Commonhold – again

Commonhold is ownership of a unit which is self-managed by property owners and each of them have rights as freeholders. The Commonhold and Leasehold Reform Bill 2001 described commonhold as: “…the name given in this jurisdiction to a scheme widely used throughout the rest of the world with greater or lesser degrees of variation. It provides for multiple occupation of developments, such as blocks of flats, or mixed flats and shops, or business parks in which unit owners have an interest in their unit of occupation, whatever that may be, which is closely analogous to a freehold interest”.

Although technically possible there has been very little uptake in the past 20 years. Commonhold ownership has not been at all popular due to the following factors:

• the conversion from leasehold to commonhold required unanimity from everyone with an interest on an estate/block (difficult to achieve);
• there was no incentive for developers of new commonhold units to secure a source of future revenue through the purchase of lease extensions or selling off the freehold interest; and
• there was reluctance by lenders to provide mortgages for commonhold properties because they were seen as being at a greater risk of insolvency.

The concept of the commonhold unit has now been relaunched by the establishment of a “Commonhold Council, which is a body corporate”. This form of ownership allows homeowners to own their property on a freehold basis, giving them greater control over their estates. It implements the co-ownership of a residential unit that has an additional stakeholder whenever someone buys a property on an estate which allows them to participate in any decisions about its future direction. 

In early 2021, the government announced its plans to encourage a transition from leasehold to a commonhold system of ownership. This would entitle membership of the commonhold association that owns the freehold estate in the property to hold any common parts and each unit would be registered at HM Land Registry under separate title numbers. This model would mean:

• each unit holder owning the property in perpetuity rather than for a set term (such as 99 years);
• no obligation to pay ground rent;
• that the interest in the property cannot be forfeited; and
• there would be no restrictions on the owner of a unit selling the whole of their interest in the commonhold. 

Commonhold has been defined as “a variant of freehold” which ameliorates the worst aspects of leaseholds. Typically, its structure is a multi-occupancy building that is divided into freehold units enabling each individual unit to own its own freehold. The common parts (staircases and hallways) are owned and managed by a commonhold association which is a registered company that is itself owned by the freeholders of the flats. The scheme does not provide for a joint system of ownership – it vests the responsibility in all owners of the flats to manage the common and external parts of the property. It eliminates the possibility of landlords imposing onerous rents in short leases and of disproportionate burden on tenants. 

The establishment of a Commonhold Council allows tenants to control the administration of their estate in respect of allocation of resources and collection of service charges. The commonhold property unit on a residential estate allows the positive covenants to bind buyers of the original interest and transfers the ownership of the freehold block with the tenants. Also, no rent is charged. The commonhold association is a limited company and it is possible to remove it from the Companies House Register. 

Why change it?

The lack of control for tenants over management decisions along with the autonomy for leaseholders is central to the revival of the commonhold unit. The Law Commission report, ‘Reinvigorating commonhold: the alternative to leasehold ownership’ (21 July 2020) believes it will significantly increase control for tenants in making a choice in improving the service on their properties and that the creation of the Commonhold Council is an innovation which will galvanise local commonhold associations into taking more management decisions over their property. It consists of removing the service charge in leases by more standardised procedures for ‘commonhold assessment’, which avoids the inconsistent calculation of standard service charge provisions in leases. The community statement issued by the Commonhold Council will lead to the commonhold assessment, which will include the costs of managing the building (such as insuring, maintaining, cleaning and repairing) and will also enable the adoption of the ‘articles of association’ which frame how the commonhold association conducts itself and takes the management decisions on how to elect its hierarchy in the same manner as “how directors can be appointed” (para 1.17).

Commonhold provides a radical alternative to leasehold property ownership and the Law Commission considers it viable for both existing and future leaseholders. Yet the terms of most leases do not allow for conversion as it requires a unanimous vote of everyone in the unit with a proprietary interest (including the mortgage lenders). This is why commonhold ownership (as it stands) may be inaccessible for the vast majority of leaseholders (para 1.20).

Nevertheless, commonhold is still desirable to owner-occupiers as it addresses the problem of lessees being dependent on an absentee landlord who is not under an obligation to carry out building maintenance and management, or who is only interested in making a profit at their expense. It will also eliminate the problem of leasehold property being an asset restricted by a limited time scale – commonholders would each have a perpetual interest as any freeholder in their individual unit. There is also the uniformity of documentation because the terms and conditions of property owners are identical and do not vary (as with leasehold agreements).

