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Commonhold and leasehold reform
I have long been commenting on commonhold, which is essentially a ready-made solution to the often-described “feudal” residential long leasehold system. However, in recent months, what progress has the Government made with commonhold and leasehold reform?
Almost a quarter of a century since commonhold first appeared on the statute book to great fanfare – only to quickly fade away – the Government has now pledged that commonhold will replace leasehold for nearly all new-build flats before the end of this parliament.
How does the commonhold system work?
Commonhold comes into being on registering freehold property as commonhold at the Land Registry. The commonhold framework is relatively straightforward. The freehold is divided into units (i.e. flats) and common areas (including the building structure, entrance hall, hallways, stairs, communal garden, etc.). This means a “unit holder” (i.e. a flat owner) owns the freehold of their flat. By contrast, the common areas are owned by a “commonhold association”, which is a company limited by guarantee. All unit holders are eligible for membership of the association, each contributing a proportional share of the cost of maintenance, repair and insurance.
Of course, within a block, not all flats necessarily have access to the same facilities or services. “Sectioning” within the commonhold allows for compartmentalised voting and cost-sharing between units, ensuring that only those with access to certain facilities have a say in their management and pay the associated costs.
The price of flats will increase
Buyers should expect to pay higher prices for flats. This is because the natural result of removing developer income streams from ground rents, service charges, lease extension premiums, and the sale of the freehold is that they will try to maximise their profit at the point of sale.
What about existing leaseholds?
The latest Government figures suggest there are around 4.77 million leasehold homes in England. Addressing this issue is a much greater challenge for the Government than legislating to ban new leaseholds. The current plan is to facilitate the easier conversion of existing leaseholds to commonhold by lowering the required consent threshold from 100% to 50% of the leaseholders in the block, aligning the rules with those for enfranchisement.
Will commonhold succeed?
A major reason why commonhold initially failed to take off was a lack of lender confidence. Currently, only about a third of lenders are willing to lend against commonhold properties. On the face of it, the Government faces a tough challenge in convincing them that commonholds pose no greater lending risk than leaseholds. Yet, significant changes to the original commonhold model are proposed to reassure lenders that their security will not be at risk. Indeed, the White Paper proclaims boldly:
“Lenders can have confidence that commonhold units offer them a more secure asset than leaseholds.” [My emphasis]
In saying this, they emphasise that:
- with commonhold, there is no forfeiture, ensuring the equity remains secure.
- there are new measures aimed at reducing the risk of commonhold association insolvency.
- commonholds ensure strong property maintenance plans.
- reserve funds are mandatory and sufficient.
- there will be an order for sale process that allows the association to recover debt.
Besides lenders, the public needs educating about this new default system of ownership. While commonhold offers buyers more security and a greater voice in managing their block, currently, few have even heard of the term, let alone understand what it represents.