On Monday 3 March, the government published a Commonhold White Paper and announced plans to bring the sale of new leasehold flats to an end. So what does this mean for the owners of leasehold properties, both now and over the next few years?
What is commonhold?
Commonhold is a form of property ownership in England and Wales that allows homeowners to own their individual flats or units while collectively managing shared areas, such as hallways and gardens and the main structure of your building. This is done through membership of a company called a ‘Commonhold Association.’
Commonhold is a type of freehold ownership under which you, as a flat owner, have two related interests - ownership of the flat itself and also membership of the Commonhold Association. You must have both interests in order to have a valid title. Commonhold was introduced by the Commonhold and Leasehold Reform Act 2002 as an alternative to leasehold.
Unlike leasehold, Commonhold has no time limit – as the owner, you hold your property indefinitely rather than for a set lease term. Each property owner automatically becomes a member of a Commonhold Association, which is responsible for managing and maintaining the structure of the building. Technically, this gives you more control over maintenance and costs-based decision-making as there is no external freeholder or landlord.
Despite its potential advantages, Commonhold has remained extremely rare to date, because of the way in which the current legislation has been drafted – the existing law envisaged only the simplest of cases and not the sort of multi-use developments that are commonplace in the 21st Century. In addition, there was no compulsion to make all new developments Commonhold. It is often said (correctly) that more books have been written about commonhold than there are actual commonhold developments.
However, the Labour government has reignited interest in commonhold, believing it to be a fairer and more transparent system of homeownership.
What are the pros and cons of commonhold?
Pros
With commonhold, there is no lease expiry: unlike leasehold, commonhold ownership is indefinite, eliminating the need for lease extensions, or to take collective action to buy the freehold. As the property owner, you, together with other property owners in the building, are responsible for collectively managing the building which technically gives you greater control – although this can also be seen as a disadvantage (see below).
The commonhold structure is inherently democratic with all flat owners having a vote in the ownership vehicle that sets the maintenance costs for the building and decides how the building should be repaired and managed.
In addition, there is a single document ‘the Commonhold Community Statement’ that sets out how the repairing and other obligations for the development are to work. This has the advantage that there is only one constitutional ‘rulebook’ unlike in a leasehold block where each unit has a lease that can potentially be different.
Technically, there may be more transparency over costs, although the Commonhold regime is not subject to the control of the service charge legislation and therefore once a budget has been set by the Commonhold Association that is ‘it’ and it is not possible to dispute your share of the costs. This is an item that any (extensive) revision of the law on Commonhold will need to look to resolve.
Cons
Whilst collective management gives you greater control, there is no one other than the flat owners involved in the decision-making process, and this can have drawbacks. For instance, if a majority of flat owners are reluctant to spend on necessary maintenance that can lead to issues of longer-term disrepair and lack of proper investment.
For instance, in Scotland where blocks of flats are owned collectively as freeholds (as the law is different there), there have been examples of these falling into disrepair as a result of poor management by the flat owners.
It is perhaps a fallacy to suggest that just because the only people with an interest and responsibility for the maintenance of the building are the flat owners, things are automatically going to be better managed. There are examples of self-managed blocks where significant issues, such as fire safety, have not been properly dealt with causing greater cost and difficulty.
Self-managed blocks sometimes also get into difficulties - particularly where the residents do not opt to use third-party managers, which is often short-sighted, particularly where complex property interests are concerned.
There is a general lack of understanding around Commonhold, specifically a long list of things that need to be ‘fixed’ before it can be made be fit for use. On one level this is not surprising as these are fairly technical and legal in nature. One of these is the position on insolvency where all the members of the association would have to pay off all of the debts of the Commonhold Association to restore it and there could be no ‘disclaimer’ of its assets - unlike with an insolvent freehold company.
At the moment, 80% of the unit holders can vote to bring the commonhold to an end. This is concerning to mortgage lenders and is one significant reason why commonhold in its current form has not been advanced.
The Commonhold Community Statement has the advantage that all the ‘rules’ for the development are in a single place. This is good for transparency. However, the disadvantage is that the statement can be amended by a majority vote.
