Commonhold White Paper: property ownership transformed

To make that possible, an alternative form of ownership needs to fill the gap. The government has firmly set its sights on commonhold as the preferred alternative.

Commonhold is not a new homeownership structure. It came into effect in 2004 through the implementation of the Commonhold and Leasehold Reform Act 2002. Yet, over 20 years later, commonhold buildings are rare. The government estimates that fewer than 20 commonhold developments exist in England and Wales, equating to under 200 homes. Compare that to the number of leasehold homes, estimated by the government to be 4.98 million in September 2023.

There are many views on why commonhold has failed to take off. On 21 July 2020 the Law Commission published its report “Reinvigorating commonhold: the alternative to leasehold ownership”. The report made 121 recommendations to rectify the shortcomings of the current commonhold regime.

The government has now published its white paper “The proposed new commonhold model for homeownership in England and Wales” which confirms its intention to implement almost all of the Law Commission’s recommendations and sets out further details of the proposed reforms.

In this article we explore commonhold, the impact of the proposed changes, and the next steps.

What is commonhold?

Commonhold is a form of freehold property ownership. Flat (or “unit”) owners own the freehold interest in their flat and a “commonhold association” (a company limited by guarantee of which all unit owners are members) owns the freehold interest in the common parts of the building. The common parts include areas used in common by unit owners (such as lifts, stairs and car parks) as well as the structure of the building (including the roof and walls).

The rights and obligations that apply to unit owners and the commonhold association are set out in the Commonhold Community Statement (“the CCS”). Unlike individual leases, one CCS applies to the whole development. Most of the provisions are set out in legislation and apply to all commonholds, supplemented by “local rules” for the particular building and voted on by unit owners.

Rejuvenating commonhold: the proposed reforms

The white paper anticipates a two-stage approach to ensure developers, buyers and lenders embrace commonhold this time around. First, address the shortfalls in the current model by adopting most of the Law Commission’s recommendations. Then eliminate the competition by banning new leasehold developments. The extensive reforms address various themes all targeting this overriding goal of replacing the leasehold regime with commonhold.

Increased flexibility

Although seen as more flexible than leasehold ownership, the government acknowledges that changes are needed to ensure commonhold works for more complex developments. The proposals include:

• New rights to create sections: giving developers the freedom to divide buildings into sections so that unit owners only make decisions affecting, and pay for the maintenance of, their section.
• Separate heads of costs: permitting the introduction of separate heads of costs so that the extent to which different unit owners pay for services can reflect the extent to which the unit owners access those services.
• Greater developer rights: facilitating the construction of developments in phases.
• Permitting certain leasehold interests: such as shared ownership leases, so that measures to help individuals achieve homeownership can operate in a commonhold structure.
• New rights to borrow money: enabling commonhold associations to raise necessary funds quickly by borrowing money secured against the common parts or commonhold payments.

Increased clarity

The white paper recognises that greater clarity is needed in key areas including:

• The appointment of directors: such as what to do if no unit owners volunteer to be directors, supplemented by additional rights of lenders to apply to the Tribunal to appoint directors where unit owners have not.
• Standards of maintenance: specifying the standard to which unit owners must maintain their properties.
• Cost apportionment: prescribing how costs should be apportioned through the introduction of a Code of Practice.

Greater safeguards

The reforms aim to limit the situations where decisions are imposed on dissenting unit owners or where the commonhold association is unable to perform its duties. The proposed changes include:

• Increasing the threshold for changes to local rules: from 50% of voting unit owners to 75%.
• Increasing the rights of minority unit owners: enabling unit owners who feel they have been unfairly affected to challenge specific decisions in the Tribunal, with powers of the Tribunal to annul, confirm or attach conditions to decisions.
• Compulsory reserve funds: to spread costs and reduce the risk of surprise bills with further regulations on how reserve funds are held by commonhold associations.
• Modifications to budget approval: so that unit owners, rather than the directors of the commonhold association, give the final approval to budgets and make key financial decisions.
• Compulsory public liability insurance: to reduce the risk that commonhold associations have insufficient funds to settle liabilities.

