Is this the time for commonhold?

William Bethune looks at whether, with a new government, commonhold’s moment to become the new residential standard has finally arrived. Commonhold was introduced under the Commonhold and Leasehold Reform Act 2002, which also brought in the right to manage and expanded rights of enfranchisement, as a new form of freehold ownership of flats, removing the need for a third-party landlord and a diminishing lease term. But there has been minimal take-up to date owing to unfamiliarity and hurdles not faced with leasehold. In more than 20 years since the 2002 Act, there have been fewer than 20 commonhold developments. The Law Commission consulted and reported on the “reinvigoration” of commonhold in 2020, but there has been no Bill or legislation since. The new Labour government has committed in its manifesto to enact the Law Commission’s proposals on commonhold and “take further steps to ban new leasehold flats and ensure commonhold is the default tenure”. What is commonhold? Commonhold is a form of freehold ownership of flats which moves away from the landlord and tenant relationship, creating a tenure where only the owners of the flats in a property can be owners of the building, providing transparency and control. It is similar to models of ownership for properties with multiple units across the globe and makes sense in terms of those in control of the building having a vested interest. However, as is usually the case, it is not that simple. A third-party landlord is often a professional landlord with experience, knowledge and contacts in the sector who knows how to run a building, which is especially important in mixed-use, shared-service arrangements. Residential unit owners will often want to save money in the short term, but that is not always in the long-term interest of the condition of the building. Commonhold differs from the current leasehold regime in the following ways: There is no landlord, as the residential unit holders own their unit on a freehold basis and the common parts are owned collectively through a company, the commonhold association. The relationship between the owners is managed through a single commonhold community statement which governs the building, with no right of forfeiture. There is no diminishing lease term, as all interests are owned freehold. There are two avenues to commonhold: a conversion from a current leasehold/freehold arrangement or the creation of a commonhold from the outset in a new development. Why hasn’t commonhold caught on?  Although there are clear advantages for leaseholders, the process and requirements to convert to commonhold are restrictive under the current regime, limiting its use. The main barriers are that the residential leaseholders have to own all of the leaseholds and freehold in order to convert (or obtain the consent of the freeholder), usually meaning that they need to have exercised their right to purchase the freehold through a collective enfranchisement claim. Further, commonhold requires the unanimous agreement of the leaseholders, which can be very difficult if not all the owners are committed or even live at the property. The use of commonhold in new developments has also been limited, due to practical obstacles for developers and lenders. For example, commonhold does not currently allow for developers to retain rights in the community statement, restricting further development or commercial involvement. Developers need to retain control of areas of sites still under development, which the current commonhold regime does not allow for. A further factor is the involvement of lenders in a new commonhold or conversion. In a conversion, the consent of all lenders is required as their security for the mortgage is being transferred from a leasehold asset to a commonhold unit. Other concerns for lenders include the solvency of the commonhold association and its ability to run a building, deal with arrears and raise funds, with the possibility of insolvency or voluntary winding-up being a major risk. These issues, together with a lack of familiarity, have meant lenders do not appear to see commonhold as a secure asset against which to lend. The limited use of commonhold can also be considered by its potential application to mixed-use sites. Under the current regime, commonhold does not allow for shared ownership or other leasehold structures. Subletting from a commonhold unit is highly restricted, which has meant commonhold cannot be considered for a large range of new-build estates and developments. As commonhold requires the whole building to be under the same structure, there is currently no room for mixed tenures. Law Commission proposals The Law Commission’s 2020 report, Reinvigorating commonhold: the alternative to leasehold ownership, set out the above-mentioned shortcomings (among others) and its proposals for reform. To allay the concerns of lenders, the proposals seek to give the commonhold association greater powers to enforce payment of arrears by creating a new right to apply to the court for the sale of the defaulting owner’s unit. Further, the proposals recommend that the commonhold association should have the ability to raise emergency funds by borrowing against common parts or selling parts. Ultimately, the proposals dealing with the lender’s charge over a unit will be of great importance as a lender will want to retain control over the commercial decision on lending against a particular asset, rather than being faced with the automatic transfer of security from a leasehold asset to a commonhold. Development issues have been addressed in the report by recommending the implementation of commonhold “sections” so as to allow parts of a building or estate to be sold on a commonhold basis prior to the whole being completed. In order to widen the availability of commonhold, “permissible residential leases” have been recommended to allow for shared ownership (where the lease contains Homes England fundamental clauses), with the shared owner having the right to be involved in the running of the commonhold association. On 100% staircasing, the shared owner would acquire the freehold title of the commonhold unit. No such equivalent exemption was proposed for retirement living, although event fees in specialist retirement properties were provided for. Further enabling reforms would most likely be necessary in order to support the retirement community sector, where the long-term presence of a commercial operator is part of the product that purchasers buy into. Conversion and management of the association is addressed in the proposals by seeking to reduce the required consent of the leaseholders to at least 50% of the flats in the building. Where leaseholders would need to enfranchise in order to convert to commonhold, a simplification of the process is provided for so that enfranchisement and conversion can take place simultaneously. The management of the building is proposed to be reformed to allow all voices to be heard by creating minority rights and the ability to more easily change and remove directors of the commonhold association. In addition, reforms could provide the unit holders with the ability to alter the “local rules” for their own block, to cater for specific needs or property arrangements. While balancing the needs of all in a commonhold is important, the proposals do raise the risk of increased disputes and additional hurdles hampering the association in running the building, which many resident-run buildings already face. The future of commonhold The government’s manifesto commitment to ensuring commonhold is the default tenure on new developments is likely to be tested over the next year given the huge impact, cost and time investment that would be needed to make commonhold a workable market standard. With pledges on further reform to enfranchisement rights and ground rent having been made, commonhold reform may come later. A great deal of work has already gone into making commonhold work, but it will still take considerable investment from the government and industry to make it a successful new tenure, which will create tensions with the new government’s pro-growth agenda and housebuilding targets. Given that a resident management company model of leasehold developments achieves a similar outcome, it will be interesting to see how far the government is willing to upset the apple cart in order to finally abolish the now politically toxic leasehold label. William Bethune is a senior managing associate at Trowers & Hamlins Image © Andrea Piacquadio/Pexels