Can commonhold be reinvigorated?

The Law Commission has issued a substantial consultation seeking to improve the manner in which the commonhold system operates and to persuade existing leaseholders to move to a commonhold structure.

Background

Commonhold is an alternative to long leasehold ownership of property. Instead of a landlord and a number of tenants, the tenants collectively own their property and have the equivalent of a freehold title in their flats or units. This form of ownership overcomes a number of shortcomings in leasehold title, not least that leases are a wasting asset, and seeks to ensure that there is collaborative ownership of the property. Commonhold titles are created using standard rules and regulations that govern the ownership of the property and each unit in it.

However, despite being introduced in 2002, commonhold has not proved popular. It is widely perceived as being too inflexible with a one-size-fits-all-structure. Lenders do not like it, developers have been reluctant to use it and it is virtually impossible to convert an existing title to a commonhold title. In the past 15 years, only 20 commonhold developments have been created.

To overcome the actual and perceived shortcomings in commonhold, the Law Commission has launched the current consultation. Responses have to be made by 10 March 2019.

Converting existing titles to commonhold

At present, the landlord, every tenant and lender and others with a significant interest in the building, have to consent before an existing title can become commonhold. Practically, this is impossible to achieve. The Law Commission proposes a model based on the qualifications for collective enfranchisement where, if a majority of tenants wish to convert to commonhold title, the landlord and others will be bound to participate in the process. Provision will need to be made for leaseholders who do not want, or cannot afford, to participate. The consultation paper sets out the options that may be available to such leaseholders. Under the Law Commission’s proposals, it would be residential tenants who would control this process. The position of non-residential occupiers of a building needs further consideration as part of the proposed changes.

Creating new commonhold structures

One of the biggest difficulties with the existing commonhold legislation is that it adopts a one-size-fits-all approach to the commonhold system. Particularly for mixed-use and complex residential developments, where different tenants will contribute to different elements of the services provided, the current rules do not allow separate “pools” of costs to which different commonhold owners contribute. The Law Commission proposes to change this. In addition, to enable commonhold to be more easily used with mixed-use developments, the Law Commission suggests that it should be possible for there to be separate classes of membership within a commonhold structure so that, for example, the residential tenants cannot vote on proposals or costs for which the non-residential tenants are responsible and vice versa.

Robustness of commonhold associations

Overall title to a property will be owned by a commonhold association. Lenders have long been concerned about the robustness of commonhold associations and what happens if the association becomes insolvent, changes its rules, needs to raise emergency funds for repairs or cannot recover costs from the individual owners of the property. The Law Commission proposes a raft of measures to make commonhold associations more robust.

Different ownership structures

Once a commonhold has been created, residential leases cannot be granted for a term that exceeds seven years. This makes commonhold title unsuitable for use for social housing providers who need to grant shared ownership leases and also prevents the use of some Sharia financing products. The Law Commission proposes creating exceptions to the ban on long residential leases for these purposes. The consultation paper does not address how equity-release products will sit within the commonhold system where a homeowner sells their property to an equity release provider for a premium and receives a lease for life in return. This needs to be addressed alongside other situations where long leases may be required.

Conclusion

The Law Commission is making a serious attempt to address the shortcomings in the commonhold system in an attempt to increase its attractiveness to homeowners, developers, lenders and others.

Commonhold is based on the fundamental assumption that community ownership, and not business ownership, is the best model for the ownership of flats. In many cases this will be correct. However, where you have investors with buy-to-let flats who want their investment to be professionally managed with no day-today involvement or responsibility, or you have commercial tenants who want their parts of the building to be owned and run on a business model, the Law Commission will have its work cut out to persuade landlords to adopt, and tenants to accept, commonhold.

The Law Commission has said “Commonhold should not be looked at through the lens of leasehold. Commonhold involves a culture change. It moves away from an ‘us and them’ mindset, towards an ‘us and ourselves’.”  Changing the law on commonhold is necessary, but changing the law will be a lot easier to do than changing the culture that still sees leasehold ownership as being more flexible and adaptable to the needs of many different types of development.

The Law Commission consultation paper can be downloaded here. Responses are due by 10 March 2019.