Last week the Government announced its commitment to commonhold – a welcome move as the leasehold reform measures passed last year did not include this. Commonhold is a better form of tenure because there is no longer a lease that decreases over time. The owner owns the property outright, rather than merely a time-limited right to occupy it.
It was first introduced as part of Labour’s 2002 leasehold reforms, but take-up was low. Developers no doubt preferred to sell leasehold properties with their lucrative ground rent and service charge income, but there were also flaws in the legislative framework.
In 2020 the Law Commission revised and updated the commonhold framework to accommodate different types of development, including complex mixed use – where different commonhold sections would be created, to be managed by respective owners.
How are decisions made?
Each resident would be a member of the Commonhold Association, which is required to seek input from members on management of the building. It can choose to buy in external help from a managing agent but unlike with leasehold, that agent will be accountable directly to the Association, rather than an absent and unaccountable freeholder. The Association will be required to set up a reserve fund to cover general maintenance as well as unexpected works.
How can a leasehold property convert to commonhold?
In short the first step is to buy the freehold, and this will require the consent of 50% of leaseholders in a building. It appears that without clearing this hurdle the process could not continue. However once the freehold is purchased there remains the question of what the status of the ‘non-consenting leaseholders’ will be. The Law Commission offers two alternatives and the Government intends to hold more consultations on these.
One option is that the existing freeholder is required to remain the landlord (take a leaseback) and become the head lessee for those leaseholders, who will continue to live in their property under the terms of their existing lease, and continue to pay any existing ground rent. They would get a 999-year lease, and conversion to commonhold would be required in the event of a sale.
However the risk here is that the lease terms may not agree with decisions made by the Commonhold Association. The example quoted is a lease that calls for painting every 5 years, while the Association may prefer every 8 years. It would also require a lot of co-operation between the Association and the freeholder regarding maintenance costs, which increases the management burden for the commonhold unit holders.
The second proposed option is that the Govt provides an upfront equity loan to non-consenting leaseholders based on the value of the property, which is paid back when the property is sold. This has the advantage of every resident having the same status, however the Govt is (unsurprisingly) not keen on the idea, but also floats the possibility of commercial lenders being willing to fill that role.