Commonhold: What’s all the Fuss About?
Talk of Commonhold is all the rage in the UK property market but beyond the hype, how will it affect you?
The short answer is nobody yet knows for sure.
The longer answer is that, whether you are a leaseholder, a freeholder or both, Commonhold is coming into force and you should be prepared.
What is Commonhold, what’s new and how does it work?
Commonhold is a type of property ownership, an alternative system to Leasehold or Freehold.
In its purest form, Commonhold works by allowing you to own the Freehold of your property, as opposed to owning a Lease over your property.
A quick scan on the Internet will have you believe that Commonhold is “new” to the UK. That’s not quite true. Commonhold came into law under the 2002 Act and into force in 2004. However, in its current form, Commonhold has been a spectacular failure. What has changed is a political will to address some of the issues with the established Leasehold system and the main solution put forward is to reinvigorate Commonhold law so that Commonhold will eventually replace the Leasehold system.
Is the law changing?
Yes. In 2016, following massive public demand, the UK Government agreed that the Leasehold market was an area to be targeted for law reform.
A number of projects were launched including reviews of the RTM, Collective Enfranchisement and the Leasehold Houses system. Commonhold, however is seen as providing the best long term solution, especially for blocks of flats.
In order to refresh the existing Commonhold law to make it workable, a government funded, independent body called the Law Commission has been tasked with delivering recommendations. They do so by engaging in a consultation process. Like many other interested parties, The Freehold Collective has made submissions to the Law Commission, as we know first-hand the impact that new legislation can have on anyone who owns property in the UK!
Further information can be found on the UK Government’s Leasehold and Commonhold Reform microsite.
So what are the differences between Commonhold and Leasehold?
In a nutshell, it boils down to what you receive when you purchase a property.
In turn, this has implications for the level of control you have over your property and how your property is managed in common with others.
Leasehold: In the case of Leasehold you purchase a Lease of a property which gives you obligations and rights over the property and common areas, until the lease expires. At that point, you must vacate the property and return it to the Freeholder. Common areas shared with others (such as entrances, gardens, hallways, rooves, utilities infrastructure etc) might be managed by the Freeholder or by a group of leaseholders.
Commonhold: Under Commonhold, you purchase the Freehold of a property and sign up to a ‘rulebook’ which gives you obligations and rights over the property and common areas. You own the property forever. Common areas shared with others (such as entrances, gardens, hallways, rooves, utilities infrastructure etc) are managed by all the property owners in common with you. Commonhold aims to simplify things with standard rules and regulations.
What are we waiting for? Let’s do it!
Sounds great doesn’t it? But Hold your horses!
For anyone buying a property, whilst Commonhold seems more attractive than Leasehold, things are not that straightforward!
When you buy a leasehold property, the fact that the lease expires, is built into the price you pay in the market. Many experts believe that a leasehold property with a short lease under 80 years, will be cheaper to purchase than the same property under Commonhold, often significantly so. Leaseholders have the right to extend their lease, albeit for a fee, so cases where leaseholders must hand over the property to the property with vacant possession are relatively rare. There are well-established mechanisms, processes and case law to address the many grey areas that exist in owning and managing a leasehold property in a building. And leaseholders have the right to purchase the Freehold with others and Collective Enfranchisement law.
Commonhold allows you to dispense with a lease that expires. Beyond that, it provides no magic remedy for any of the challenges that go with owning and managing a property in a mixed-dwelling environment. The new sets of laws will need to decide on key questions without re-inventing the wheel: Who sets the rules? Who decides on the rights and obligations that are normally written into leases? Who changes them, when and how? Who really controls the management of the building, sets the budget and manages the expenditure? How are disputes between Commonholders settled? How do you ensure that a Freeholder is not simply replaced by a small group of Commonholders that do not act in the common interest? How do you ensure that no single Commonholder has a veto over key decisions? If the government mandates standard documents and decision-making policies for Commonhold in a “one-size-fits-all” approach, how can Commonholders tailor anything to their own circumstances?
Moreover, Commonhold needs to address the most thorny issues if it is not to fail again. How do you convert from Leasehold to Commonhold in a mixed-dwelling? What happens when not everyone wants to or has the means? What parts of the common areas can be acquired and who manages them? How is the Freeholder fairly compensated? What about the hundreds of thousands of Council flats that want similar rights?
What should we do now?
As of writing, the Government has announced that they “will bring forward a response to the remaining Law Commission recommendations, including commonhold, in due course”.
In other words, there is nothing tangible planned.
If you want to benefit from owning your Freehold, either wait for Commonhold to come into force and hopefully mature to something workable, or exercise your existing rights under Collective Enfranchisement and other legislation now. Just remember that meaningful Commonhold reform could take years to mature.
Either way, be prepared.