House of Commons - Explanatory Note
Commonhold and Leasehold Reform Bill [HL] - continued          House of Commons

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Clause 25: Use and maintenance

74.     Clause 25 requires that the commonhold community statement (CCS) 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

75.     Clause 26 forbids the commonhold community statement (CCS) 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

76.     Clause 27 imposes, subject to clause 28, the general prohibition on charging of common parts. Subsections (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

77.     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

78.     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 (CCS) by the commonhold association under clause 32, the Registrar registering the interest without the need for a separate application.

Commonhold community statement (CCS)

79.     Clauses 30-32 set out the provisions governing the CCS, 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

80.     Clause 30 sets out at some length the core provisions to be made by the statement. Subsection (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 (2) requires the statement to be in a form to be prescribed and subsection (3) gives the power for the statement to confer rights or impose duties on both the commonhold association and on unit-holders. Subsection (3) also confers the power to regulate the taking of decisions in connection with the commonhold land, but subsection (4) makes these powers subject to any provision of Part 1 of the Bill and to the memorandum and articles of association of the commonhold association (M&As). Subsection (5) lists examples of duties which the statement might impose, and subsection (6) provides that, where there is a duty to pay money, whether under subsection (5) or otherwise, that duty can be extended to the payment of interest if payment is late. Subsection (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 (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 (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 1 of the Bill or with the memorandum and articles of association of the commonhold association (M&As), will be of no effect.

Clause 31: Regulations

81.     Clause 31 sets out the regulation making powers in relation to the commonhold community statement (CCS). Subsections (1) and (2) set out the general powers for the making of the regulations. Subsection (3) provides that, if a statement is defective in any respect set out in the regulations, it may be deemed to contain such matter or be allowed to contain provisions which stand in place of provisions which otherwise would be deemed by the regulations to exist in the statement. Subsection (4) permits regulations to make different provisions in different circumstances and subsection (5) sets out the clauses to which the regulations may apply, whilst not restricting the scope to those listed.

Clause 32: Amendment

82.     Clause 32(1) requires that regulations made under clause 31 must contain provisions as to how the statement can be amended, particularly (subsection (2)) in respect of what the regulations may deem to be included (clause 31(3)(a)) or what may be permitted to stand in place of a deemed provisions (clause 31(3)(b)). To have effect, the amended statement must be registered with HM Land Registry (subsection (3)) and the Registrar is required to keep in his custody the amended statement in place of the then existing statement if it is submitted in accordance with this clause (subsection (4)). The commonhold association must file with the amended statement a certificate that the statement accords with the requirements of this Part (subsection (5)). Where the amendment changes the extent of a unit or of the common parts, the necessary consents relating to charges must be submitted, or the court orders dispensing with them, as required in clause 23(3)) and clause 29 (3) respectively (subsections (6) and (7)). Subsection (8) gives the Registrar the discretion, on filing the amended statement under subsection (4), to make any other amendments to the register as he thinks appropriate.

Commonhold association

83.     Clauses 33, 34 and 35 (and Schedule 3) set out the provisions relating to the commonhold association, which, as has been mentioned, owns and manages the common parts of the commonhold development and is a private company limited by guarantee, its membership consisting exclusively of all the unit-holders in the development.

Clause 33: Constitution

84.     Clause 33(1) makes provision about the type of company as mentioned above, and goes on to say (subsection (1)(a)) that one of the objects of the company must be to carry out the functions proper to a commonhold association in relation to specified commonhold land and (subsection (1)(b)) that the guarantee required of each member shall be £1. Subsection (2) brings Schedule 3 into effect.

Clause 34: Duty to manage

85.     Clause 34(1) places on the commonhold association a duty to manage the development in such a way as to allow unit-holders (or their tenants (subsection (4)) to exercise their rights and to enjoy their occupation of their units. However, subsection (2) also requires the association to use any of its rights and powers granted under clause 36 to ensure that any unit-holder or tenant who is in breach of any requirement or duty imposed on him either complies or stops committing the breach. Subsection (3) gives the association discretion not to enforce if that would be more conducive to corporate harmony and requires the association to consider alternative dispute resolution before resorting to the courts.

Clause 35: Voting

86.     Clause 35 relates to any voting provision in Part 1 of the Bill which requires unanimity or a specified percentage of votes in favour of a resolution. Subsection (2) requires all members of the association to be given an opportunity to vote on such a resolution in accordance with any relevant provision in the commonhold community statement (CCS) or the memorandum and articles of association of the commonhold association (M&As). Subsection (3) provides that a vote may be cast in person or, if such provision is made in the statement or the M&As, by proxy, by post or in any other way in accordance with the regulations governing the particular commonhold association. Except in relation to clause 43 a vote is to be considered unanimous if all those members voting cast a vote in favour of the motion or proposition (subsection (4)).

