Scandals and issues and problems surrounding leaseholds have recently been very newsworthy. In the background however the Law Commission last year published terms of reference for leasehold reform.
Included in this are reforms to ‘commonhold’ ownership. This little known form of ownership is not new but became law in 2004, as a new way to own property but has failed to gain acceptance with only 20 developments having been created.
The Law Commission is proposing reforms to this to look to support the expansion of commonhold as an alternative to leasehold.
So what are the ways in which property can be owned?
Ignoring commonhold, in England and Wales properties can either be owned as freehold or as leasehold.
Leasehold is a form of ownership where a person owns property for a set number of years on the lease from a landlord who owns the freehold. Flats or properties which form part of the building are usually owned on a leasehold basis although the recent scandals focused on the fact that some newly built houses were sold by developers on a leasehold basis.
So what is commonhold?
In commonhold, the property owners all retain freehold ownership of their flats and the common parts are held by a ‘commonhold association’ which is a company limited by guarantee. A ‘Commonhold Community Statement’ sets out the obligations that apply.
Why is this Commonhold beneficial?
The benefit is that a lease is a wasting/depreciating asset. It can expire and even an apparently long lease can be classed as short in legal terms and need renewing- namely under 80 years.
This problem does not exist in commonhold as each unit retains its freehold status. In leaseholds the owners are ‘tenants’ and the freehold is held by the ‘landlord’. There is no landlord in commonhold and all the owners of the building have a say in its running and management as members of the Community Association.
So why is this method not used?
Certainly there will have been an element of conservatism when it was introduced. However despite recent issues as an ownership model leaseholds can work well and have great flexibility.
When new developments of flats have been formed through development or conversion, developers and freeholders have recognised the value of retaining the freehold as an asset. Ground rent income is valuable, as is the future value of the capital sums generated on the grant of lease extensions. So there was – and still would be even with reforms – no incentive to use the commonhold model. Indeed one of the consultation issues is as to whether the use of commonhold should be incentivised.
Where the freeholder or developer is not interested in retaining the freehold the usual set up transfers the freehold to a residents controlled management company, and the leases are granted on 999 year leases. Ultimately there is little practical difference between this arrangement and the commonhold arrangement.
What are the drawbacks with the commonhold model?
Drawbacks include concerns as to the status and marketability of commonhold flats should the commonhold association company be struck off through failures of the owners, or insolvency by failure or catastrophic event. The flats potentially are left as freehold flats and few lenders lend on freehold flats.
Whilst the model remains out of favour, the fear is that buyers will be put off from buying units with this type of ownership and the majority of lenders will not currently lend on commonholds.
Commonhold also envisages that whilst developments could be mixed in nature including residential and commercial units, that the individual units would be comparable in size. In its present format it does not fit the modern trend of complex large mixed use developments with units of different sizes and with different interests, nor has the flexibility of leasehold.
So what are the proposals?
The Law Commission is looking to “reinvigorate” commonhold, and has looked at solutions to enable homeowners to convert to commonhold.
It is clear however that this will not be simple. The benefit may also be doubtful in practical terms. Where the freeholder does not consent, the leaseholders would first be obliged to go through the enfranchisement process to obtain the freehold.
The position of leaseholders who then did not agree also need to be considered. The proposal is that where support was up to 50 per cent that the non-participating leaseholder would retain their lease – probably at least until resale. Otherwise if the support reached at least 80 per cent then all holders including objectors would be required to take commonhold.
Do we need to wait for the reforms to become law?
Commonhold is available now and could be used in the appropriate circumstances. Undoubtedly however it won’t be used, due to lack of familiarity and concerns as to marketability and mortgageability.
When might the reforms take place?
The Law Commissioner, Professor Nicholas Hopkins, has acknowledged the complexity of the issues involved and whilst appreciating that for many reform could not come quickly enough, cautioned that hasty and rushed legislative reform is a dangerous and ultimately in no-ones interest.
It is obvious that there is not going to be any quick fix. The Law Commission is currently on the road consulting on commonhold ownership (and Right to Manage reforms) with the intention of publishing recommendations by the end of the year. Or possibly early 2020. These then have to be accepted by Parliament and proceed along on the road to legislation.
Have a view? Interested in learning more?
The consultation closes on 10 March 2019. Views are requested from everyone including leaseholders and future owners. Everyone is invited to respond- and to reply to as many or as few questions as they wish. To find out more about the consultation process, click here.