Your long read: Does commonhold make common sense?
With further leasehold reform on the horizon, Senior Public Affairs Officer, Eleanor Bateman, takes a closer look at commonhold – the Government’s preferred tenure for leasehold properties – to see whether it offers a better alternative, and what the future of property ownership might look like.
The leasehold system has come under increasing scrutiny for its time-limited and ‘feudal’ nature, with leases owned for a limited number of years and freeholders retaining an interest in the property.
Many believe this results in a mismatch of power, and recent practices such as ‘fleecehold’ – where homeowners face excessive and escalating service charges and/or ground rents – have fuelled calls to abolish the tenure altogether. This has led to renewed interest in commonhold as an alternative.
What is commonhold?
First proposed in 1987 and introduced two decades ago by the Commonhold and Leasehold Reform Act 2002, commonhold is a distinct tenure.
It enables individual units to be privately owned while shared areas are owned collectively by the unit owners. These are managed through a commonhold association comprised of the individual owners or a managing agent. This model eliminates the role of the freeholder and grants owners the ability to hold their properties outright in perpetuity.
Despite its legal foundations having been laid more than twenty years ago, commonhold has yet to gain traction and just a handful of commonhold developments exist.
Several factors contribute to this, including hesitancy from mortgage providers to lend on commonhold property and uncertainty about the impact of commonhold association insolvency.
In its report on leasehold reform, which included recommendations on commonhold, the Law Commission also noted that developers lack incentives to invest in commonhold due to the absence of long-term income potential.
Is commonhold used elsewhere?
There are examples of similar systems around the world, including strata title (first adopted in Australia) and condominium (used frequently in the U.S. and Canada). But Scotland offers an interesting point of comparison, having implemented a system similar to commonhold long before England and Wales.
Most property in Scotland is owned as a heritable title, the equivalent to freehold in England and Wales. But nearly a quarter of its housing stock consists of flats, which are managed through a different framework.
Legislation passed in Scotland fifty years ago prohibited the creation of residential leases longer than 20 years, with certain exceptions.
By 2012, leasehold was entirely abolished and any lease exceeding 175 years was automatically converted into a heritable title or outright ownership. This move was not universally welcomed, but signalled a significant shift towards simplifying property ownership.
Challenges of commonhold
Proponents of commonhold argue that it is beneficial for individual owners because it enables outright ownership and removes any systemic conflict of interest between unit owners and block owner – they are one and the same.
However, there are notable risks and barriers that have prevented commonhold from being adopted more widely, some of which are evident in Scotland.
While Scotland’s system is more advanced than that in England and Wales, it is not without its flaws.
The Tenements (Scotland) Act 2004 did not establish a commonhold association equivalent and reforms assumed that all property owners would actively cooperate and contribute to on-going property maintenance.
This lack of a central authority (as well as the absence of any obligation to sustain a reserve fund) has led to failures in tenement maintenance and presents a significant challenge for energy efficiency improvements, which require block-wide coordination to complete.
Scotland has some of the most ambitious energy efficiency targets in the UK, but the latest Scottish House Condition Survey suggests that nearly a third of tenements have an Energy Performance Certificate (EPC) rating of D or lower.
For comparison, just over a quarter of purpose-built flats in England have an EPC rating of D or lower.
A recommendation by the Scottish Law Commission saw the introduction of the Development Management Scheme (DMS) which enables owners to create an association to govern the ownership of common parts without the need for Companies House reporting (as is the case in England and Wales).
DMS take-up has been slow, due to the need for unanimity among owners to establish it, but new developments make use of the mechanism routinely.
Is commonhold the solution?
Tenement law in Scotland demonstrates the need for a robust property management mechanism that does not place additional burdens on individual owners.
While commonhold provides lifetime ownership of a freehold title and removes any requirement to pay ground rent, it does not guarantee effective property management or service charge savings.
In fact, data suggests that those living in resident-run buildings pay no less service charge than those managed by a professional freeholder.
Critical to the success of commonhold is cooperation and theoretical benefits will not be sufficient to overcome practical challenges.
Without coordinated reform, the risks associated with commonhold are likely to persist, and though commonhold can work well, if things go wrong – a unit owner failing to pay their contribution for repairs, for instance – the burden lies with members of the association to remedy them.
What's likely to happen next?
The Government has committed to a draft Leasehold and Commonhold Reform Bill, as well as implement the Leasehold and Freehold Reform Act passed under the last government.
However, a recent legal challenge arguing that elements of the Leasehold and Freehold Reform Act are incompatible with the Human Rights Act 1998 could delay or even prevent the publication of secondary legislation needed to bring reforms fully into force.
- Keep an eye on our news site and social media channels for further updates.