Operation of commonhold

Clause 36: Enforcement and compensation

87.     Clause 36(1) gives power to make regulations covering enforcement of rights or duties springing from the commonhold community statement (CCS), the memorandum and articles of association of the commonhold association (M&As) or Part 1 of the Bill or any subordinate legislation made under it. Subsection (2) lists matters about which the regulations may make provision. The list is not exhaustive. Subsection (3) provides that any mention of a provision for the payment of compensation that may be payable under such regulations or under the CCS should include provision for determining the amount of the compensation and provision for the payment of interest if payment is late. Subsection (4) makes it clear that regulations made in relation to CCS may include regulations under clause 31(5)(b).

Clause 37: Commonhold assessment

88.     Clause 37(1) requires the commonhold community statement (CCS) to include provision for the setting of annual budgets (subsection (1)(a)) to meet the expenses of the association and to enable the setting of interim budgets (subsection (1)(b)) in addition to the annual budget from time to time. It must also specify the percentage of the annual and other estimates which fall to be collected from the unit-holders to be allocated to each unit (subsection (1)(c)), ensuring that the total of those percentages shall be 100 (subsection (2)) and must require each unit-holder to pay the required amount, to be called the commonhold assessment, in response to a notice or notices which the association must issue (subsection (1)(e)). Subsection (2)(b) makes it possible to specify a 0% share for a unit. This is chiefly to ensure that, where a commonhold association is the unit-holder, it is not in the anomalous position of having to levy assessments on itself. It will be possible for the CCS to specify a 0% for any unit.

Clause 38: Reserve fund

89.     Clause 38 provides that regulations made under clause 31 may require a commonhold community statement (CCS) to include provision for the setting up and maintaining of reserve funds for the repair and maintenance of either or both of the common parts (subsection (1)(a)) and the units (subsection (1)(b)) within the commonhold. Subsection (2) provides that, where such fund or funds are set up, the statement must provide for the commonhold association to set a levy from time to time (subsection (2)(a)), allocate percentages of the levy to be paid by each unit (subsection (2)(b)), again with the requirement that the percentages total 100 (subsection (3)), (though also allowing the setting of a 0% share for specified units) requiring the unit holders to pay (subsection (2)(c)) and providing for the issue of notices requiring payment (subsection (2)(d)).

90.     Clause 38(4) provides that funds established under this clause may not be used in satisfaction of any debt other than a judgement debt arising from an activity which, under the commonhold community statement (CCS), could properly be funded from such a fund. Thus, if regular roof replacement is an item to be funded by the reserve fund under a statement, and a roofing contractor has to proceed against the commonhold association, the reserve fund may be used in satisfaction of the debt if a court finds in the contractor's favour. However, if the association is required to pay a substantial excess to its insurer in connection with a claim and the payment of insurance is not a proper call on the reserve fund, the fund cannot be touched by the insurer, even if it is in possession of a judgement, except where the association is insolvent (see definition of reserve fund activity in subsection (5)(a)). Subsection (5)(a) defines reserve fund activity, (see note to subsection (4) above), subsection (5)(b) specifies what is meant by assets being used for purposes of debt enforcement, and subsection (5)(c) makes it clear that the term judgement debt includes any interest on such a debt.

Clause 39: Rectification of documents

91.     Clause 39(1) makes provision for a unit-holder to apply to the court for a declaration that either (a) the commonhold community statement (CCS) or (b) the memorandum and articles of association of the commonhold association (M&As) relating to the commonhold association do not comply with the provisions of the Bill or regulations made under it. Subsection (2) provides that, where the court makes such a declaration, it may make any other order it thinks appropriate, and subsection (3) lists a number of matters that might be covered by such an order. These include requiring that the officers of the commonhold association take steps to alter or amend the offending document or take other specified steps, requiring the association to pay compensation and ultimately, ordering that the land cease to be commonhold. Subsection (4) sets a time limit for such an application of three months from the date the applicant became a unit-holder, three months from the alleged start of the failure to comply, or, failing these, subject to a time limit or any other permission laid down by the court.

Clause 40: Enlargement

92.     Clause 40 applies where a commonhold association relating to existing commonhold land votes unanimously and in advance (subsection (3)) (and see clause 35 as to unanimity) to apply to bring further land into the commonhold to be held as part of their commonhold land and an application under clause 2 is submitted to the Registrar (subsection (1)). The requirement that all the documents listed in Schedule 1 should be submitted for registration is lifted in relation to this application by subsection (2) but consents will be required as set out in paragraph 6 of Schedule 1, as will an application as set out in clause 32 to amend the commonhold community statement (CCS) to take account of the new land. Also to be provided will be a certificate stating, first, that the application satisfies Schedule 2, which specifies which land may not become commonhold land, and second that the vote leading to the application was unanimous.

