Shared Ownership v Commonhold
Does Labour’s manifesto commitment to make commonhold the default tenure spell the end of shared ownership?
Mark Foxcroft
Partner
020 7065 1861
Labour’s manifesto stated that, if elected, they would take steps to ban new leasehold flats and ensure commonhold becomes the default method for the ownership of flats. For a short but informative overview of what commonhold is and what Labour’s approach to this may be, have a read of Neil Toner’s article ‘Get commonhold done!’.
As Neil explores, Labour’s manifesto suggests that Labour have a bit of a head-start with this particular manifesto commitment as they have the benefit of the Law Commission’s proposals on commonhold contained in their 640 page report, ‘Reinvigorating commonhold: the alternative to leasehold ownership’ first published in 2020. Indeed, Labour expressly stated in the manifesto that they will enact the Law Commission’s proposals contained in this report.
This article focuses on Chapter 11 of the Law Commission report and the potentially thorny issue of how the shared ownership model of home ownership could work within commonhold.
What’s shared ownership?
For decades, shared ownership has been a key component of Government programmes to create affordable housing in England and Wales. And, whilst the new Government have firmly committed to ‘prioritise’ social rent as their preferred tenure, it would be neigh on impossible to achieve their 1.5m new homes target within 5 years without shared ownership being in the mix.
Shared ownership enables a person to buy a percentage share in the leasehold interest of a flat and pay rent on the share retained by the shared ownership provider. The purchaser enters into a lease for a significant term of years (e.g. 125 or 990) with the provider, but only pays a percentage of the full market value of the leasehold interest in the property. The shared ownership product therefore enables people to get onto the housing ladder with a lower upfront cost. Additional shares can be purchased in the future through a process known as “staircasing”, usually up to the point at which the property is fully owned by the leaseholder.
Homes England and the Welsh Government support the development of shared ownership properties through grant funding. However, currently, grant funding of shared ownership is only available in respect of shared ownership leases.
What’s commonhold?
Commonhold is a type of freehold ownership introduced by Part 1 of the Commonhold and Leasehold Reform Act 2002 which, despite being around for over 20 years, has barely ever been used. The main concepts are:
- Each flat (or ‘unit’) is owned by a unit holder as a freehold.
- Each unit holder is a member of a Commonhold Association. That is a company limited by guarantee. The Commonhold Association makes the decisions which would formerly have been made by the landlord.
- For each commonhold scheme there must be a Commonhold Community Statement (“CCS”). 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 obligations of the parties to the CCS therefore, in effect, replace the obligations of the parties under a lease in a traditional landlord and tenant arrangement.
What’s the issue?
Under the 2002 Act, commonhold unit owners are prohibited from granting residential leases for a term of longer than seven years, or for a premium. This prohibition was justified to “avoid the possibility of repeating the difficulties which exist in leasehold blocks”, i.e. subletting and the absent landlord.
As the eagle-eyed amongst you will have no doubt identified, shared ownership leases will fall within this prohibition as they are leases granted for a premium and for a term of over 7 years. As such, on the basis of the current legislation, shared ownership leases aren’t permitted within the commonhold system. As grant funding is currently only available for shared ownership leases, this has the knock-on effect that grant funding will not be available for new shared ownership properties if commonhold becomes the default tenure. And even without this grant issue, its difficult (probably impossible) to see how the detailed legislative requirements of how a commonhold block is to be managed would be compatible with the fundamental concepts of shared ownership.
This appears to create a conflict between the new Government’s stated aim of making commonhold ubiquitous for new flats and the continued use of the shared ownership model of affordable home ownership for flats. Although shared ownership has its issues and some very vocal critics, it remains a popular method of home ownership, especially in urban centres where astronomical property prices mean purchasing an initial percentage is the only viable way to get on the ladder, and there has been no suggestion of scrapping it to date. Indeed, just prior to the dissolution of the last Parliament in May 2024, the Leasehold and Freehold Act 2024 was rammed through and that included measures, with cross-party support, aimed at enhancing the rights of shared owners.
What does the Law Commission recommend?
In brief, that an exception is made to the prohibition within commonhold to the grant of leases for a premium and/or for over 7 years’ duration to allow for the grant of shared ownership leases. This straightforward exception appears to solve the issue at a stroke of the legislative pen.
Is it really that simple?
Although use of shared ownership within commonhold can be easily achieved by amending the 2002 Act to allow this exception, this only deals with the principle itself. The reality of shared ownership within commonhold is likely to be less straightforward. In such an arrangement, it would be the shared ownership provider who becomes the unit holder for the relevant property (unless or until 100% staircasing is achieved) and thus must be a member of the Commonhold Association required to adhere to the CCS whilst the shared owner leaseholder is only beholden to their landlord pursuant to the terms of their lease, which will include paying as service charge a proportion of the costs the Commonhold Association spends on the building without their input or approval.
The landlord/unit holder will therefore remain responsible for ensuring their shared owner adheres to the CCS meaning it must maintain an active role in managing the unit whilst the leaseholder is excluded from the Commonhold Association meaning they do not have an active voice in how the building in which they live is managed or costs incurred. This somewhat undermines the ideals behind commonhold as a form of common freehold ownership between those with the vested interests of properly managing the building.
How does the Law Commission propose to address these issues?
By using the terms of the shared ownership lease itself to empower the shared owner within the commonhold:
- Compliance with Commonhold Community Statement (CCS): Shared ownership leases in commonholds should require shared owners to comply with the terms of the CCS. This alignment ensures that all residents, whether full or partial owners, adhere to the same rules and regulations, facilitating harmonious community living and simplifying enforcement for providers.
- Voting Rights and Participation: In shared ownership leases granted within new commonholds or in buildings that have converted to commonholds, shared owners should be able to exercise all voting rights associated with their unit, except for decisions to terminate the commonhold, which should be made jointly with the shared ownership provider. This recommendation aims to ensure that shared owners have a significant say in the management of the commonhold, promoting democratic governance and protecting minority interests.
- Rights to Challenge Costs: The Law Commission recommends that shared owners retain the right to challenge unreasonable service charges under leasehold legislation, unless the provider delegates full voting rights to the shared owner. This protection ensures that shared owners are not unfairly burdened by costs imposed by the Commonhold Association as they can seek to challenge them in the First-Tier Tribunal. If the provider delegates voting rights in full, the shared owner will be able to challenge costs in the same way as unit owners.
Conclusion
With its recommendations, the Law Commission seeks to harmonise two disparate versions of home ownership in commonhold and the shared ownership model. Given the on-going popularity of the shared ownership product and the already uphill battle Labour face in making commonhold the default tenure for flat ownership from a standing start, we would suggest such harmony is going to be required in order to persuade both traditional providers and the home-buying public that commonhold and shared ownership can work together.
The Law Commission's recommendations appear on the face of it to provide a framework for integrating shared ownership into commonhold tenures, ensuring that shared owners can benefit from the advantages of commonhold while retaining necessary protections and rights. However, we would suggest that the proof of this will very much be in the pudding.
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Copyright in this publication belongs to Devonshires Solicitors LLP. The content of this publication is current as at the time of publication. It is intended as guide to the subject matter and not as legal advice, and it should not be construed as the giving of legal advice. For further information, please email one of the contacts named at the end of this publication.