If this happens certain flat owners may be marginalised and unhappy with the outcome. With Leasehold there is little chance of amending the existing grant unless both parties agree. Consider for instance a provision preventing Airbnb-type lettings: it could be that this provision could be removed by a number of investors, to the detriment of residents. When a resident buys into a leasehold scheme they know that the lease terms are set, and it is very difficult for the freeholder to move away from ownership.
Proponents of commonhold see the absence of a freeholder as a benefit (specifically because ground rents are no longer charged), but when problems occur sometimes having a single entity responsible for resolving the issue is a benefit.
With leasehold, the freeholder has an economic interest in seeing value maintained in the block and is likely to be prepared to make difficult decisions in relation to management. They also have the ‘big stick’ of forfeiture to act as the ultimate sanction in extreme cases of non-compliance, although it has to be borne in mind that actual cases of forfeiture are extremely rare.
Should those looking to buy a leasehold flat hold off until these commonhold changes happen?
I would not recommend this, as the changes may take many years to come about. Additionally, there are pros and cons to Commonhold and it would be wrong to assume that an owner of a leasehold flat was automatically any worse off than the owner of a commonhold flat – certainly at least until all of the known problems with Commonhold have been ironed out.
If you buy a flat at the moment it can only be leasehold. This is likely to remain the case for some time to come, whatever the promises in the White Paper. After all the White Paper is the precursor to legislation itself and it is likely to be some time before we see the draft Leasehold and Commonhold Reform Bill.
What does this all mean for those in existing leasehold agreements?
In practical terms, those who have bought flats as leasehold properties will find that these remain as leasehold properties, and could only be converted to commonhold if all the flat owners and freehold owners agree. It is important to realise that the government’s proposed change is only intended to affect new properties. There will be no ‘magic wand’ converting all existing residential leaseholds to commonholds.
Existing tools, such as the recently extended Right to Manage, allow owners of leasehold properties to take on the management of properties in some circumstances and where these have been exercised, the management concerns may fall away.
Leasehold should not be seen as a second-class form of tenure and as a workable system that has much to commend.
There are likely to be lots of leasehold properties for years to come, even if a ban on new leasehold flats comes into force and therefore, we need to be careful not to ‘talk down’ leasehold as an asset class.
After all, at the moment the only type of flat that you can buy will be leasehold and the ills that some have experienced are in many cases as much down to poor management as much as the fact that the freehold is in third-party hands.
Could existing leasehold properties be converted to commonhold and what would this involve?
Under the 2002 Act, existing leasehold properties can be converted to Commonhold in England and Wales, but the process is complex and rarely undertaken as it is little better than the option to buy the freehold and extend the lease.
Additionally, under the current law, all leaseholders and the freeholder must agree to the conversion, which is a significant barrier, and of course, this unanimity is hard if not impossible to achieve.
To convert, leaseholders must form a Commonhold Association, purchase the freehold (if they don’t already own it), and then implement the necessary changes - such as putting in place a Commonhold Community Statement, which sets out rules for managing the building.
However, because of legal and financial complexities - such as mortgage lender reluctance and potential enfranchisement costs - very few leasehold buildings have successfully converted to commonhold. At the moment, the existing form of commonhold is not ‘fit for purpose’ and it would be a brave group of flat owners that set out to do this with the law as it currently stands.
The reforms currently being discussed, and due to be clarified later this year in a Leasehold and Commonhold Reform Bill, will aim to simplify the process and perhaps it may then be easier to carry out a conversion, potentially removing the need for full agreement among leaseholders and freeholders although this suggestion itself is not without its potential challenges.
Therefore, whilst it might be possible to convert in the future, if the leaseholders own the freehold and each has a 999-year lease at a nil ground rent, it is hard to see the additional benefit that Commonhold would have.
Looking to the future
While ALEP welcomes the publication of the commonhold white paper, there are a number of challenges that will need to be overcome to make it work properly.
The announcement made on 3 March suggests that once commonhold has been introduced, the sale of new leasehold flats will be banned. Such a position will of course only be possible if and when all of the necessary reforms to the commonhold system have taken place, which is likely to take some significant time.
