What is happening?

The Government has published its Commonhold White Paper this week, promising to "reinvigorate commonhold through the introduction of a comprehensive new legal framework". Such fundamental reforms will significantly change the real estate landscape in England and Wales and have profound implications for the Living sector in particular.

Investors across all asset classes in both the residential and mixed-use markets should seize any opportunity to engage with government ahead of this major legislative change. 

Haven't we heard this before?

Although commonhold was introduced in the early 2000s, it never took off and remains obscure. In 2017 the previous government asked the Law Commission to review the model and to recommend ways in which to promote its wider adoption. A report was issued in 2020 which did just this, but it was overshadowed by the Covid pandemic and there was little parliamentary time to deal with wholesale reform.

All of the main parties have promised to address perceived problems with the leasehold system, but this is the first concrete step to be taken to reinvigorate commonhold tenure. While it feels as though we've been here before, there does now seem to be appetite to tackle what will be a difficult and complicated area.

What's wrong with leasehold?

Currently there are two main ways to own land in England and Wales - either freehold or leasehold.  While freehold is a form of absolute ownership, leasehold gives ownership only for the duration of the lease and is subject to the terms of the lease. Most flats in the private sector are leasehold – the flat owner has a long lease of the flat and the freeholder retains the common area and structure of the building. 

Anyone owning a leasehold property owns an asset which diminishes in value as the term of the lease gets shorter. They have also had to pay ground rents to their landlord and, although these have historically been low, for a period some developers insisted on rents which escalated quickly. This gave an income stream to landlords but left leaseholders with high rent bills even though they'd paid a premium.

Critics of leasehold also point to the very nature of the landlord / tenant relationship as being problematic, that leaseholders lack sufficient control of their homes and their service charge budgets. 

Haven't leasehold problems already been fixed?

A number of the disadvantages of owning a leasehold home have been addressed. The last government banned developers from imposing new ground rents; so while home owners under existing leases may have to pay ground rent, new leases can't reserve a ground rent.

The previous government also passed laws to make it easier and cheaper for leaseholders to extend their leases and buy their freeholds – measures which have in part been brought into force by the current government. 

However, by its very nature, there will always be a landlord / tenant relationship. In the residential context leaseholders have strong statutory protections, for example against having to pay unreasonable and opaque service charges. In spite of this there is concern that they still do not have adequate control over how their homes are managed or what bills they have to pay.

As to whether commonhold will address these concerns or raise new problems remains to be seen.

How does commonhold work?

Legislation was passed in 2002 which aimed at overcoming the disadvantages of leasehold ownership. It introduced commonhold as a new form of ownership and the intention was that it would become the standard form of ownership for new-build blocks of flats. The law also envisaged that tenants of existing flats would convert their leaseholds to commonhold.

In a commonhold property, the flat owner owns the freehold of their flat and the flat is referred to as a unit – there is no landlord or tenant. A commonhold association (CA) is set up that owns the freehold of all of the common parts and which manages the building. All unit owners are members of the CA and some will also be directors.

There is a commonhold community statement (CCS) which sets out the rules for the unit owners and the CA (similar to a lease). All unit owners contribute towards the cost of maintaining the building and have a say in its management.

If commonhold is better, why hasn't it been embraced by the market?

Although commonhold has been available as an alternative to leaseholds for many years, there are fewer than 20 blocks in commonhold ownership. The reasons that it hasn't taken off include:

  • Conversion to commonhold requires unanimity from everyone with an interest in the block which is difficult to achieve;
  • The current law is inflexible and doesn't work for the mix of interests and uses which are common in large complex mixed-use developments; 
  • Developers haven't been persuaded to build new commonhold developments and have had no incentives to build commonhold when leasehold offers opportunities as a source of future revenue through the purchase of lease extensions or selling the freehold interest;
  • Lenders have tended to be reluctant to provide mortgages for commonhold properties for a variety of reasons, including the fact that commonhold associations may be considered at greater risk of insolvency;
  • Commonhold does not solve many of the problems of flat ownership – owners may still face problems of other owners in multi-occupied buildings refusing to contribute towards costs;
  • Commonhold owners may not want to take an interest in the management of the building;
  • Commonhold owners may be ill equipped to become directors of the CA or unwilling to be directors with the increasing liabilities that attach to that role, particularly in higher risk buildings;
  • Commonhold does not work in its current form for those schemes where tenants are looking to their landlords to take on the responsibility and risks of running what are complex service led operations, such as schemes in the Integrated Retirement Community sector.

How does the Government propose to fix commonhold?

The Law Commission made 121 recommendations to address these concerns and improve the existing system of commonhold – the White Paper confirms that the Government agrees with most of them.  These recommendations include:

  • improving lender confidence in commonhold;
  • providing developers with flexibility to use commonhold for all developments irrespective of the development's size, make-up or complexity. To this end a new tool – "sections" - is recommended to enable developers to separate out the management of different types of interests (e.g. commercial and residential);
  • strengthening the management of commonholds with new rules around director appointments, reserve funds and repair standards and improved dispute resolution regimes;
  • greater protections around the insolvency of commonhold associations;
  • bringing shared ownership and home purchase plan leases within commonhold;
  • making it easier and cheaper to covert from leasehold to commonhold – conversion will be possible without unanimous consent, although this is complicated by the fact that changing peoples' property rights has implications under human rights legislation and will need careful thought.

Crucially, the Government has confirmed that they are looking to ban the sale of new leasehold flats so that there will be no choice about whether to adopt commonhold for new builds. This will align with the ban on the sale of leasehold houses - legislation has already been passed to ban the sale of new leasehold houses in almost all circumstances (although the ban is not yet in force). 

What next?

The Government has promised to:

  • consult later this year on the best approach to banning new leasehold flats;
  • publish a draft Bill in the second half of the year which will include enough detail to enable proper discussion and scrutiny ahead of an actual Bill being presented for consideration by Parliament;
  • continue to work with industry and consumer groups to help prepare for commonhold becoming the default tenure for new flats;
  • promote commonhold by engaging with consumers once a Bill is introduced.

What can you be doing now?

Given the enormity of the changes proposed, it is essential to start thinking now about how different assets, their development and operation, will be affected and to engage proactively as the legislation evolves. We will be tracking the emerging legislation and helping our clients to prepare for the arrival of the reinvigorated Commonhold tenure model.

For more information, speak to Co-Head of Living Dominic Morris, Principal Associate Tom Kiernan-Wilson or any member of our team.