What is commonhold? Despite the fanfare greeting its arrival on the statute book two decades ago, few people today have heard of it. Residential leasehold specialist Siobhan Dunsdon explains why that may change.
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In 2002, the Commonhold and Leasehold Reform Act (“the Act”) achieved something unusual: introducing the first new type of property ownership in over 75 years into English and Welsh law. Commonhold aimed to address issues created by long leases, typically of flats.
How does commonhold work?
A commonhold is created from freehold property, whether land or a building (new or existing). It comes into effect on its registration as commonhold at the Land Registry.
The framework is relatively straightforward, dividing the freehold estate into units (flats) and common areas. Doing so allows a person (a “unit holder”) to own the freehold of their flat. Then, a “commonhold association” – a company limited by guarantee – owns the freehold of the common areas. Typically, common areas include the actual structure of the building, stairs, corridors, entrance hall, car park and garden. Membership of the association is open to all unit holders. Each contributes a proportion of the cost of insuring the building and maintaining and repairing the common areas.
Commonhold versus leasehold
Unit holders must comply with the rules. However, as each of them owns the freehold of their flat, there is no restriction on them selling or transferring their property – unlike leasehold. And with no landlord, there is no risk of forfeiture.
When introduced in 2002, there was hope that the new system would quickly become popular. After all, it highlights all of the negative aspects of long leaseholds. However, it struggled to gain traction, with fewer than 20 schemes and only 150 registered units. One reason for its failure is that mortgage lenders proved reluctant to lend to commonhold buyers, citing concerns over the potential insolvency of the associations. But also, the concept is not attractive to developers who benefit handsomely from the income stream provided by ground rents, extension premiums and other ongoing income that leaseholds create.
In 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. Their report recommends making the system more appealing to lenders, developers, and existing leaseholders.
But they also say the government must consider whether to ban the sale of leasehold flats altogether. And with a ban on selling leasehold houses expected, developers should not be surprised at the compulsory introduction of commonhold.
The Commission also seeks to make the new system more flexible than at present by allowing mixed residential and commercial schemes. This would cater for shared ownership leases, equity release products and the Help to Buy Scheme.
The report recommends changes to allow existing leaseholders to convert. That would either be with the freeholder’s consent or, failing that, via a “collective freehold acquisition claim”.
To succeed, lenders’ concerns need addressing. And the commission argues that their proposals provide improved security for lenders as a commonhold does not depreciate, and there is no risk of forfeiture. But they recognise the government will need to work with lenders to help alleviate their concerns. It’s noticeable that the Commission stops short of recommending the automatic transfer of existing mortgages on leasehold flats to the new commonhold title on conversion.
A sea change
The Law Commission believes that leasehold ownership of flats is not 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. That’s because developers will lose the residual income 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 offered.