As reported last week in various media outlets, the Government appears to be ramping up their plans to reform the ownership of leasehold properties, including a proposal to replace the current leasehold system with commonhold ownership.
Leasehold ownership has faced increasing criticism for years, primarily due to its reputation for escalating service charges and unfair management practices, which are commonly considered to be detrimental to owners and can make purchasing leasehold properties a less desirable option for prospective buyers.
It seems likely that any reforms implemented by the Government will closely follow at least some of the recommendations published in the Law Commission’s report from July 2020, ‘Reinvigorating Commonhold: The Alternative to Leasehold Ownership’. The report was issued by the Law Commission in response to a request for them to investigate the reasons why the introduction of commonhold ownership, by the Commonhold and Leasehold Reform Act 2002, did not take hold (at the time of their report, only 20 commonhold developments had been established in English and Wales since 2004).
In order to explore the possible changes that could be made in the future, this blog considers the Law Commission’s recommendations and evaluates what they could mean for the future of property ownership.
What challenges are presented by the Leasehold system?
The current system of leasehold ownership applies to the vast majority of flats, and some houses.
With leasehold property, owners will hold a Lease of the house or flat that they occupy, with a separate entity (either a person or a company) owning the freehold interest. The lease will exist for a fixed number of years (known as the ‘term’), and once this has expired, ownership of the property will revert back to the freeholder. Leases are commonly granted for a term of 99, 125, 250 or 999 years, and are therefore known as a ‘deteriorating’ asset – the remaining length of the lease will reduce each year. The term can be extended, but this can be costly and time-consuming.
Most leases will include provisions requiring the leaseholder to pay annual fees to the freeholder (a ‘Ground Rent’). This is often nominal, but some leases contain onerous ground rent provisions, meaning that the annual fee may become expensive in the future. Since June 2022 there has been a ban on ground rent provisions being included in new leases, but these changes are not retrospective, so ground rents still apply to the majority of existing leases.
A lease may include restrictions on the use of the property, and prohibitions on alterations. As the freeholder may be a person who is not living in the building, or a private company, there can also often be little transparency and control for a leaseholder in the service charges that they are required to pay for the maintenance of the building day-to-day.
What is ‘Commonhold’?
Commonhold is a form of property ownership that is similar to structures used across the world. The commonhold system provides a mechanism to manage the relationship of separate, individually owned properties, whether they are in a block (i.e. flats) or otherwise.
The freehold of each property in a commonhold system is owned by a ‘unit-owner’, and anyone who becomes a unit-owner will also become a member of a company which owns and manages the common parts of the estate. This company is called a ‘Commonhold Association’, and in practice this would work similarly to an estate management company that is owned by residents as shareholders. As members of the commonhold association, members can vote on decisions which affect the development (such as matters involving works and maintenance).
Each commonhold association would have their own ‘commonhold community statement’, which acts as the association’s rules governing how they are operated in practice and sets out the responsibilities and rights of unit owners.
The benefits of commonhold ownership include allowing the unit-owners to own their properties forever (without having a deteriorating asset in the form of a lease), giving unit owners more control over the management of their buildings, and providing increased flexibility in decision making.
Key recommendations from the Law Commission
The original proposals for implementing commonhold ownership did not take hold, so the Law Commission’s report includes an analysis of the reasons behind this and makes recommendations as to how the challenges can be overcome.
One of the biggest stumbling blocks preventing commonhold from taking off before was its perceived complexity and lack of flexibility. To overcome this, the Law Commission recommended standardising documents to simplify the process for stakeholders (including buyers, lenders and solicitors), clarifying rules on service charges to reduce disputes, and strengthening owners’ rights by ensuring that commonhold associations are required to operate fairly and transparently.
The proposals also include offering financial and legal support to current leaseholders who wish to convert to commonhold ownership. This will ensure that switching to commonhold will become attainable and achievable for a greater number of leaseholders.
Another major hurdle which the report identifies and seeks to alleviate is the approach of mortgage lenders to the new system of commonhold ownership. The Law Commission circulated an open letter to mortgage lenders in July 2020 explaining the benefits of the commonhold system and offering reassurance to lenders that they would continue to obtain adequate security over properties that are held on a commonhold basis. One recommendation is that the mortgage lender should be entitled to apply to the First Tier Tribunal for a professional director to be appointed, where no unit owners are willing to become a director of their commonhold association. This will allow the lender a certain level of control over maintenance and repairs, which will reduce the risk of the building falling into disrepair and subsequently jeopardising the lender’s security.
What Next?
It remains to be seen whether commonhold will indeed be well and truly reinvigorated, however the Government certainly appears to have expressed strong support for the reforms. Whilst the commonhold system goes some way to removing the drawbacks of the leasehold system, any reforms would require unequivocal buy-in from leaseholders, buyers, lenders and developers before they take hold. Certainly, from the perspective of property owners and their buyers, the commonhold system has the potential to revolutionise property ownership and could offer a much fairer and more flexible home ownership option for thousands of people.
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