Clause 41: Ombudsman

93.     Clause 41 gives the Lord Chancellor power to approve an ombudsman scheme or schemes as part of the dispute resolution process available to commonhold associations and unit-holders.

Termination: voluntary winding-up

94.     Clauses 42-48 deal with the termination of a commonhold following from a voluntary winding up of the commonhold association, which might arise, for instance, from the decision to recognise the eventual demise of a building through old age, or from a particularly advantageous offer by a developer to buy the land. The clauses differentiate between terminations which are the result of unanimous resolutions (clause 43) and those which are the result of majority votes (clause 44).

Clause 42: Winding-up resolution

95.     Clause 42 provides that, for any winding-up resolution to be effective, there must have been a declaration of solvency by the directors in a specified form (so that the winding up will be commenced as a members' voluntary winding up rather than a creditors' voluntary winding up) and that a termination statement resolution (agreeing the details of the termination and disposition of assets) should have been passed, with at least 80% of the members voting in favour.

Clause 43: 100 per cent agreement

96.     Clause 43 provides that the liquidator of a commonhold association shall make an application for termination within six months of the association's having achieved a 100% vote in favour of winding-up and termination-statement resolutions from the members. Should the liquidator fail to do so, the application may be made by a unit-holder or some other prescribed person.

Clause 44: 80 per cent agreement

97.     Clause 44 provides for the liquidator to make an application to a court to determine the terms upon which a termination application may be made and also the terms of the termination statement which must accompany the application, in the event that a vote of between 80% and 100% is achieved in favour of winding-up and termination statement resolutions. The liquidator must make the application to the court within a period, prescribed by regulations, from the date of the passing of the winding-up resolution, and must make the termination application within 3 months of the court order. Should the liquidator fail to do so, the application may be made by a unit-holder or some other prescribed person.

Clause 45: Termination application

98.     Clause 45(1) defines the termination application as the application to the Registrar to achieve the result of the termination resolution that all the commonhold land for which the commonhold association acts should cease to be commonhold. Subsection (2) requires that such an application should be accompanied by a termination statement (see clause 46) and subsection (3) requires the Registrar to note the application on the register on receipt.

Clause 46: Termination statement

99.     Clause 46(1) requires the termination statement to specify what is to be done with the land which had been the commonhold land, when the commonhold association has acquired the freehold estate in all the units under clause 48(2), and how any assets of the commonhold association will be distributed amongst the members. Subsection (2) provides that a commonhold community statement may make provisions as to how the termination statement will make arrangements or specific kinds, or how it will determine in a specific manner about the rights of unit-holders in the event of termination. Subsection (3) requires any termination produced for the purposes of a termination application to comply with the terms of the commonhold community statement (CCS). Subsection (4) allows for a court to disapply subsection (3) as to all the terms of the statement or in respect of specific matters or for a specific purpose, and an application to the court for this purpose may be made by any unit-holder. This gives the court the power to take into account changed circumstances since the current statement reached its final state. It also allows challenges to the fairness of the statement in this respect which otherwise would not have given rise to a challenge.

Clause 47: The liquidator

100.     This clause deals specifically with the position of a liquidator in a members' voluntary winding up and specifically his position vis-...-vis the termination application. Clause 47 applies where a termination application has been made and a liquidator has been appointed (subsection (1)). Subsection (2) requires the liquidator to inform the Registrar of his appointment and subsection (3) requires him either to notify the Registrar that he is content with the termination statement or to make an application to the court under the Insolvency Act 1986 for an order determining the terms. Subsection (4) requires the liquidator to inform the Registrar of the outcome of any application to the court under subsection (3)(b), subsection (5) specifies that subsection (4) is to be done in addition to anything which is required to be done under the terms of section 112(3) of the Insolvency Act 1986, and subsection (6) specifies that any duty placed on a liquidator by this clause must be done as soon as possible (the term used by the parent Act being 'forthwith'). Subsection (6) explains that references to the liquidator encompass not only the person appointed in the members' voluntary winding up, but also, in the rare case where the members' voluntary winding up becomes a creditors' voluntary winding up, the person who thereupon acts as liquidator (who may be the same person).

Clause 48: Termination

101.     Clause 48 provides that, where the Registrar receives notice from the liquidator that he is satisfied with the statement, or receives a copy order from the court in accordance with clause 47(4), or an application is made under clause 44, the commonhold association will become entitled to be registered as the owner of the freehold interests in all the units (subsection (2)). Subsection (3) then requires the Registrar to take the appropriate action to give effect to the termination statement.

Termination: winding-up by the court

102.     Clauses 49, 50, 51, 52 and 53 deal with winding-up by the court following a petition to declare the commonhold association insolvent by a creditor. Clause 50 makes provision for a successor commonhold association to be set up where the court approves, so that those members of the association who have paid all their liabilities to the creditors of the insolvent association may continue to live in a stable commonhold development.

