Commonhold Revisited

Introduction

Twenty-plus years after commonhold ownership was first introduced, a recent survey reveals only 184 are registered in England and Wales. 

We consider that the reason for this is a combination of the protective need to resist anything new, and ignorance of what commonhold is and how it works.

Collective ownership is not a new concept. In Australia, there is the Strata Title system, and in North America, the condominium system. Both have proved popular.

The government intends to address the current conflict and imbalance between the landlord and tenant relationship. A landlord’s primary motivation is a return on their investment through income production, which conflicts with a tenant’s need for security of tenure and their interest in the property not to depreciate. 

To this end, the government is promoting the commonhold model for new developments as an alternative to and replacement of leasehold ownership. 

In 2021, the government created the Commonhold Council, which is tasked with making commonhold more attractive and user-friendly for all potential stakeholders, including homeowners, lenders, investors, and developers. 

What is commonhold?

Commonhold ownership applies to properties, notably flats, that share communal structures, areas, or services, for example, roofs, walls, foundations, gardens, and access roads.

However, in contrast to leasehold ownership, where property is owned for a fixed period, commonhold property, known as a unit, is owned indefinitely as a freehold. 

Further, owners have a say in managing their building, including costs and responsibilities. Shared areas are jointly owned and managed by a commonhold association. Residents are members of the association who each contribute towards the costs of the upkeep of the common areas.

Management duties can be outsourced to a third party, but the owners retain complete control over decision-making and how their building or development is run.

There are obligations on all homeowners for the benefit of other residents and the development generally. These include restrictions on carrying out alterations, social behaviour, and changes in use. Such obligations are regulated by a commonhold community statement, which all residents must sign on purchase and have their buyers sign up for on sale.

Unlike leasehold properties, as the residents own their freehold, it dispenses with the need to exercise the cumbersome and expensive statutory frameworks for extending leases, collective enfranchisement, and the right to manage. 

Stakeholders

Investors and developers can exit the scheme on the sale of the final unit, relinquishing any future management responsibilities and obligations, such as repairs, maintenance, service charge collection, and insurance. 

From a commercial point of view, once relinquished, investors and developers are free to reinvest elsewhere in other future developments.

Currently, lenders are reluctant to offer mortgage finance on commonhold properties. This is the main reason so few have been registered, as a lack of mortgage finance means buyers cannot proceed to purchase.

This reluctance is mainly due to a lack of adequate security through obtaining proper valuations, difficulties with insurance, and an inability to enforce obligations against other homeowners. The result is that most lenders take the commercial view that commonholds are not worth the risk. 

Issues

With any new concept, especially in the property sector, leaseholds will not disappear overnight. We predict that for a considerable period, there will be a two-tier system in operation.

This may create confusion and a sense of unfairness by homeowners, which is precisely what the government wishes to eradicate. 

We consider that one of the aims of the Commonhold Council will be to conceive a simple and inexpensive structure allowing leaseholders to convert their buildings into a commonhold model. 

In addition, existing stakeholders will not relinquish their investment without an adequate compensation scheme being in operation. 

Potentially, any discord between members of the collective could play havoc with the management and enforcement of obligations under the community statement. Currently, there are no checks and balances to prevent this. Consequently, an effective dispute resolution service will need to be created.

The Commonhold Council will need to get to grips with these issues to offer a suitable alternative to the leasehold model.

Is there an end in sight?

The government is committed to leasehold reform and has recently announced its plans to bring forward a Leasehold Reform Bill in the King’s Speech, on 7 November 2023.

There is no doubt that reforms are long overdue, requiring considered and well-drafted legislation.

We predict that the Bill will propose to ban the creation of new leasehold houses, commit to the abolition of the unpopular marriage value (which is an additional charge payable by the leaseholder when the lease they are extending has fallen below 80 years), and put forward a revitalised model for commonhold, fit for the demands of modern society.

If the cool kid on the block is to attract admiration and a loyal following, it will require a slick and sharp image.