The UK government’s recent White Paper on commonhold, The proposed new commonhold model for homeownership in England and Wales, proposes significant reforms to the property ownership system. It aims to replace the traditional leasehold model with commonhold as the default tenure, starting with new build flats and apartments. While these reforms have been widely discussed in the context of home ownership and leasehold abolition, their impact on shared-ownership properties and registered providers of social housing is crucial.
This article explores how the government’s commonhold reforms interact with shared-ownership schemes and examines the potential challenges and opportunities for housing associations and other RPs on new developments.
A structural shift in property ownership
Commonhold, introduced by the Commonhold and Leasehold Reform Act 2002, was designed as an alternative model to leasehold, allowing homeowners to own their individual flats outright while jointly managing communal areas through a commonhold association. Each commonhold association will be governed by a commonhold community statement, which sets out the rights and obligations for all flat owners within the building.
Unlike leasehold, there is no landlord, no ground rent, and no risk of leases expiring. However, to date, commonhold has struggled to gain widespread acceptance in England and Wales, with the following issues contributing to its limited uptake:
- Familiarity and extensive acceptance and use of the existing leasehold structure.
- Lenders’ caution and lack of mortgageability.
- Unfamiliarity with commonhold.
- Developers’ preference for additional income through leasehold property via ground rents and other charges.
- Governance concerns of the commonhold association, complex legal frameworks.
- Unfeasibility with mixed use and shared-ownership properties.
In 2020, the Law Commission released a report titled Reinvigorating Commonhold: The Alternative to Leasehold Ownership. In an attempt to revitalise commonhold, the 2020 report made various recommendations to address the above issues, many of which have been incorporated into the White Paper. The White Paper seeks to address these barriers and create a more attractive, functional system by simplifying governance structures, improving mortgage availability, ensuring that commonhold is financially viable for new developments and critically enabling commonhold schemes to be adopted for mixed use or shared-ownership buildings.
How shared ownership fits into the new framework
Shared ownership is a long leasehold structure, comprising a part-buy, part-rent scheme where individuals purchase a percentage of a property – typically between 10% and 75% – and pay rent on the remaining share, which is usually owned by a housing association or another RP. Over time, shared owners can buy additional shares (a process known as “staircasing”) with the goal of eventually owning the property outright.
Historically, a major flaw of commonhold was that it did not accommodate shared-ownership structures, as commonhold units must be fully owned by their occupants and leases for more than seven years or for a premium are banned. This lack of flexibility has, for two decades, made it unviable for a proportion of the housing and development market.
To address these issues, the government’s recommended changes will allow shared ownership to operate within commonhold for the first time. The white paper explains that shared-ownership leases will be an exception to the ban on leases over seven years.
This change is significant, as it aligns with government funding and planning policies that support shared-ownership properties. The government’s aspiration is that, by allowing shared-ownership schemes within commonhold, it will open up commonhold to a wider spectrum of property investors, such as developers and RPs.
So, what types of rights will shared owners have and how will this affect RPs?
- Retention of leasehold structure: Shared owners will remain leaseholders, with the RP retaining ownership of the freehold of the commonhold unit. However, they will enjoy a raft of commonhold rights that are not currently accessible in a leasehold structure.
- Collaborative decision making: Shared owners, like other commonhold unit owners, will be involved in decisions about managing and funding their building. They will also gain the rights and protections of the commonhold system, which will, for example, replace their right to dispute costs under leasehold law.
- Shared voting powers: Shared owners will have exclusive voting rights on budgets, leadership elections and other issues, without RP interference. However, as the RP has an ongoing financial interest in the unit, certain key decisions affecting their security will involve shared voting powers. For example, selling the entire commonhold block will require a joint decision.
- Protection from certain repair costs: RPs will be subject to rules requiring them to cover certain repair costs during the first 10 years of the lease, known as the initial repair period. During this period RPs will also have a say in repair decisions, but these can be delegated to the homeowner at their discretion.
- Conversion to commonhold: Once fully staircased, a shared owner will acquire the freehold of their flat, following which their rights and obligations will be the same as any other commonhold unit owner.
It should be emphasised that there are still uncertainties over how shared-ownership properties will integrate in practice with commonhold schemes. The White Paper stresses that, while the government has outlined the operation of new shared-ownership units in newly built commonhold blocks, it is still evaluating how shared ownership will function in existing buildings that have been converted to commonhold.
