As residential leasehold ownership comes under increasing scrutiny (see update), the Law Commission has just kick-started an attempt to reinvigorate commonhold as a viable alternative. Developers, homeowners and funders should all take note as this may mark the start of a process that could see commonhold becoming the structure of choice for certain multi-unit developments, both residential and commercial.

The call for evidence

Historically flats in England and Wales have been sold almost exclusively on a leasehold basis. There are various legal reasons for this, most notably the fact that the law makes it difficult to pass positive obligations (such as ones to pay money or to repair) between buyers and sellers of freehold property but relatively easy between buyers and sellers of leasehold property. The passing of positive covenants is particularly important in multi-owned buildings given the structural interdependency of the individual units (for example, in relation to rights of support).

Leasehold, however, has its own flaws. A leaseholder has no automatic interest in the freehold of the property. For blocks of flats and other multi-owned properties this often means that the freeholder (landlord) controls the management of the block rather than the owners of the individual units. Further, while a freehold interest lasts forever, a leasehold interest is, by its very nature, time limited. While it is common to have long leasehold interests of 99 or 125 years, they are still diminishing assets which will eventually expire or have to be extended (often at a notable cost to the leaseholder).

It was because of the problems with both freeholds and leaseholds that commonhold was introduced by the Commonhold and Leasehold Reform Act 2002 as a means of standardising and regulating rights and obligations in blocks of flats and other multi-owned properties. Each unit within a commonhold is a freehold property which is held by a unit holder. The common parts of the building that do not form part of the individual units are owned and managed by an association made up of the unit owners, rather than a separate landlord who may have competing interests. The commonhold community statement then sets out the rights and obligations of the unit holders and the commonhold association. Those rights and obligations run with the unit and not the individual owner. In this way commonhold seeks to combine the advantages of freehold and leasehold while avoiding some of the pitfalls.

Unfortunately, commonhold has been far from a runaway success. Figures indicate that fewer than 20 commonholds have been created since it was introduced in 2002, and that the majority of lenders currently refuse to lend on commonhold (partly due to uncertainty surrounding enforcement).

Accordingly on 22 February 2018 the Law Commission issued a call for evidence inviting views on the aspects of the law that need to be improved in order to make commonhold more acceptable. The Law Commission wants to know why commonhold has not been more successful. Specifically it wants to identify the legal barriers to wider acceptance of commonhold as an alternative to leasehold.

The call for evidence focuses on three broad categories of potential legal issues surrounding the current scheme of commonhold.

1. Issues in the process of creating or converting to commonhold

To convert an existing scheme into a commonhold requires the consent of the freeholder, all leaseholders with terms over 21 years and any mortgagees of the whole or part of the property. The paper suggests this is one possible barrier to the take-up of commonhold. The Law Commission would like to know if stakeholders are aware of any other barriers.

2. Issues which may make commonhold unattractive to homeowners

The paper suggests a number of potential problems which could make commonhold unattractive to homeowners including: 

• the application of company law to commonhold associations – company law is seen by some as being unnecessarily complicated given that both the members and directors of the associations will generally be individual homeowners; 
• concerns about whether or not the right balance has been struck within the current regime between:
  • granting flexibility to developers and protecting the end consumers; and
  • the terms which must apply to all commonholds and those which can be changed; and
• concerns about the costs associated with commonholds, the dispute resolution procedures and what happens in the event of termination or insolvency of the commonhold association.

It is likely that there are other issues deterring homeowners – the Law Commission is keen to hear about these.

3. Issues which may make commonhold unattractive across the wider property sector

One particular concern identified under this heading is the lack of flexibility in the commonhold model. Mixed-use, multi-owned developments are increasingly popular. However, under the current regime only one uniform commonhold structure can apply to any such scheme. The paper suggests that one way to make commonhold more attractive would be to introduce "layers" within a commonhold. For example, while there would need to be an overarching scheme, there could be sub-layers specifically tailored to, say, the retail element and the residential elements. This would offer greater flexibility in the way in which commonhold applies. 

There are also concerns that commonhold is currently incompatible with shared ownership leases which are used to deliver affordable housing.

The government's role

The paper explains that the government will tackle separately the wider issues which could affect the success of commonhold, including lack of consumer awareness and the difficulty obtaining finance.

Comment

It seems that residential leasehold is falling out of favour with the political establishment. It has received a bad press in the media and is therefore likely to undergo significant reform over the next few years. While commonhold has, it is fair to say, not been popular with developers, funders or homeowners, the government and the Law Commission think that, if properly reformed, it may hold the answer to how to deal, at a legal level, with multi-owned properties. This is understandable – other jurisdictions have successfully developed their own structures to allow flats to be owned on a freehold basis (such as "strata title" in Australia and "condominium" in America) so there is no reason to think that, with the right legislation and incentives, England and Wales could not follow suit.

Although most likely to be applied in a residential or mixed-use development context, the call for evidence suggests that commonhold could apply equally to commercial retail parks or office blocks. Accordingly there is a good reason for all stakeholders to take a special interest in the subject as this is likely to be the start of an extensive journey of reform which could well see the decline of long leasehold interests.

The call for evidence closes on 19 April 2018 and will be followed up later this year with a full consultation paper from the Law Commission.