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Commonhold – an alternative to leasehold ownership

October 05, 2020

Commonhold was introduced in England and Wales in 2002 through the Commonhold and Leasehold Reform Act 2002. The legislation created a new way of owning properties with communal facilities. Systems similar to commonhold are already in existence and work well in other parts of the world, for example, the “condominium” in the United States or the “strata” in Australia, Singapore and in the United Arab Emirates.

With commonhold, the individual flats in the building, referred to as “units”, are owned on a freehold basis by “unit holders” while the common parts are owned and managed by a Commonhold Association (a company) formed jointly by unit holders. Each unit holder owns a share in the Commonhold Association and signs up to a single Commonhold Community Statement which specifies the properties within the development and sets out the rights and obligations of the unit holders and the Commonhold Association. While commonhold was primarily designed to facilitate the freehold ownership of flats, houses and non-residential premises in a building or on an estate can also be commonhold units.

Commonhold has numerous advantages when compared to a traditional English lease. The concept of a lease and a landlord is eradicated. All decisions regarding the building, its management and costs are made jointly by flat owners within the building without the involvement of an external landlord, for whom the building in question is often nothing more than a profit generating asset. The abuses frequently seen in leasehold schemes such as escalating ground rents, excessive service charges, poorly maintained buildings and high management fees are eliminated. Unlike leasehold, there is no limit on how long you can own the property for – your interest never runs out. Neither do you run a risk of your lease being terminated if you remain in breach of its terms.

Despite these perceived advantages, commonhold has never proved popular and flats in England and Wales invariably continue to be owned on a leasehold basis. Fewer than 20 commonholds have been created since the commonhold legislation came into force (for comparison, it is estimated that there are at least 4.3 million leasehold homes in England alone). One key reason for such a result is that commonhold remains less attractive to developers than leasehold. There is no incentive for developers to set up new commonholds, which unlike leasehold flats, do not produce ongoing income streams for landlords in the form of ground rents, lease extension premiums and other administrative fees.

On the other hand, there are shortcomings in the current law. At present, conversion from leasehold to commonhold is nearly impossible to achieve. The process is very complex and requires acquisition of the freehold of the building first (the process formally called “enfranchisement”). Then, there must be a unanimous agreement to convert into commonhold from all the parties with an interest in the building, i.e. all leaseholders in the building, the freeholder and their mortgagees. The current commonhold law is also often criticised by developers for being ‘one size fits all’ and unsuitable for larger, mixed-use developments.

Last but not least, there is a widespread lack of awareness about commonhold ownership among homebuyers.

Homeowners are increasingly dissatisfied with leasehold as a form of land ownership and have been calling for a reform to address the issues that come with it, including eliminating leasehold as a type of ownership altogether. The COVID-19 pandemic has brought even more focus on where we live and housing policy appears to be back on the political agenda.

On 21 July 2020, the Law Commission published a report on Commonhold “Reinvigorating commonhold: the alternative to leasehold ownership”. The Commission’s overall aim is to address the shortcomings in the current law and make commonhold a more workable and a preferred alternative to leasehold for both existing and new homes. The proposed reforms are designed to make it easier for leaseholders to convert to commonhold, provide developers with the flexibility they need to build new commonhold developments and improve confidence in commonhold among mortgage lenders.

If the proposed reforms are implemented and the current law improved, if more awareness is raised among homebuyers and the wider property sector about commonhold, and if developers are somehow incentivised to build new commonhold homes, commonhold may find its place in the future homeownership landscape in England and Wales. It would be a shame if it did not as it presents a very attractive alternative to leasehold.

If you are thinking about purchasing a commonhold unit or you and other leaseholders in your building are considering converting your current leasehold ownership into commonhold and wish to understand your options and the conversion process, or you have other leasehold related enquiries,

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© Miller Rosenfalck LLP, October 2020

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