Get commonhold done!
What are Labour’s plans for commonhold? And what is commonhold anyway?
Neil Toner
Senior Consultant
020 7065 1823
Leasehold, as a tenure for home ownership, has received a pretty bad press in recent years. Many in the previous Government would have loved to be the ones to have dispatched it. But they left their tenure reforms to too late in the lifetime of the last Parliament to fully deal with such a tricky subject. They frankly ran out of the time (and possibly the political capital) necessary to push through such a revolution to its logical end. They managed to enact legislation to ‘ban’ the use of long leaseholds as a way of selling houses, but dropped similar plans when it came to flats.
Taking up the fight
Labour’s manifesto committed them to take up the fight. It said: For far too many leaseholders, the reality of home ownership falls woefully short of the dream they were promised. Labour will act where the Conservatives have failed and finally bring the feudal leasehold system to an end. We will enact the package of Law Commission proposals on leasehold enfranchisement, right to manage and commonhold. We will take further steps to ban new leasehold flats and ensure commonhold is the default tenure.
Not an easy task
To be fair to the previous Government, moving England away from the use of long leases to regulate the ownership of flats is fraught with difficulties.
For almost all of the last century, English property law has recognised just two ways of owning land. Freehold (which is, for practical purposes, full ownership of the plot of land forever) and leasehold (which is ownership for a limited period of time, with someone else owning the forever freehold above).
When the choice was just between straight freehold and leasehold, there was no real contest when it came to how to structure the ownership of a block of flats. That is because of the difficulty, in English law, of making positive obligations ‘run with the land’ (i.e. bind everyone who owns that land). Whilst there are mechanisms which can be put in place within freehold ownership to achieve that, those mechanisms are fiddly and can easily break down. Within a leasehold ownership structure, it is easy to make positive obligations automatically bind anyone who owns the flat, in favour of their landlord, and bind anyone who owns the freehold, in favour of the flat owner. And in a block of flats, where you need to agree who will maintain the common parts and insure the building and who will pay the cost of doing that, the ability to make positive obligations run is essential.
But leasehold ownership is not without its problems.
- One of the fundamental aspects of a lease is that it must have a fixed term. Historically that was often 99 or 125 years. When the lease is first granted that seems like a long time. But the clock is always counting down and, with it, the value of the leaseholder’s interest.
- And, within a leasehold structure, it is the landlord who gets to make the fundamental decisions in relation to the block. Who to insure with, how often to clean the stairwell, when to decorate the hallways and whether to replace the leaking roof. Whilst the terms of the leases, and statutory requirements, will influence what the landlord is required to do, it is the landlord who will be making those decisions within those constraints. That means that the voices of the leaseholders, who actually own the flats (which is the main reason for the building), are somewhat muted.
A third way
In 2002, the then Blair led Government saw commonhold as the solution. Commonhold is, in fact, a type of freehold ownership - rather than a new tenure altogether. It was introduced by Part 1 of the Commonhold and Leasehold Reform Act 2002. The main concepts are:
- Each flat (or ‘unit’ using the language of the Act) is owned by a unit holder as a freehold. So that is forever.
- Each unit holder is a member of a Commonhold Association. That is a company limited by guarantee. It is the Commonhold Association which makes the decisions which would formerly have been made by the landlord. And so, it is the flat owners who get to control those decisions. There is no one ‘above’ them.
- For each commonhold scheme there must be a Commonhold Community Statement. And, like any company, the Commonhold Association must have Articles of Association.
Broadly speaking, the CCS is the document that deals with the obligations of the unit holder (such as paying costs, using their flat as a home, not causing a nuisance) and of the Commonhold Association (such as insuring the block, maintaining the structure and cleaning the common parts).
The Articles of Association then govern how the Commonhold Association is run and takes decisions. Thus, giving a voice to the unit holders.
The Act is pretty prescriptive about what both the statement and the articles say – not just what issues they must cover but actually what they provide for in respect of those issues. That is intentional. The rules are intended to ensure that there is, to the extent possible, uniformity across all commonhold schemes. The theory being that that will be simpler than where we have ended up with leases, with each block having a bespoke set of terms.
0%
All that sounds great. So, what’s the problem?
The difficulty with commonhold to date is that, whilst its been an available option for two decades, it would be fair to say that it has not been widely taken up. Out of the 26 million registered titles maintained at His Majesty’s Land Registry only around 20 commonhold schemes have been established. That is, roughly speaking, 0%. There are various reasons why that might be.
- Whilst some leaseholders actively and vocally want to control the decisions taken about their block, there are many others who would rather, in practice, not to have to put in the effort that that would take. That silent majority may change their mind if a particular issue they care about crops up but, on an average day, they don’t want to engage.
- No one wants to be first. For most people, buying a property will be their biggest purchase. And when faced with the choice of buying a tenure which, whilst it has its problems, has been marketable for the past few hundred years or a tenure which is novel and has little to no track record, they will plump for ‘safety’.
- The mortgage industry in the England did not warmly welcome commonhold. Many of the big lenders will simply not lend on it. Whilst many would argue that it, in fact, provides lenders with better security than a traditional lease, the lenders remain reserved.
Commonhold definitely has its plus points. And, if you were designing a legal system from scratch, it would probably be seen as obviously superior to leasehold structures when it comes to the ownership of a block of flats. But we are not starting from scratch. We live in a country where leasehold structures are near ubiquitous for blocks of flats. So, what will Labour do to fulfil their promise to “ban new leasehold flats and ensure commonhold is the default tenure”
640 pages of detail
In this respect, and in contrast to almost every other area, there is actually quite a lot of detail ‘in’ the manifesto. We say ‘in’ in inverted commas because all the detail comes from short phrase “We will enact the package of Law Commission proposals on …. commonhold”. Those 11 words pack a lot of punch - as they refer to the 640 page Law Commission Report: Reinvigorating commonhold: the alternative to leasehold ownership published in 2020. And that includes detail, lots and lots of detail. But broadly speaking three fundamental aspects stand out:
1. Some very bright people have, in the last two decades, spent a considerable amount of time looking at commonhold, as envisaged in 2002, and suggesting tweaks to make it work better.
The sheer number of tweaks in the Law Commission Report make it impossible to even list them here, but they include changes to improve how the system would work in mixed tenure blocks, mechanisms to adapt the system for mixed use blocks and structures to better cope with the awkward time between the first unit in a new development being sold and the developer completing development and disposing of the final unit. There are also small tweaks to the way decisions would be made, increased flexibility as to how costs are to be shared amongst the unit holders and greater detail as to the establishment of sinking funds.
Almost none of these would, on their own, be described as revolutionary. But, implemented together, they will result in a much refined (and much better) form of commonhold. And this, Labour hope, will be more attractive to current leasehold flat owners (and mortgagees).
2. The Law Commission Report also includes recommendations to make it easier for existing leasehold blocks to convert to a commonhold arrangement. At present such conversion is theoretically provided for, but requires unanimity amongst the freeholder, all leaseholders and the mortgagees of everyone. And the near 0% take up of this option suggests that unanimity is ‘difficult’ to come by. The recommendations include (i) that a simple majority leaseholder vote is all that is required and (ii) provisions as to what to do about leaseholders that don’t vote to convert.
3. And the ‘easy’ legislative step will be that, in relation to new blocks being sold off for the first time, commonhold will be mandatory.
The above will be complex and revolutionary. A lot of professionals, lawyers included, are going to need to go back to school to learn about commonhold from scratch. But it will have the advantage that, if done right, it will be revolutionary in a popular way, without much cost to the Government. Which will be a win win for the Government when planning what to do first.
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