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Commonhold: what do I need to know about it?

Insight

Residential housing

Last week, Angela Rayner confirmed to the Housing, Communities and Local Government Committee that the Government would push forward as quickly as possible this year on its intention to make commonhold (as opposed to leasehold) the default tenure for flats. Whilst significant new legislation will be required if this is to become a reality, the Government appears determined, suggesting that 2025 could be the year for commonhold.

What is commonhold?

  • Commonhold is a form of freehold ownership that was introduced over two decades ago by the Commonhold and Leasehold Reform Act 2002 as an alternative to long leasehold ownership. Fewer than 20 commonhold developments have been registered during this period so uptake has been very limited.
  • Each flat in a commonhold building is referred to as a unit and as the owner of a unit you hold the freehold to your unit. In a mixed-use development, each commercial premises will also be a unit.
  • The freehold of the common parts (ie the structure of the building, all internal hallways, bin stores, staircases, lifts etc and any external grounds and gardens) is owned by the commonhold association (a company limited by guarantee).
  • All unit holders must be a member of the commonhold association so will each own a share in the freehold of the common parts (through the commonhold association). This can be differentiated from a share of freehold (where lessees own the freehold through a company) as not all leaseholders will necessarily be a member of the company that buys the freehold.
  • The commonhold association is responsible for the management and upkeep of the building (meaning it assumes the role of the traditional leasehold freeholder/management company) and the relationship between the commonhold association and the unit holders is governed by a prescribed form commonhold community statement (CCS).
  • The CCS sets out the standard rules governing the use and management of each unit and the rights and obligations of the commonhold association and each unit holder. Since the CCS is in a prescribed form, the same rules apply to every unit in every commonhold development. This contrasts to a leasehold arrangement where the rules depend upon the drafting of a particular lease.
  • The rights and obligations of unit holders and the commonhold association are mutually enforceable, which means a unit holder can enforce the obligations contained in the CCS on another unit holder directly. This would not be possible in a typical leasehold structure where enforcement action against another lessee would usually need to be taken by the landlord.
  • Each unit holder contributes to the costs incurred by the commonhold association for the management and maintenance of the building. This is the commonhold assessment (which is akin to the service charge in a traditional leasehold structure).

What are the main challenges with commonhold currently?

  • Since there are so few commonhold developments, the structure is poorly understood by purchasers and lenders.
  • Lenders do not generally see commonhold as a secure asset to lend against.  This is largely driven by concerns over the solvency of the commonhold association; there is no right to forfeit a unit if the unit holder fails to pay its share of the commonhold assessment and there is no ability for the commonhold association to raise funds or draw from a reserve fund to cover costs. Concerns over the ability of the commonhold association to effectively run and maintain a building are also a factor here. Currently only about a quarter of lenders covered by the UK Finance Mortgage Lenders’ Handbook (Handbook) state they will lend on commonhold and, as a minimum, these lenders will only accept commonhold if the requirements set out at 5.9.2 of the Handbook are satisfied (this covers insurance and a requirement that the CCS must state that unit holders are to repay their mortgage if the commonhold is voluntarily terminated, amongst other things).
  • Currently, the unanimous consent of the freeholder, all leaseholders and lenders is required to be able to convert a leasehold scheme to commonhold. This is a significant barrier, particularly given commonhold ownership remains unfamiliar and therefore less attractive. A key appeal of commonhold for occupiers is the ability to have control over the management of their building. However, this control and management can far more readily be achieved by leaseholders joining together to exercise their right to manage or right to buy the freehold of their building.
  • Commonhold does not give developers the ability to retain sufficient control of and rights in the commonhold association throughout the development process. This does not work on a practical basis; a developer needs to be in control of all sections of a scheme where these are still undergoing development.
  • The owner of a residential unit is not allowed to let their unit for a premium or for a term of more than seven years. This means that residential units will either be owner-occupied or let on short-term lettings.
  • The prescribed form commonhold documents are not suitable for all types of schemes and it is hard to see how a single set of documents will ever be able to work across the board. The nuances of a small single building residential scheme will be very different from those of a large mixed-use scheme with multiple blocks to be delivered across a number of development phases.
  • Finally, more widespread adoption of commonhold seems unlikely unless and until the government takes steps to mandate the use of the commonhold title structure. The government has said that it will act to restrict the sale of new leasehold flats. This would indirectly mandate the use of commonhold for new developments. It remains to be seen whether any actions would be taken to mandate the conversion of existing leasehold structures in order to achieve the government’s stated aim of making commonhold the “default tenure”. So far, the only specific proposal is that the conversion from leasehold to commonhold is made easier (by removing the requirement for unanimous consent) as discussed above.