What key reforms mean for registered providers
The shift toward commonhold has wide-ranging implications for RPs in a number of respects, particularly in how they develop, manage, and finance shared-ownership schemes.
Governance and management of shared-ownership properties
Under the leasehold system, RPs retain a significant degree of control over shared-ownership properties, managing things such as maintenance, service charges and leasehold extensions. Under the government’s new commonhold framework, shared-ownership units will exist within a commonhold association, where all unit owners (including shared owners) collectively manage the building.
For RPs, this is a fundamental shift in governance. Instead of acting as the landlord, they will participate in the commonhold association alongside the shared owners and full commonhold owners. While this ensures a more democratic and transparent system, it also reduces the direct control that RPs currently exercise over shared-ownership properties.
Challenges:
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- Housing associations must adapt to the new governance structures of commonhold associations.
- Loss of freehold control may impact financial planning and long-term investment strategies.
- Ensuring shared owners have a voice in commonhold decision-making processes.
Opportunities:
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- Encourages a more cooperative approach to property management, reducing disputes between leaseholders and freeholders.
- Enhances transparency in service charge costs and building management decisions.
Mortgage lender confidence and affordability
One of the reasons commonhold has struggled to gain traction is the reluctance of mortgage lenders to finance commonhold properties. The white paper proposes measures to improve lender confidence, such as standardising legal structures and ensuring robust management arrangements.
For shared-ownership buyers, mortgage accessibility is already a challenge. Many lenders are cautious about financing part-buy, part-rent properties due to the complexities of staircasing and potential resale restrictions. The introduction of commonhold adds an additional layer of uncertainty, and it remains to be seen whether lenders will fully embrace the new system.
Challenges:
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- Uncertainty around how mortgage lenders will respond to shared-ownership commonhold properties.
- Potential for delays in adoption due to financial sector hesitancy.
Opportunities:
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- Clearer legal frameworks may eventually lead to greater mortgage availability for shared owners.
- Removing leasehold complexities could make shared ownership more attractive to first-time buyers.
Regulatory and compliance considerations
The Social Housing (Regulation) Act 2023 has already placed increased regulatory responsibilities on RPs, emphasising tenant safety, accountability and transparency. With the introduction of commonhold, RPs will need to ensure compliance with both existing social housing regulations and the governance requirements of commonhold associations.
Challenges:
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- Balancing compliance with both social housing regulations and commonhold governance rules.
- Potential need for additional training and legal expertise in commonhold structures.
Opportunities:
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- A fairer and more transparent property management system could reduce legal disputes between leaseholders and housing associations.
- Strengthened tenant engagement through active participation in commonhold associations.
Implications for developers
The government’s intention is for developers to benefit from the expansion of commonhold to include shared ownership, improving development viability, to assist with the process of securing planning permission and facilitate the provision of affordable housing in accordance with the National Planning Policy Framework.
Challenges:
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- Adapting to new regulations and understanding and implementing the new commonhold rules and regulations.
- Managing phased commonhold developments and ensuring ongoing access to completed and sold parts of the scheme.
- Aligning the interests of RPs and their shared-ownership leaseholders with those of the developer.
Opportunities:
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- Attracting a broader range of potential homebuyers through shared-ownership schemes in commonhold blocks.
- Enhancing development viability by putting commonhold on a par with leasehold blocks.
- Easier securing of planning permission, especially when shared-ownership units are required.
- Including necessary rights in the commonhold rulebook from the outset to support completion and marketing.
- Simplified registration and director appointment processes.
A transformative moment
The government’s push for commonhold represents one of the most significant housing tenure reforms in recent history. By integrating shared ownership into commonhold structures, the white paper seeks to address the previous inadequacies of the system. However, the transition poses considerable challenges for RPs, particularly in governance, financial planning, and regulatory compliance.
While commonhold offers the potential for a more equitable property ownership model, its success will depend on the willingness of mortgage lenders, developers and RPs to adapt to the new proposed landscape. RPs must carefully navigate this transition, balancing their social mission with the new legal and financial realities of commonhold.
Mark Sellers is a partner in the housing team and Hannah Ouseley is a senior knowledge lawyer in the real estate division at Pennington Manches Cooper LLP
