Leasehold reforms and commonhold: what’s next?

The Commonhold and Leasehold Reform Act 2002 introduced a new property ownership structure as an alternative to Leasehold, whereby property owners can hold the freehold of their individual flats or commercial units, with the common parts of the building being managed collectively by the unit owners, known as the Commonhold Association. Each unit holder is entitled to be a member of the Commonhold Association.

The land is registered as commonhold at the Land Registry with one title for each unit and one title for the common parts. The common parts of the building will include its structural components. The Commonhold Association is a Limited Company registered at Companies House and is managed in accordance with its articles. The articles are prescribed by the Commonhold Regulations 2004 (as amended in 2009). The prescribed regulations cannot be changed, although further regulations may be added to the articles.

The Commonhold Community Statement (CCS) sets out how the land is to be governed to include:-

• the extent of each unit and the common parts
• the percentage of maintenance charges attributable to each unit
• the regulations and obligations to be adhered to by each unit holder and by the Commonhold Association, which aren’t dissimilar to leasehold covenants
• how disputes between members are to be dealt with

Unlike leases, commonholds do not depreciate in value and are not wasting assets.

• There are no restrictions on selling an individual unit, the forfeiture provisions do not apply and no ground rent is levied.
• There is only one CCS registered against the commonhold title, as opposed to different forms of leases and deeds of variation.
• Each unit holder is able to participate in making decisions in connection with the management of the building and will be represented by the Commonhold Association.
• Many of the problems associated with a lease fall away because of the self-management connotations involved with commonhold.

There are, of course, shortcomings with commonhold land which the leasehold reforms have sought to eradicate, but overall commonhold is perceived by many within the industry as a welcome solution to the longstanding complications arising from badly drawn, archaic and unfavourable leasehold provisions. It is puzzling as to why commonhold has proved to be so unpopular with approximately less than 20 commonholds being registered in England and Wales, whereas hundreds of thousands of leases continue to be granted, some of which contain very onerous provisions.

On 21 July 2020 The Law Commission published its long awaited report with proposals for leasehold reforms in, among other areas, commonhold, with the intention of reviving the concept so that it offers a tangible, if not the preferred, alternative to leasehold for both existing and new properties. A brief summary of the proposals made are below.

• Leasehold land may be converted to commonhold with the consent of the freeholder or, as part of a collective enfranchisement claim subject to the unanimous agreement of all the participating tenants following a streamlined 'acquire and convert' to commonhold procedure.
• Removing the prescriptive nature of a standard commonhold approach so that commonholds can be built and tailored in accordance with the needs and size of the building.
• Provide for shared ownership leases be granted within commonhold titles in order to maintain the provision of affordable homes.
• Putting in place mandatory systems for reserve and maintenance funds to be collected to provide for structural repairs and maintenance so as to guard against any financial shortcomings of the Community Association. This would make the scheme more desirable for lenders to advance monies.
• Improving the day-to-day management of commonholds.

These proposals offer solutions to some of the legal issues associated with commonhold land and we are there in principle but are the reforms attractive enough for consumers, developers and lenders to bite?

A fundamental issue is that commonhold is still an alien concept in England and Wales and the majority of consumers, developers and/or sometimes lenders do not wish to engage with 'setting the precedent'. Lenders need assurance that mortgage funds are secure and re-coverable given the risks of the Commonhold Association becoming insolvent. The fact remains that leasehold land is far more habitual and familiar, notwithstanding its disadvantages.

Does the Government need to offer some form of incentive to developers and consumers and assurance for lenders? Obvious examples are waiving the community infrastructure levy, or other tax-related breaks, for developers; stamp duty discounts for consumers and, insurance backed guarantees for lenders. Such incentives would surely appeal to consumers, lenders and developers, which, in addition to the proposals ironing out the existing legal concerns, may just be the push needed for commonhold to really take off.