Is commonhold the answer to the leasehold “problem”?

As a commonhold unit is a freehold interest in land it will not diminish in duration in legal terms and cannot be forfeited. No ground rent will be payable and there will be no need to renew or extend a commonhold interest, as it is permanent. Further, all unit holders will be governed by the same set of rules and unit holders can enforce against one another directly in an event of default. These are all seemingly positive points for flat owners.

However, for a commonhold to work effectively, it still relies on the people living in and managing the commonhold building to abide by the regulations set out in the commonhold community statement, to work in cohesion together and to positively engage in the management of the commonhold. This has been referred to as “the human factor” and is a key issue both in leasehold and commonhold ownership; that is, a flat or unit owner’s experience remains dependent upon the approach taken by the fellow residents. Unless all of those living in the building are prepared to engage with and invest time and money into the building, there is a risk that the capital value of the building and flats within it will diminish. This means that many of the management challenges currently faced by some leaseholders are likely to persist under commonhold.

Is there still a place for leasehold flat ownership?

If all flats are to be freehold it is hard to see a way that this will not upwardly impact on value; there is no diminishing asset and there will be no retained or deferred value by way of freehold reversion which will all feed into the price of the asset. This is not necessarily without negatives; buyers may be priced out of the market as a result which may mean more people living in rented property for longer before they can buy their first home.

Leasehold also offers choices to tenants that will fall away with commonhold. For example, there are flat owners that would prefer for the freehold of their building to remain in the hands of a third-party professional landlord with the contacts and expertise required to efficiently manage a building. The ability to live in a flat without having to assume any liability associated with owning the building and without having to engage on the running of the building can be seen as a positive. As it stands under the leasehold system, even if qualifying tenants in a building collectively exercise their right to manage or right to buy the freehold of the building, it is possible for a tenant to choose not to partake in this process.

Conclusion

The Government faces a monumental task as it seeks to move away from traditional leasehold ownership structures in favour of commonhold for residential and mixed-use developments and will need to resolve the current challenges with commonhold (as examined in this article) in a manner that is acceptable to lenders, investors and developers if it is to succeed. It seems likely that the Government will need to mandate the adoption of commonhold if it is to make commonhold the default tenure.

At the end of last year, the Government stated there would be a consultation on commonhold reform. It is expected that the consultation will be concluded by the middle of this year and draft legislation released shortly thereafter, with a view to the changes becoming law by the end of this year. The Government appears resolute to reform the “feudal” leasehold system as soon as is possible.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2025

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About the authors

Annabel Dean lawyer photo

Annabel Dean

Partner

Annabel advises on all aspects of the acquisition and management of real estate, particularly residential property. Her clients include individuals, trustees and landed estates. Annabel also has a great deal of experience acting for lenders taking security over property.

Annabel advises on all aspects of the acquisition and management of real estate, particularly residential property. Her clients include individuals, trustees and landed estates. Annabel also has a great deal of experience acting for lenders taking security over property.

Email Annabel +44 (0)20 3375 7206
Camilla Tunnicliffe lawyer

Camilla Tunnicliffe

Knowledge Lawyer

Camilla is a Knowledge Lawyer in the Residential and Secured Lending team. Camilla has many years' experience in both residential and commercial property. She has acted for a variety of clients on all aspects of the development, acquisition and management of real estate.

Camilla is a Knowledge Lawyer in the Residential and Secured Lending team. Camilla has many years' experience in both residential and commercial property. She has acted for a variety of clients on all aspects of the development, acquisition and management of real estate.

Email Camilla +44 (0)20 3375 7544
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