Commonhold: Bringing Homeownership into the 21st Century (with a bit of recycling)

Leasehold has certainly had a lot of bad press in recent years – from a litany of legal cases brought over unreasonable service and administration charges to the live subject of developers selling new build leasehold homes with crippling ground rents – it has come under scrutiny and criticism from pressure groups, the media, politicians and practitioners alike and is now firmly on the Government’s agenda.

As part of their, the Law Commission has included ‘Residential Leasehold’ and ‘Unfair Terms in Residential Leasehold’ as part of their 13th Programme of Law Reform.

Leasehold is defined by an unprecedented array of Parliamentary Acts and an incalculable number of leases in varying forms making it very difficult to understand and navigate safely for both leaseholder and landlord. Frankly, I am not surprised that Leasehold is under the spotlight but am surprised at how long it has taken.

I have lost count of the number of hours spent explaining Leasehold to clients. Particularly, to foreign clients who are used to ‘property ownership’ meaning just that. The reality is that when you ‘buy’ a Leasehold property, you are not really buying the property, you are buying the lease to which the property is subject.

If I were to say to you:

“You are buying a tenancy agreement over a depreciating asset with an upfront payment of £500,000 for a limited term of years during which you will have to pay additional rent including a service charge which will probably be thousands of pounds a year. At the end of the term, you will have to return the property to the landlord with no compensation irrespective of the money you have spent to maintain the property over the years.”

Would you not think twice about buying it? So, where do we go from here?

It seems there is little that can be done with existing leaseholds in England and Wales of which there are approximately 4 million (2.8 million flats and 1.2 houses). Those leaseholders still have the option of triggering the statutory procedure to purchase their Freehold.

However, an alternative to Leasehold already exists for new developments. The Commonhold and Leasehold Reform Act 2002 introduced Commonhold.

Under Commonhold, properties are known as ‘units’. The units are Freehold and the owners are called unit holders. Every part other than the units are common parts. The common parts are owned by a Commonhold Association – a limited company set up to own and manage the common parts. Each unit holder must become a member of the company. A unit holder is therefore both the freeholder of their unit and a shareholder of the Commonhold Association.

The common parts are managed in accordance with the terms of a prescribed form Commonhold Community Statement which comprises all the rights and obligations of the unit holders and defines the extent of the common parts. It incorporates a dispute resolution process and is binding on all unit holders who are also able to enforce obligations against other unit holders.

Similar tenures exist around the world including the Australian Strata Title and the American Condominium which have themselves been through reform to improve and perfect.

The introduction of Commonhold in 2002 failed (with only around 20 Commonhold developments in England and Wales today) due to its incongruity with the law governing positive covenants, a lack of both information for the public and drive and commitment from Government. This resulted in the majority of lenders refusing to lend on Commonhold. However, all of these things can be corrected and with a faltering leasehold system, the time has come to bring homeownership into the 21st century and breathe new life into Commonhold.

For advice on all aspects of Leasehold and Commonhold, please contact Dominic Danvers on 020 7703 5034 or ddanvers@meaby.co.uk.

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