On 21 July the Law Commission published three reports on residential leasehold and commonhold, which pave the way for fit-for-purpose home ownership.
Our recommendations will make it easier, quicker and cheaper for leaseholders to buy their freehold or extend their lease, or to take control of their building by exercising the right to manage. These recommendations provide leaseholders with greater security and control over their homes, and (for those buying their freehold or extending their lease) place the financial value of the home in the leaseholders’ hands. In this article, however, we focus on our recommendations in relation to commonhold – a means of owning flats on a freehold basis. We explain how our recommendations pave the way for flats to be owned on a freehold basis.
What is commonhold?
Commonhold is an alternative to leasehold which was introduced by a law passed in 2002. In a commonhold you own the freehold of your flat, and become a member of a company – the Commonhold Association – which owns and looks after the common parts of the block. As commonhold is freehold, it brings significant advantages. There is no landlord, the freehold cannot be forfeited and nor will ownership ever expire. But that does not mean that you have to manage the block yourselves. In most cases we expect that commonholds will appoint professional managers to do so – just as a landlord would now. But the mangers will be chosen by and answerable to the flat owners. And the flat owners will have control over the costs.
Around the world there are equivalent systems to commonhold. It is a very successful way of managing multi-occupied buildings in a rational, democratic and accountable way. England and Wales is unusual in its reliance on leasehold to facilitate the ownership of flats.
Why has commonhold not taken off?
Despite the advantages of commonhold, it has not taken off. Fewer than 20 have been created since it was introduced.
Various reasons have offered to explain this. It is currently difficult to convert a leasehold block to a commonhold. Commonhold does not currently offer sufficient flexibility to combine commercial and residential uses in a single scheme. And some mortgage lenders have raised concerns about lending on commonhold units. Finally, there is a lack of awareness of what commonhold is.
If our reforms are implemented by Government, our view is that commonhold is not just an alternative to leasehold home ownership – it is the preferred alternative. Although our recommendations in respect of leaseholders’ ability to buy their freeholds, extend their leases or exercise the right to manage will significantly improve the position of current leaseholders, there are inherent limitations to leasehold which can only be overcome by the adoption of commonhold to enable freehold ownership of flats.
Making it easier to convert from leasehold to commonhold
Conversion currently requires the unanimous consent of all leaseholders and their mortgage lenders, making it all but impossible to use in practice.
We recommend removing the requirement that conversion to commonhold needs the unanimous agreement of leaseholders and others with particular interests in the building, combined with safeguards for those who do not consent.
This will make it much easier to convert to commonhold, enabling leaseholders to make their homes their own.
Creating an accountable management structure
Unlike leasehold, commonhold unit owners are in control of how their building is managed and the money that is spent on it. There are no ground rents or permission fees. Our recommendations strengthen the management and financing regime of commonholds.
We recommend that unit owners should be entitled to approve the annual budget. We simplify the procedure for the election of directors to improve accountability, and ensure that directors can be removed when they are failing in their duties. And we provide commonholds with easier ways of raising finance to undertake essential works if emergencies arise.
Ensuring that commonhold is suitable for new and mixed-use developments
We address criticism that commonhold is not suited for mixed-use developments. We recommend a management structure (“sections”) that can be used to separate out decision making to distinct parts of the commonhold. This will allow, for example, residential unit owners to vote on matters only affecting them.
We have also made recommendations that will build in protections to ensure that abuses that have occurred in the leasehold sector do not occur in commonhold. We recommend safeguards to prevent developers retaining unnecessary control over a development and leaving unit owners with unfair long-term management agreements and other contracts.
Protecting homeowners against onerous terms
Because commonhold is freehold, there is no lease. This removes the possibility for a landlord or developer to include provisions requiring homeowners to do (or not do) certain things, or to pay for permission to alter or sell their homes.
Instead, the rules of a commonhold are set out in a single rulebook that is applicable to all unit owners: the commonhold community statement (“CCS”). Some rules in the CCS are required by law. For example, all CCSs must include provisions as to the insurance of the building.
Other rules may be made, changed or removed from the CCS by unit owners if a sufficient number agree. For example, a particular commonhold may wish to include a rule in the CCS that bans holiday lettings in the building.
Our recommendations ensure that the rules in the CCS cannot be amended without a high level of support from unit owners, and we have built in protections where the amendment of the CCS would disproportionately impact a minority of owners.
Addressing mortgage lenders’ concerns
The support of lenders is vital to commonhold. A number of mortgage lenders will already lend on commonhold.
We think that the advantages of commonhold are attractive for lenders. As commonhold is freehold, the unit not a wasting asset, nor can it be forfeited by a landlord. A commonhold unit therefore offers improved security than that of a leasehold property. We think that our recommendations will increase the attraction of commonhold to lenders
However, lenders expressed legitimate concerns about some aspects of the current law as we developed our recommendations. We listened and addressed these concerns in our report, and we have written an open letter to mortgage lenders detailing how we have accommodated their concerns.
Conclusion
Our reforms are about making our homes ours rather than someone else’s asset. To that end, commonhold entails a culture change. It moves away from an ‘us and them’ mindset, towards ‘us and ourselves’. Our recommendations lay the legal groundwork for facilitating that change.
Professor Nick Hopkins, Commissioner for Property Law, and Harley Ronan, Research Assistant.
More details are available at www.lawcom.gov.uk/project/residential-leasehold-and-commonhold/
