Posted by Caroline Preist, Partner
Is commonhold making a comeback?
The Commonhold Reform Act 2002 did not result in the sweeping changes that were perhaps anticipated at the time. There are fewer than 20 commonholds in existence which have been created since the legislation came into force.
Commonhold is a structure which enables the freehold ownership of flats and offers an alternative way of owning property and it avoids the shortcomings of leasehold ownership.
Why are we talking about commonhold? You may wonder if there have been so few commonholds created, why commonhold is back on the agenda.
There has been much criticism of leasehold and in addition to changes to leasehold, government is considering alternatives.
The Government has set out the following policy objectives following the negative publicity on leasehold:-
- to promote transparency and fairness in the residential leasehold sector
- to provide a better deal for leaseholders as consumers, and
- as part of the Law Commissions agenda, there has been a consultation on leasehold enfranchisement which closed at the beginning of 2019. The commonhold consultation is now under way, with the right to manage consultation due to follow shortly.
What is commonhold?
The main difference between leasehold and commonhold is that the freehold of an individual property is owned by the owner of that property; so in a block of flats, there are a number of units and each one is a freehold unit owned by the unit owner. There is then a Commonhold Association of which each unit owner is a member. The unit owner is a member of the Commonhold Association and is able to vote on decisions which affect the commonhold.
There is a Commonhold Community Statement (“CCS”) which defines the physical boundaries of each commonhold unit and sets out the rights and obligations of each of the unit owners and also of the Commonhold Association. There are also Articles of Association which include information on how Directors are appointed, Director’s duties, members meetings and unit owners’ votes.
A move to commonhold ownership would be a culture change. The view on leasehold ownership is very much a “them and us” whereas commonhold is “us and ourselves”.
The CCS will be a standard set of rules for all properties and it is proposed that the content would be prescribed by statute.
The advantage of commonhold over leasehold is that as there is a freeholder for each individual unit and therefore, the units cannot be forfeited. However one issue that the Law Commission is currently considering is how to deal with issues surrounding payments of non-service charge by the members of the Commonhold Association and whether this is done by a money claim and then a charge on the property, or an alternative. Non-payment of service charge by one individual unit owner will affect the overall management of the commonhold.
Why has there been so little take up on the current commonhold legislation?
The current legislation has gaps in it which has resulted in mortgage lenders being unwilling to lend on commonhold properties and there has been a lack of consumer and sector awareness. There also remains financial incentives for developers to use leasehold rather than commonhold, particularly with ground rent and also the ability to recover money from lease extensions in the future. The ability to covert from leasehold to commonhold is also fraught with difficulties.
What happens next?
The Law Commission has published its consultation paper and its terms of reference is for commonhold to be a viable alternative to leasehold in respect of home owners and existing leasehold home owners. The Law Commission’s remit is to look at how to deal with the creation of new commonhold properties, converting existing leasehold properties to commonhold properties and also for building developments in phases and how this can be done a commonhold basis.
The Law Commission is considering legislation so that the Articles of Association for the commonhold are prescribed by statue and can only be amended in limited circumstances. The legislation is likely to prescribe the rules that are to be included in the CCS. The Law Commission is also considering an automatic statutory charge over commonhold units for payments of commonhold costs when these have not been paid and that this charge should take priority including over mortgages.
The consultation has now closed and the Law Commission are currently considering the responses.
In the meantime, if you require any assistance with leasehold matters including collective enfranchisement, the purchase of the freehold of your house, a lease extension or service charge issues, we have a specialist team who can help. Please contact Sarah Taylor on:
01225 730 151 Email us