Clause 49: Introduction

103.     Clause 49 specifies that clause 50 applies when a petition to wind up a commonhold association is made to the court and defines the terms 'insolvent commonhold association' and 'successor commonhold association'.

Clause 50: Succession order

104.     Clause 50 provides a mechanism for the continuation of a commonhold development in circumstances in which a proportion of the members of an insolvent association have paid the full extent of their liabilities. As it is essential to have a commonhold association in existence to have the benefits of commonhold, it is necessary to find a way to provide for the continuity of the association if there is to be a continuing element of commonhold following a winding-up on the petition of a creditor. Clause 50 enables a court to make an order bringing a successor commonhold association into being whilst dealing with a winding up (requiring the court to make the order unless satisfied that this would not be appropriate) and specifies who may make the application for the successor association and the documentation which must accompany the application.

Clause 51: Assets and liabilities

105.     Clause 51 applies where the court winds-up an association following a petition and puts in place a successor association. It provides that the successor association shall be entitled to be registered as the owner of the common parts and that the insolvent association should, at the same time, cease to be the owner.

Clause 52: Transfer of responsibility

106.     Clause 52 makes provision for the transfer of responsibilities from the insolvent association to the successor association from the time of the winding-up order.

Clause 53: Termination of commonhold

107.     Clause 53 makes provision for termination of a commonhold where the court has made a winding-up order and has not made a succession order, which will result in the requirements of clause 1 not being met so that the land must cease to be commonhold land. The liquidator is required to inform the Registrar that this clause applies and to give certain other information, and the Registrar is then required to take such action as will result in the land no longer being registered as commonhold land and also to give effect to the liquidator's determinations.

Termination: miscellaneous

Clause 54: Termination by court

108.     Clause 54 provides that, where the court orders under clause 6(6)(c) that land should cease to be commonhold as it should never have been registered as such, or under clause 39(3)(d) that it should cease to be commonhold because it has declared a fatal flaw in the memorandum and articles of association of the commonhold association (M&As) or the commonhold community statement (CCS), it should have the same powers that it would have if it were making a winding-up order against the commonhold association. The liquidator appointed to carry out the termination will have like powers, but in these peculiar circumstances the court will have power to require the liquidator to carry out his functions in a particular way, may impose additional rights or duties on the liquidator and modify or remove the rights or duties of the liquidator. These powers are given to the court to mark the unusual nature of the commonhold association, and particularly the fact that winding up the company also fundamentally changes the nature of the tenure of the members of their homes.

Clause 55: Release of reserve fund

109.     Clause 38(4) protects reserve funds from creditors whilst the commonhold association is a going concern, but once the association has decided to wind itself up voluntarily or is wound-up by the court on the petition of a creditor or the court orders that the land should no longer be commonhold land (see clause 54) that protection is lifted.

Miscellaneous

Clause 56: Multiple site commonholds

110.     Clause 56 provides for the possibility of a commonhold association being made up of two or more areas of land which need not be contiguous. However, for that to apply the memorandum and articles of association of the commonhold association (M&As) must specify that the association is to exercise commonhold functions over that land and a single commonhold community statement (CCS) must apply to all the land in question. The clause also makes provision for applications to register commonhold land coming from two or more people each of whom owns the freehold estate in part of the land to be registered, and gives a regulation making power to facilitate that.

Clause 57: Development rights

111.     This clause and the next are designed to reserve to the developer certain rights to do things which will enable him both to develop and market the units in the development and to develop the common parts, and to react reasonably to commercial pressures.

112.     Clause 57(1) defines a developer as one who makes an application under clause 2, and development business as set out in Schedule 4. Broadly, this relates to execution or completion of works, marketing and variation of the extent of the commonhold land. Subsection (2) permits the commonhold community statement (CCS) to contain provisions to facilitate or permit the developer to do development business, and subsection (3) provides that those provisions may include a requirement that a unit-holder or the association co-operate with the developer for the appropriate purposes, but that the rights conferred on the developer may be constrained by terms and conditions set down in the CCS and that there may be provisions about breach of such a term or condition. Subsection (4) provides that any provisions for this purpose made under subsection (2) shall be subject to regulations under clause 31, and in the case of development business under paragraph 7 of Schedule 4 which relates to the appointment and removal of directors, subject to the memorandum and articles of association of the commonhold association (M&As). Subsection (5) provides that the rights conferred under subsection (2) may be regulated or restricted by regulations. Subsection (6) provides that, should the developer have been granted rights under subsection (2) but subsequently surrenders them, he shall send a notice to the Registrar, who will note the register and inform the commonhold association and the rights will cease to apply from the date of registration.

 
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Prepared: 20 November 2001