Since its introduction in 2004, commonhold has been met with resistance, with only a small number of developments adopting the framework, compared to millions of leasehold properties. Anushka Nicholas, Head of the Leasehold Enfranchisement team at Blacks Solicitors, shares insight on what commonhold ownership is, how the legislation differentiates from leaseholds and the challenges and benefits of embracing this framework.
What is commonhold ownership?
Commonhold ownership allows individuals to own their properties (e.g. flats or houses) outright, while also sharing ownership of common areas and facilities, such as gardens, hallways and parking spaces. Unlike leasehold ownership, where the leaseholder rents the property from a landlord for a specified period, commonhold grants home owners permanent ownership.
How does a commonhold arrangement work?
In a commonhold arrangement, homeowners are known as unit-holders and form a Commonhold Association (CA), which assumes responsibility for managing the building. The CA’s membership is comprised of unit-holders within the commonhold and it must be registered as a limited liability company, with the unit-holders making decisions regarding maintenance, repairs and insurance.
Commonhold vs leasehold
While both commonhold and leasehold involve shared living spaces, there are significant differences between the two;
- Ownership: In a commonhold, homeowners own their specific units and share ownership of common areas. Leaseholders, however, do not own any of the land and essentially rent the property for the duration of the lease.
- Ground rent: Commonhold properties do not incur any ground rent, whilst leaseholders typically pay ground rent to the freeholder, which can also increase over time.
- Management control: Commonhold gives homeowners much greater control over property management through the CA, whereas in leasehold blocks management decisions are made by the freeholder or their managing agent and not home owners.
Commonhold vs Right to Manage
Both commonhold and Right to Manage (RTM) provide property owners with a voice in management but differ fundamentally. RTM allows leaseholders to manage their building without purchasing the freehold and without having to prove fault on the part of the landlord, enabling them to form a company that takes over certain management responsibilities. In contrast, commonhold is a complete ownership structure, allowing homeowners to own their units outright and share ownership of common areas.
There are a number of key factors relating to the lack of adoption of the commonhold regime, including;
- Financial barriers: Many mortgage lenders are reluctant to fund commonhold properties due to lack of awareness.
- Developer preference: Leasehold structures are often more financially advantageous, permitting retention of the freehold and thus generating ongoing revenue through ground rent and management fees.
- Coordinating challenges: Converting existing leaseholds to commonhold requires significant coordination and can be both challenging and costly.
Looking ahead
The Law Commission published its consultation report on commonhold in July 2020, and made amongst others the following recommendations with a view to invigorating commonhold in the UK such as;
- Simplifying the process for converting leasehold properties to commonhold.
- Providing clearer governance guidelines and improved dispute resolution processes.
- Improving mortgage lenders’ confidence in commonhold.
- Enabling commonhold to be used for larger, mixed-use developments, which include both residential and commercial properties, by reducing regulatory hurdles to encourage developers to adopt commonhold.
With a view to implementing the Law Commission recommendations, the Draft Leasehold and Commonhold Reform Bill to be published by the Government aims to tackle issues in leasehold arrangements and promote commonhold as a viable alternative. However, it will not be without its challenges as participators get to grips with the various aspects of the commonhold regime, current or revised.
Anushka Nicholas, Head of the Leasehold Enfranchisement team at Blacks Solicitors
