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In 2002, the Commonhold and Leasehold Reform Act (“the Act”) achieved something unusual – the introduction into English and Welsh law of the first new type of property ownership in over 75 years. This new form of ownership is called commonhold, and its creation was aimed at addressing some particular issues created by long leases, typically of flats.
How does commonhold work?
A commonhold can only be created out of freehold property. This can be land or a building (new or existing) and the commonhold comes into effect as soon as the property has been registered as a commonhold at the Land Registry.
The framework is quite straightforward. The freehold estate is divided into units (flats) and common areas. This allows a person (a “unit holder”) to own the freehold of their flat. The freehold of the common areas such as the actual structure of the building, stairs, corridors, entrance hall, car park and garden, is owned by a “commonhold association”, which will be a company limited by guarantee. Membership of the commonhold association is limited to the unit holders, all of whom are entitled to membership. Unit holders will each contribute a proportion of the cost of insuring the building and managing, maintaining and repairing the common areas.
Commonhold versus leasehold
While unit holders must comply with the rules of commonhold, as each of them owns the freehold of their flat, unlike leasehold, there can be no restriction on them selling or transferring their property. In addition, there can be no forfeiture, which is where a lease can in certain situations be brought to an end, with ownership of the property transferring back to the landlord.
When it was introduced in 2002, it was hoped that commonhold would quickly become popular, highlighting as it does all of the negative aspects of being a long leaseholder. However, it struggled to gain traction at all, with fewer than 20 schemes and only 150 commonhold units ever registered.
One reason for this is that mortgage lenders have proved reluctant to lend to commonhold buyers, citing concerns over potential insolvency of commonhold associations. Also, commonhold is not attractive to property developers who benefit handsomely from the income stream provided by ground rents, extension premiums and other ongoing income that leasehold creates.
In July 2020, the Law Commission published their “Package of reforms to transform the future of home ownership in England and Wales”, and “reinvigorating commonhold” is high on their list, with recommendations on how commonholds can be made more appealing to lenders and developers, as well as existing leaseholders.
They also say that the government must consider whether they should go a step further and actually ban the sale of leasehold flats altogether, making it compulsory for them to be sold on a commonhold basis. With an expected ban on the sale of leasehold houses, this should not come as a complete surprise to developers.
The Commission also seek to make commonhold more flexible than at present by allowing mixed residential and commercial schemes, catering for shared ownership leases, equity release products and the Help to Buy Scheme.
The report recommends changes to make it possible for existing leaseholders to convert to commonhold, either with the freeholder’s consent or, failing that, enabling leaseholders make a “collective freehold acquisition claim” to enable conversion.
Clearly, if commonhold is to succeed, lenders’ concerns will need to be addressed. The commission argue that their proposals provide improved security for lenders as a commonhold does not depreciate and there is no risk of forfeiture. But the Commission recognise that the government will need to work with lenders to help alleviate their concerns. It is noticeable that they have stopped short of recommending the automatic transfer of existing mortgages over leasehold flats to the new commonhold title if there is a conversion.
A sea change
The Law Commission do not believe that leasehold ownership of flats is fit for purpose and, if adopted, their proposals will represent a sea change in the property market. Whether this happens remains uncertain. What is inevitable is that making commonhold mandatory will increase the price of flats. This is because developers will lose the residual income derived from either retaining the freehold or selling the ground rents. However, a higher purchase price may prove an acceptable set-off for the considerable additional security that commonhold offers.