The conveyance from leasehold to commonhold ownership will take place when each unit holder in the estate becomes part of a ‘commonhold unit’. Those leaseholders who elect to be part of the conversion will receive the freehold of their property and transfer to a commonhold unit by forfeiting “their leasehold interests”(para 1.22).

What are the prospects for commonhold?

The government opened a public consultation in January 2022 to adopt the commonhold model over the leasehold model by seeking the views of leaseholders on the transition to an increased use of commonhold, including for those in shared ownership schemes in England. The consultation, which ended on 22 February, had the intention to reform the leasehold and commonhold system in accordance with the Law Commission’s reports of July 2020, to broaden access to enfranchisement (buying the freehold), the “right to manage” a building or converting to commonhold. The consultation sought recommendations that:

• allow leaseholders to require that a landlord take on leases for any non-participating units following a collective enfranchisement; and
• introduce a non-residential limit for individual freehold acquisitions; and changes to voting rights in right to manage companies.

However, these have not yet been addressed by the government and may or may not be introduced by future legislation.

Disadvantages of long leases

The present leasehold system allows a single lease of three or more flats in the same building, or where the lease comes under the business tenancy regime of Part 2 of the Landlord and Tenant Act (LTA) 1954, and there is an onerous rent imposed with no right to apply for a variation under section 35(6) of the Landlord and Tenant Act 1987. An application can be made where the lease fails to make satisfactory provision with respect of one or more of the burdens of either repair or maintenance of the flat, or the building containing the flat; insurance of the building containing the flat, such as where the freeholder is not obliged to insure under the lease (section 35 Landlord and Tenant Act 1987, as amended by sections 162-163 Commonhold and Leasehold Reform Act 2002).

A real concern for leaseholders was that the ground rents on their properties were serving as a source of revenue for freeholders without transparency, accountability or self-management for tenants. The ground rents charged on properties could be several times the real value that had been estimated at freeholders charging initial ground rents of £295 per year on properties purchased for just under £200,000, which increased to £9,440 per year after 50 years. The estimated cost of purchasing the freehold using a statutory valuation method would be over £35,000. In such cases leaseholders can also encounter difficulties selling or re-mortgaging their property. 

The All Party Parliamentary Group on Leasehold and Commonhold Reform report entitled “A preliminary report on improving key areas of leasehold and common hold law” stated that leaseholders were being charged rents that were “onerous” and “informal” and that the government should undertake to “reduce legal costs and remove incentives for landlords to impose such conditions when selling/extending a freehold interest on an informal (non-statutory) basis”.

To address this the government brought forward legislation to prohibit new residential long leases from being granted on houses, whether new build or on existing freehold houses. 

Abolition of ground rents

The Leasehold Reform (Ground Rent) Act 2022 abolished ground rents and gave leaseholders of residential properties the right to extend their leases by 990 years at zero ground rent. It also protects elderly residents by reducing ground rents to zero for all new leasehold retirement properties. It will not be possible for applications to HM Land Registry to register a non-compliant residential long lease of a house. If a lease is found to be contrary to the ban, the consumer will be entitled to zero cost enfranchisement as a means of redress; the ban will apply to residential long leases (over 21 years) for new build houses or existing freehold houses (defined as single dwellings, self-contained buildings or parts of buildings structurally detached or vertically divided). 

The protection also includes the Housing, Communities and Local Government Select Committee report ‘Leasehold Reform’, that came out in March 2019, that states the ground rent impacted on the leaseholder’s ability to sell their home, and where the rent value becomes disproportionate to the value of a home. The government has prevented freeholders’ ability to increase the amount of ground rent with little or no benefit to those lessees facing extra charges which can also lengthen and lead to increased costs when buying or selling the property.

What’s next?

The government has, in reviving commonhold ownership, combined the security of freehold ownership with the management potential of positive covenants which do not apply to freehold property. In the unit of commonhold property this problem has been overcome by the existence of positive covenants that could apply to each owner of an interdependent property. This is necessary for the stability of the building that depends on the proper maintenance and repair both of the individual flats and the common parts. 

The transfer to commonhold is likely to be in the interest of the owners of the properties in which they reside. It is assumed that, once in place, commonhold will become the standard form of tenure for new-build blocks of flats which consumers, developers and lenders will find more responsive to their needs.