Commonhold: a positive change to leasehold property?

Leasehold vs Commonhold

When considering a block of flats or a relevant estate, the traditional leasehold ownership structure involves there being a person or entity owning the freehold and the individual Units being leased to owners for a term of years certain. Ownership structures can vary and headleases can make things more complicated, but in basic terms this is how the leasehold structure has operated for the past 100 years or so.

There are inherent problems with leaseholds. Unit owners need to pay rent and only own their property for a defined period of time. Value reduces drastically when the term falls below 80 years. Expensive and time consuming lease extensions are needed under the Leasehold Reform, Housing and Urban Development Act 1993. Absentee landlords can neglect carrying out services leaving buildings in disrepair. There’s difficulty in enforcing covenants on other tenants where landlords do not wish to incur costs.

Commonhold removes the need for a freeholder or a separate landlord. Under the commonhold system each Unit owner will become a member of the ‘commonhold association’ for the block/estate with at least two people/companies being ‘directors’. Rules and regulations for the Unit owners to abide by are set out in a Commonhold Community Statement (“CCS”) rather than in individual leases.

The commonhold structure also means lease extensions will no longer be necessary and Unit owners will not need to pay rent. The intention is to put money in the pockets of homeowners and give them control over the building’s management.

Will Commonhold Improve the Status Quo?

Whilst the move to commonhold seems like a positive step for Unit owners, this system has not worked in the past and has not been taken up by developers.

The CCS will need to be as detailed as possible requiring due consideration before individual Units are sold. They will likely mirror the covenants and regulations seen in modern day leases. Sellers of commonhold land may be reluctant to incur significant legal fees in having a detailed and long-winded CCS drafted before Units can be sold. Developers will likely want the CCS drafted in a cost-effective manner so Units can be sold as soon as possible. Indeed, the government has produced a pro forma CCS which is very vague and lacking in detail. If this is used, then there will be more potential for disputes.

In addition, the government have already enacted a number of legislations designed to protect leaseholders. The Landlord and Tenant Act 1985 provides strict rules on services charges (in respect of how demands are to be made and how tenants can challenge unreasonable charges) and also provides an implied obligation for landlord to repair properties.

It is unclear if owners of commonhold property will have the same level of protection against unreasonable service charges or how commonhold owners can ensure repairs works are completed in the building/estate because these laws depend on leases. Further legislation will likely need to be considered.

Likewise, if there are proceedings brought against a commonhold association it is not clear how enforcement will work in practice. There will be no right to forfeit and so the commonhold association will have little or no leverage to bring offending Unit holders to heel. That may sound unimportant when you are considering buying a Unit, but not if you live above a Unit holder who has decided to make structural alterations to their Unit without consent and your Unit is now at risk of collapse. The system therefore largely depends on and assumes that everyone will co-operate with each other.      Creditors may have uncertainty in recovering monies from a commonhold association, particularly if a commonhold association is reliant on Unit owners paying their share of the service charges. One or two non-paying owners could cause significant cash-flow problems for commonhold associations and the risk of insolvency will be greater. Furthermore, not every building may contain owners who want to run a commonhold association. Whilst professional managing agents can be appointed, this somewhat defeats the purpose of reducing costs. Ultimately, someone has to take charge and give instructions and make decisions and this is not always possible.

Overall, the commonhold system could be positive for homeowners. It will give owners control over management of a building/estate. There is no term of years for ownership which will likely lead to more valuable assets. Before it can be enacted, any legislation making commonhold the norm will need to consider the practical implications of owning and managing large blocks of flats/estates.   The risk is that a “one size fits all” regime will result in unwanted and unintended consequences.

The government’s White Paper can be found here.