Addressing disagreements and default

Although the government considers commonhold to be a democratic form of property ownership, it accepts that issues will come up. The current commonhold regime has been criticised for including inadequate mechanisms for addressing such issues. The reforms include:

• Changes to dispute resolution procedures: to speed up the process, while retaining a focus on alternative dispute resolution.
• New rights to sell units: allowing commonhold associations to recover debts by applying for a court order to sell a unit to generate funds. The proposals include the compulsory notification of lenders, enabling lenders to cover the debts or enforce their own rights against the borrower should the lender choose to.

How will the proposals impact new and existing buildings?

New residential developments

The government hopes that the new legislation will result in the commonhold model increasingly being adopted for new residential developments. Although this change may be gradual at first, the anticipated ban on new leaseholds should guarantee the transition to commonhold.

Existing residential leasehold buildings

In practice, converting to a commonhold structure would require homeowners to first acquire the freehold interest in the building, then vote on the move to commonhold. The government currently proposes that the conversion of existing residential buildings from leasehold to commonhold ownership remains voluntary. However, it does want to facilitate this process. A consultation on how to do this and how to address the issue of minority leaseholders, who do not wish to convert, is proposed later in the year.

Mixed-use sites

A major limitation of the current commonhold regime is the inability to adapt voting rights and cost contributions to the different occupiers of a mixed-use site. Currently, in a building with retail units on the ground floor and flats above, flat owners could be entitled to vote on, and required to pay for, matters relating to areas solely used by the commercial occupiers.  

The proposed power to create sections means a development could be structured so that residential and commercial units are managed separately. Owners of a residential unit in a section would only vote on, and pay for, matters that relate to that section. These proposals are intended to make commonhold a viable form of ownership for complex and mixed-use developments.

Commercial properties

It is clear from the white paper that the government does not see commonhold as being limited to residential or mixed-use properties. It believes that commercial buildings, industrial sites and shopping centres could also be owned through a commonhold structure. Currently, many commercial occupiers prefer to acquire a shorter-term interest in a building, spreading the cost through periodic rent payments, rather than paying a lump-sum for a long-term interest in a building. Perhaps that could change, given the potential for commercial occupiers to have greater control over the management of the building and associated costs. For now, commercial buildings are not the focus of the white paper and are not expected to be impacted by the proposed reforms.

Next steps

The detailed reforms will be set out in the draft Leasehold and Commonhold Reform Bill which is expected to be published in the second half of this year. The government is still considering some aspects of commonhold including how to improve the process of converting from leasehold to commonhold ownership and whether commonhold should be applied in different ways to different sized buildings. Further details are expected to be included in the draft Bill.

Further consultations are also expected later this year on two areas. The first concerns the role and regulation of managing agents in commonhold developments, including whether the employment of professional managing agents should be compulsory in certain circumstances. A separate consultation is proposed on the ban on new leasehold flats including how to achieve this and the potential exemptions to that ban. This can be expected to generate significant debate in the sector.

Final thoughts

Changing from leasehold to commonhold ownership is a radical move away from a system whose origins date back to Medieval times. It requires developers to build commonhold developments, homeowners to purchase commonhold units and lenders to fund those purchases. The proposed reforms aim to address many of the criticisms of the current commonhold regime with these stakeholders in mind.

However, the government recognises that this may not be enough. A reluctance to take on the responsibility of freehold ownership, combined with a preference for the familiar, could see commonhold continue to languish. Therefore, the government proposes to combine the reforms with more draconian steps to abolish new leaseholds altogether, leaving no choice but to transition to commonhold. Given the persistent commitment of successive governments to a move away from leasehold ownership, the key question seems to be how (not whether) this will happen.