Commonhold: love thy neighbour

The commonhold community statement ("CCS") sets out the rights, responsibilities and rules for all unit owners.  This may be supplemented by local rules.  According to the Law Commission, the presence of these rules will of itself prompt unit owners to behave responsibly. Managing agents might be forgiven for thinking that this is optimistic – leaseholders too have a set of rules to follow, in the form of the tenant covenants in a lease, but these are not always adhered to.

The White Paper points out that service charges are probably the most frequently contested feature of leasehold disputes. They therefore surmise that when unit owners can have a say on how charges are set or can contest them before the associated expenditure has been incurred, this will remove most of these service charge disputes. The Law Commission's Recommendation 9 proposes that the directors of the CA will be obliged to set out their proposed expenditure for the year ahead, and that the proposed contributions to shared costs should require the owners' approval by way of an ordinary resolution (a majority of those owners who turn up to the CA meeting to vote).

However, they also recommend that a CA should be able to dispense with the obligation to approve proposed contributions this way.  It is also important to highlight the fact that residential leaseholders have the protection of significant statutory safeguards, and commercial leaseholders are protected by the terms of their lease and the duty of professional managing agents to comply with professional standard such as the RICS Service Charge Code, whereas commonhold owners do not have any such protections (though see section 4 below).

The Government states that, "without a third-party landlord, the interests of all owners in the block should be more aligned from the outset, meaning fewer disputes in the first place." This perhaps overlooks the extent to which freehold residential neighbours fall out (particularly over shared accessways, noise interference, and boundary features such as hedges and fences) and the extent to which landlords are called upon by leaseholders to enforce neighbours' tenant obligations. Commonhold neighbours will face the same stresses and strains as all other neighbours to do with sharing space and living in close proximity to each other, and will also have to agree on financial arrangements for their buildings. Employing a third-party manager might help diffuse these tensions as well as helping owners manage their legal liabilities for statutory duties such as fire safety.

The CCS contains a template process for parties to follow to resolve a dispute. This involves an initial attempt to negotiate and/ or use dispute resolution processes; if this is unsuccessful then the aggrieved owner must lodge a formal complaint using the requisite pro forma; then follows another phase of attempted dispute resolution; if the matter is still unresolved, the parties can at this stage raise the matter with an ombudsman. Only after the ombudsman has reached its conclusion or if there is no such ombudsman, may the complainant commence legal proceedings.

This system assumes that neighbourly disputes are capable of being resolved by negotiation, which will not always be the case. The mechanism is also limited in scope in that it allows for disputes between owners, and disputes between owners and the CA, but it does not provide for owners to take steps against a director or other office holder. In this instance, the Law Commission suggests that owners could commence a dispute resolution procedure against the directors if they have breached the CCS in making their decision (for example in breach of an obligation to act reasonably when making a decision); bring an unfair prejudice claim against the directors in accordance with company law; vote to remove the directors; or vote by special resolution to compel the directors to make a different decision. They could also apply to the Tribunal to replace the directors where there has been a persistent failure to comply with the CCS in some material respect.

Academics and commentators suggest that these mechanisms work tolerably well in smaller schemes where neighbours try hard to settle disputes and disagreements amicably and for the greater good, whereas larger sites may struggle to maintain cohesion and goodwill. The Law Commission has considered their effectiveness in great detail and has proposed a few changes to the current regime, see box below.

To resolve a dispute, the CA must follow the same process as that set out at section 4 above.  Separately, the CA has various ways to resolve breaches of the CCS by unit owners, such as a failure to pay the commonhold contribution. This includes charging interest on unpaid sums, and the ability to divert rent payable to the unit owners if they have let out a unit.  In addition, the Law Commission's Recommendation 106 suggests that a CA should be able to apply to court for the sale of a defaulting unit owner’s unit, in order to recover arrears of commonhold contributions from the proceeds of sale, in accordance with a proposed new pre-action protocol. This is akin to the forfeiture rights in a lease, which to some extent undermines the advantage of commonhold over leasehold.

Although the Law Commission proposes that lenders would have step-in rights, this power of sale may still make commonhold feel more risky for lenders, as the system for protecting unit owners from such drastic remedies is less well-known and less well-developed than leaseholder protections such as the right to claim relief from forfeiture, and the suggestion that the CA should have a first charge over the units might be unattractive to a lender whose charge would be ranked second in priority.

For non-financial breaches, the Law Commission explored the idea of allowing CAs to levy fines on defaulting owners, or of giving CAs a general right to restrict a unit owner’s access to parts of the commonhold or suspend voting rights, in all cases without a court or tribunal order. They concluded that there would be a risk of the CA using these sanctions without any clear evidence that a breach had occurred. Although the unit owner could challenge this, it might damage the social dynamic within the commonhold, where members of the CA will be the neighbours of the defaulter. There might also be a risk that the use of such sanctions could enflame disputes or give rise to concerns of discrimination. Finally, the Law Commission reasoned that unit owners will have recourse to the same rights regarding neighbours as other freeholders, such as self-help remedies for nuisances, asking the Police to enforce the Anti-social Behaviour, Crime and Policing Act 2014; and asking the local authority for help in respect of noise complaints and other nuisances, such as vermin infestations and fly-tipping.

One of the interesting ideas flowing through the Law Commission's report on commonhold stems from the recognition that although democratic decision-making is one of commonhold's key attributes, it leaves open the risk that a majority of unit owners will make decisions that negatively impact on the interests of the minority. They recommend that there should be four "gateways" that give rise to the right to appeal to the Tribunal:

• where a CA votes to approve an amendment to the local rules in the CCS;
• where a CA approves the creation of a section (or sections), which is where parts of a commonhold scheme are partitioned off so that owners can vote on matters that only affect them, eg the maintenance of a car parking area that only certain owners can use;
• where the CA has approved the combination of two or more sections; and
• where a CA approves a budget in excess of a “cap” set out in the CCS.

The Tribunal would have the ability to consider a wide range of factors in determining whether to grant a remedy to the applicant. These ideas are laudable but rely on the minority having the time, cash and knowledge of the system in order to seek redress. It's also hard to know at this stage what sort of redress would be appropriate without undermining the wishes of the majority.

Dispute resolution is at the heart of the commonhold proposal: is it better to have to deal with a third-party landlord or with your neighbours? The Law Commission has made various suggestions to balance off the competing interests at stake: democratic voting systems, lenders' rights, the need for secure and reliable funding, and the protection of minority voters. It remains to be seen whether these solutions will work but, as with other jurisdictions with some sort of strata title, it is likely that the relevant law and practice will evolve over time once the new regime has bedded in.