Martin Keegan

For common ownership of blocks of flats in England and Wales, there are only two viable solutions: share-of-freehold, and reformed commonhold.

The two leasehold models

In England and Wales there are two primary patterns of ownership for blocks of flats which occur when each flat is owned by a different person:

• conventional leasehold (never mutual)
• share-of-freehold (potentially fully mutual)

Conventional leasehold involves each flat being held on a long lease by its owner, and someone else owning the freehold of the flats and the common parts of the building such as corridors and the roof. This accounts for most of the so-called "private" housing stock.

"Share-of-freehold" involves some or all of the flat leaseholders, and possibly other parties, jointly owning the freehold over the flats and the building's common parts. Where all the leaseholders have a stake in the ownership, and no-one else does, it can be termed a "fully mutual" arrangement. Although the flats are still leasehold flats, most of the pathologies attendant upon leasehold are absent, because the interests of the owners are broadly aligned.

Fully mutual share-of-freehold arragements operatee, in practice, so differently from non-mutual arrangements that it's often misleading to generalise between conventional leasehold and fully mutual share-of-freehold. The incentive structures are barely comparable.

Alternatives to leasehold

There are three "viable" alternatives to leasehold for blocks of flats:

• commonhold
• strata title
• company title

None of them is currently viable in the UK: commonhold requires secondary legislation or unusual private arrangements to make it viable even on the dozen or so sites which currently use it.

Company title is effectively the predecessor of strata title in Australia. The owners of the building form a company to own the freehold of the building, and each share in the company comes with the right to occupy one of the flats, and there is no lease in addition to the terms of membership of the company; all matters concerning the respective rights of each flat "owner" vis-a-vis each other and vis-a-vis the group are determined on the basis of the company's internal rules.

But look at it another way: company title is basically share-of-freehold without actual leases on the flats. The rules that would appear in an English lease instead feature as provisions of the company's articles of association or of regulations made by the company. With one crucial difference: leases are by definition time-limited, whereas there is no time limit on owning shares. So a share in a company title block of flats is not a wasting asset, but a share in a conventional English share-of-freehold company is.

However, while you could set up a company like that today in England, it would likely be difficult to get a mortgage against a share certificate rather than against a property title. The arrangement is simply unfamiliar in the UK and mortgage lenders would likely decide it was in their interests to turn up their nose at it. So company title, while possible in the UK, is likely even rarer than commonhold.

Why not strata title for the UK?

Strata title, which is the norm in Australia and elsewhere, however, is simply not available in the UK. Commonhold and strata title are very similar: they provide for freehold ownership of individual flats when those flats are vertically one on top of the other, and a fully mutual corporate body for owning and managing the common parts.

So what's the difference between strata title and commonhold?

Strata title and commonhold principally differ according to the type of legal body that comprises the owners' corporation. Under commonhold, this corporation operates under the general company law used by hundreds of thousands of non-profit and millions of for-profit enterprises; it is no different in this respect from share-of-freehold or indeed company title. Strata title on the other hand has a specific type of corporate body that operates under laws that only relate to managing blocks of flats.

This gives rise to a much bigger practical difference in administration, in particular, what government bodies must be dealt with, and whether other economic groups share any of the administrative and dispute resolution facilities.

Commonhold fundamentally involves using a UK registered company as the owners' association for the block of flats. As a company, it has to be registered with Companies House and annually confirmed by its directors. In my opinion, this is better than strata title, because for the small cost of complying with company law, the owners of the flats get all the benefits of being first class corporate citizens in the UK: all the facilities for ensuring democratic governance, finding out the identities of other members, decision-making, audits, accounts, electing and sacking directors, and so on, is shared with five million other UK businesses. Companies House, the company registrar, even provides a very swish API that enables people to manage their company data using third party software, to cover situations that Companies House itself can't or won't support.

There are alternate schemes in the UK legal system which allow groups of individuals to manage their affairs collectively: partnerships, registered societies (think Nationwide Building Society, credit unions and housing associations), trusts, associations, etc. None of these bodies of law is kept up-to-date by Parliament the way company law is. When the pandemic hit, all UK companies were already able to conduct valid shareholder and board meetings electronically, due to legislation passed twenty years ago. Associations and trusts that hadn't foreseen this found themselves hamstrung. Commonhold makes the best trade-off available. Having a bespoke set of laws for the management of owners' corporations for blocks of flats guarantees that they'll become second class corporate citizens, and fall out of the slipstream of big business and small business that currently keeps their governing law up to date.

So commonhold and strata title are very similar in practical outcomes from the perspective of the relationships that flat owners have with each other and with third parties. But they're not the same, and people who say that commonhold exists outside the UK, equating it with strata title or similar, are really muddying the waters. This leads to unfortunate confusions, such as how internal governance works. Many strata jurisdictions require that there be an annual general meeting, but this requirement was disposed of in the UK to help small businesses; the UK model is much more that company members elect (and if necessary sack) directors to run their companies, but the thresholds for requisitioning general meetings to overrule the board unfortunately do not work for companies with more than 20 members where a single member is aggrieved. This could be trivially fixed via secondary legislation.

Summary

The most important factor for the welfare of owners of flats is whether the block is owned on a fully mutual basis. Otherwise there is significant risk of conflicting interests.

In England & Wales, the only realistic means of having blocks of flats owned on a fully mutual basis are share-of-freehold and commonhold. There is no chance of strata title being introduced in the UK because commonhold is so similar, and no chance of company title taking off because it's so weird and runs up against a century of land registration and mortgage-lending practice.

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