Understanding the shift from leasehold to commonhold

Commonhold was introduced in the Commonhold and Leasehold Reform Act 2002. I was working for LEASE at the time and needless to say it caused quite a stir. However, its actual impact was far more lacklustre. Current records show that there are less than 20 commonholds registered in England and Wales more than 20 years later.

A ban on new leasehold flats is in line with the Government’s ethos of boosting commonhold. The changes outlined within the White Paper, which follow on from leasehold reforms, are part of the Government’s pledge to end what is a feudal system. The reforms are designed to make commonhold more accessible to leaseholders thereby moving away from the leasehold system. 

There has been a great deal of dissatisfaction with the leasehold system. For many, it involves a third-party freeholder, sometimes through a managing agent running the property and charging leaseholders via a service charge. Many leaseholders complain about unreasonable service charges, poor management and maintenance as well as an overall lack of control over their own property. In some cases, leaseholders reside in these homes. 

The White Paper sets out plans to ease the conversion process from leasehold to commonhold. However, currently 100% participation is required, whereby every single property owner in a leasehold arrangement would need to agree and participate in the conversion to commonhold and rounding up fellow leaseholders can be tough and stressful. 

Currently, groups of leaseholders in flats have the right to collectively enfranchise. However, generally, at least 50% of flats in a building must participate, which can be challenging in larger buildings. Leaseholders may be hesitant to commit to a decision before embarking on the process and similar challenges could arise with commonhold. Therefore, clarity and transparency are crucial. If the reforms are well-drafted, we may see a rise in leaseholders acquiring the freehold, especially as the reforms make this process easier.

Many other countries including Australia already embrace a commonhold model which is proof it can and does work.

Commonhold will give leaseholders control over the management of their buildings and do away with leases. This will alleviate concerns about diminishing assets and negate the need for extending leases. 

The key benefits of converting to commonhold will be:

• greater control over management
• enhanced control over budgets
• no concerns about lease lengths
• clearer rules, as opposed convoluted or ambiguous leases

Provisions will be in place to boost lenders’ confidence and protect their security. This will include mandatory public liability insurance and reserve funds to ensure the smooth operation of developments. A commonhold community association will effectively run the building and there will be no third-party landlord involved.

The reforms are set to allow shared ownership leaseholders to participate too, marking a huge development. Shared ownership allows leaseholders to buy a proportion of their home and was designed to make stepping onto the housing ladder more affordable. Some would argue it has had the reverse effect, leaving many shared ownership leaseholders feeling disadvantaged as they own less than 100% of the flat, yet pay 100% of the service charge. Many have likely heard horror stories of both leaseholders and shared ownership leaseholders struggling to sell their properties, with buyers deterred by the excessive service charges and poor management.