, the parliamentary under-secretary of state at the Ministry of Justice (which, curiously, rather than the Department for Communities and Local Government, supervises commonhold – and herein may lie a substantial part of the problem) said:

“The government are absolutely committed to commonhold. We shall investigate why progress is so slow and report back to the House early in the new year”.

No such report was ever produced. A consultation was instead promised “to improve take-up of what… is a desirable option”. That did not happen either.

An all-party meeting on commonhold organised by LKP/CARLEX (led by Martin Boyd) took place at Portcullis House last month, with a view to ascertaining why the market rejected commonhold, and what changes would be needed if the government were to consider updating or introducing relevant legislation. Those who spoke were largely dismissive of leasehold and supportive of commonhold, but alive to the difficulties of reawakening interest in this alternative system.

Those of us who believe commonhold is indeed “a very desirable option” will continue to press for its improvement and widescale implementation.


Guy Fetherstonhaugh QC is a barrister at Falcon Chambers