Law Commission Report on proposed changes to Commonhold

Summary

On 21 July 2020 the Law Commission published its reports on Leasehold Enfranchisement, Right to Manage and Commonhold. The common theme in all three reports is to make each process simpler, quicker, more flexible and to reduce costs for leaseholders. This Law-Now looks at some of the key recommendations in the Commonhold report. While commonhold was introduced over 15 years ago, it has hardly been used and the Law Commission seeks to make commonhold a preferred alternative to residential leasehold.

Context

The legal framework for the commonhold ownership of land in England and Wales, contained in the Commonhold and Leasehold Reform Act 2002, came into force in September 2004.

Commonhold allows for freehold ownership of a single property (known as a commonhold unit and an example being a flat) within a larger development, plus membership of a company (the commonhold association) that owns and manages the common parts of the development. This ensures that the unit-holder (such as the flat owner) is, together with their fellow unit-holders, in control of the development.

Since the unit is owned freehold, this would overcome the problems of having only a leasehold interest. In particular, the value of the interest depreciates over the lease term and the landlord controls the management of the development. With leases there may be a requirement to pay ground rent and the lease may be forfeited. Commonhold overcomes those concerns.

Both commercial and residential developments (and mixed-use ones) may be commonholds with exceptions.

While commonhold seemed to offer many benefits, it has not been popular over the last 15 years, highlighted by the fact that there has been less than 20 commonhold developments. Explanations for this include that the procedures, for example to establish the commonhold, are complex and that some lenders are unwilling to lend on commonhold security. Also currently, conversion from an existing leasehold building to commonhold is almost impossible to achieve as it requires the unanimous agreement of nearly every interested party in the building, including the freeholder, all leaseholders and every lender with a mortgage secured over the properties. Commonhold may therefore currently be out of reach for most leaseholders.

The Government sees commonhold as a viable alternative to leasehold ownership, especially of flats and asked the Law Commission to recommend reforms to reinvigorate commonhold so that it may offer a workable alternative to leasehold, for both existing and new homes. The Law Commission in 2018 issued a call for evidence and a consultation paper on commonhold, examining why it has not succeeded, how the position can be improved and suggested proposals for reform.

Law Commission’s Report

The Law Commission issued its final Report “Reinvigorating commonhold: the alternative to leasehold ownership” on 21 July 2020, making various recommendations that seek to make commonhold a preferred form of homeownership to residential leasehold. While commonhold has applications beyond residential leasehold, it is the homeowner who is the clear focus of the Government and the Law Commission.

The recommendations are intended to overcome the legal problems with commonhold that are undermining its use and include the following:

• Make it cheaper, quicker and simpler for existing leaseholders to convert to commonhold. This would for example enable conversion to commonhold without requiring the agreement of the freeholder, every leaseholder and mortgage lenders, but there are safeguards to protect those who have not agreed. Conversion to commonhold should be possible where at least half of the leaseholders in the building support the conversion.
• The Law Commission recommends that the Government works with lenders to ensure they will accept the automatic transfer of their mortgages from the leasehold title to the commonhold on conversion, on the basis that commonhold offers lenders improved security, since it is over a permanent freehold as compared to a time-limited, determinable leasehold.
• Flexibility for unit-owners (the freehold owners of commonhold units, known previously as unit-holders) to change the commonhold’s rules, but providing greater protection for those affected by the change.
• Enable commonhold to be used for larger, mixed-use developments, accommodating not only residential properties but also shops, restaurants and leisure facilities. The new commonhold would be more flexible to accommodate a greater variety of developments. The Law Commission recommends a new tool – “sections” – that will enable developers to separate out the management of different types of interest within a commonhold, such as commercial and residential interests. Sections can be used to ensure that only unit-owners within a particular section are able to vote on matters affecting that section, and only those who benefit from a particular service are responsible for paying for it.
• Allowing shared ownership leases to be granted in commonholds.
• Give unit-owners a greater say in how the costs of running their commonhold are met and ensure they have sufficient funds for future repairs and emergency works by requiring a reserve fund.
• Providing greater certainty to lenders that their interests will be protected.
• Make it easier to take action against those who fail to pay their share of the commonhold’s costs.
• Ensure commonholds are well maintained, kept in good repair and properly insured, thereby improving the experience of the unit-owners, and there are new powers to replace directors who do not comply with the rules of the commonhold.

The Law Commission has also provided an open letter to the lender community outlining the steps it has taken to address concerns raised by mortgage lenders in relation to commonhold.

The Law Commission has now made its recommendations and it is for the Government to decide whether commonhold should be compulsory (in all or some circumstances), incentivised, or left optional.

The Report can be accessed here and a Summary here.

Please also see our Law-Now articles: Law Commission Reform: Buying your freehold or extending your lease and The Law Commission recommends a simpler, cheaper and more flexible approach to RTM Claims.