The Commonhold and Leasehold Reform Act 2002 introduced a new form of property ownership in England and Wales known as commonhold, designed to offer a more equitable alternative to the traditional leasehold system. This article explores the structure and benefits of commonhold, examines the reasons behind its limited adoption, and discusses the potential for reform. It also considers the challenges faced by developers and mortgage lenders, as well as the advantages commonhold could offer to flat owners.
What is commonhold?
The Commonhold and Leasehold Reform Act 2002 introduced commonhold, a form of property tenure that allows individuals to own the freehold of their 'unit' within a multi-occupancy building, and to manage the shared areas collectively through a commonhold association. The terms and conditions applicable to the commonhold are standard and set out in statute. This system was designed to provide a viable alternative to leasehold, offering perpetual ownership and eliminating the obligation to pay ground rent.
Despite the advantages of commonhold, its uptake has been minimal. The leasehold system remains the predominant model for the sale of new flats, partly due to the leasehold's deep-rooted presence in the property market and the financial benefits it has offered to developers through ground rent, service charges, lease extensions and the ability to sell the freehold.
The Labour Government's proposal to make commonhold the default tenure for flats is a response to the criticisms of leasehold, particularly the power imbalance between leaseholders and freeholders and the financial burdens placed on leaseholders.
How can the lack of commonhold be explained?
One of the major reasons has been that mortgage lenders are concerned about the absence of forfeiture as a means of enforcement for debt recovery if a unit owner defaults on their mortgage.
Lenders are also concerned about the possible insolvency of the commonhold association if leaseholders fail to pay service charges (particularly in the absence of forfeiture provisions for enforcement which would be contained in a lease), which could impact the association's ability to cover maintenance costs and potentially affect the value of the properties within the commonhold.
As with share of freehold and right to manage arrangements, commonhold can lead to disagreements among unit owners. Both systems require collective decision-making regarding the management and maintenance of the property, which can be a source of conflict if unit owners have differing opinions or objectives.
Commonhold lacks the statutory protections that are available to leaseholders in relation to service charges. Leaseholders benefit from a range of statutory rights and protections concerning the reasonableness of service charges and the right to challenge them, which do not currently apply to commonhold assessments. This could potentially leave unit owners in a commonhold association with less protection against unfair or excessive charges for the maintenance of shared areas.
Commonhold restricts the ability to let units for a term of more than seven years. This restriction is intended to maintain stability within the commonhold community but may be seen as a disadvantage by unit owners who wish to let their property for longer periods.
Conversion to commonhold requires the consent of all parties involved, including the freeholder and any lenders. This unanimous consent can be difficult to obtain, making the conversion process potentially complex and cumbersome. As a result, commonhold is more likely to be applied to new developments, where there is no need to obtain consent from existing leaseholders or freeholders.
Leaseholders may have reservations about converting to commonhold, preferring instead to pursue self-management by purchasing the freehold of their building or to setting up a Right to Manage (RTM) company. These options allow leaseholders to gain more control over the management of their property without the need to transition to the commonhold structure set down by legislation and without requiring unanimous consent.
Commonhold for new developments
Developers harbour several reservations about the commonhold system, particularly regarding its perceived lack of flexibility compared to traditional leasehold arrangements. This is especially pertinent in complex, phased developments where the ability to adapt to changing circumstances is crucial.
The protection of development rights within the Commonhold Community Statement (CCS) is a complex legal challenge, and developers worry that they may not be able to secure the rights needed to complete their projects.
The commonhold model is less familiar to lenders than the established leasehold system, potentially making it more difficult for developers to secure funding. Additionally, the marketability of commonhold units may be hindered by a general lack of public awareness and understanding, which could affect sales.
The profitability of developments under commonhold is also a concern with developers/landlords not being able to collect ground rents, although since 2022 ground rents cannot be charged on new residential leases in any event.
Lastly, the legal and administrative workload involved in setting up a commonhold is considerable, posing a deterrent for developers who are accustomed to the leasehold framework. These issues underscore the necessity for a legal framework that balances the interests of developers with the rights of homeowners in a commonhold context.
Advantages with commonhold
Apart from the greater involvement that flat owners would enjoy in the management of the building, the removal of a lease as a diminishing asset, and the absence of any ground rent payable, there are other positive aspects to the commonhold system that address some of the complexities and frustrations of leasehold.
The CCS, while still governing the use of individual flats (for matters similar to a lease such as alterations, nuisance and pets), is intended to be written in plain language and contain standard terms, making it more accessible and easier to understand than many traditional leases.
There would also be no risk of forfeiture, although given the concerns raised by mortgage lenders, it must be expected that lender's concerns will need to be addressed on this point in some way. Additionally, commonhold does not require consent from the commonhold association for the sale of a flat, providing owners with more freedom and flexibility in the transfer of their property.
Disputes regarding assessments are managed internally by the commonhold association, which can be a simpler and more informal process than the formal procedures often necessary for leasehold disputes. When disputes arise, the procedure set out in the CCS must be followed before any legal action is taken, providing a clear framework for resolution.
Moreover, the commonhold association is responsible for setting a commonhold assessment, which is a contribution each flat must make towards the maintenance of the common parts. These charges are determined by the association, giving unit holders more control over costs, unlike leasehold service charges which are typically determined by the freeholder. This can lead to a more transparent and equitable approach to managing the financial obligations of property maintenance.
Conclusion
In the King's speech last year, the Government confirmed an intention to issue a white paper on commonhold reform in 2025 and to publish a draft Leasehold and Commonhold Reform Bill to modernise the legal framework and help to remove some of the objections to the current form of commonhold. The Government's ambition to establish commonhold as the norm for flat ownership aims to create a fairer housing system, but it faces significant challenges.
Commonhold presents an opportunity for a fairer and more balanced form of property ownership when contrasted with the traditional leasehold system. Yet, its widespread adoption hinges on addressing the concerns and requirements of all the various parties involved to their satisfaction. With the right support and legislative reforms, commonhold has the potential to provide a more secure and transparent way of owning flats in England