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Commonhold Ownership: the future? A viable alternative to leasehold ownership?

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In January 2021 the Ministry of Housing, Communities and Local Government revealed its plans for reform in the residential leasehold market. This included the formation of the Commonhold Council to help reinvigorate commonhold and prepare the “market for the widespread up-take of commonhold”. So then, what is commonhold and what does the future hold for it?

What is Commonhold?

The concept of commonhold was created by the Government in 2002 to offer an alternative to leasehold ownership. It allows for a freehold estate (i.e. a block of flats) to be divided up into ‘units’, which are owned individually by unit holders, and ‘common parts’ which are owned collectively by the unit-holders through a ‘commonhold association’. This commonhold association is a company limited by guarantee to which all the unit holders are members.

What are the pros and cons?

In the UK, long leases have traditionally proved the only viable way of delivering individual ownership of interdependent properties, such as a block of flats. However, leaseholds have a number of perceived problems which commonhold avoids:

  • Leaseholds offer a time-limited interest which depreciates in value over time; commonholds are equivalent to a freehold and should only appreciate.
  • The management of a leasehold is generally the responsibility of the landlord, or their managing agent. This means that leaseholders have little or no say in the management functions of the building. The commonhold association owns and manages the common parts of a commonhold; unit holders therefore have far greater influence on property management and its relative cost.

However, commonhold never found success; it relied on uptake by developers as it is practically impossible to convert existing leaseholds to commonhold. The conversion requires the consent of all the parties with a significant interest; this includes the freeholder, all the leaseholders and their mortgage lenders. There is no incentive for developers to build commonholds and as a result fewer than 20 commonholds have been registered in the 15 years since its creation.

What does the future hold?

The Law Commission has released a report into the reinvigoration of commonhold, and proposed a number of ways in which it could be reformed. This includes recommendations that:

  • Freeholder’s consent should not be required. If a freeholder does not consent to the conversion of the property to a commonhold then the leaseholders should be able to collectively acquire the freehold so that they can convert it;
  • Conversion should not require unanimous consent by the leaseholders. Conversion should be able to take place if at least 50% of leaseholders vote in favour of it, and lender’s consent should not be required.

Further to this, the Government is attempting to encourage the development of commonhold by disincentivising the development of leasehold property. For example, the Leasehold (Reform Ground Rent) Bill, which is currently in its 1st reading in the House of Commons, will introduce zero ground rents; the ability to charge high ground rents on leaseholds is a major financial incentive for developers.

We must wait to see if the Government actions the Law Commission’s recommendations, and whether they can successfully incentivise developers. However, it does appear that commonhold ownership has a place in our future, with the Law Commission even saying that they would “go as far as to say that it should be used in preference to leasehold, because it overcomes the inherent limitations of leasehold ownership”.

Written by Tom Spratley – Trainee Solicitor

If you have an enquiry regarding matters discussed in this article, please contact a member of our property department.

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