The government has just released a Commonhold White Paper. Liz Emerson, IF CEO, outlines what it hopes to achieve and why younger generations should support it.
What is the Commonhold White Paper?
Commonhold is a system of freehold tenure of a unit within a multi-occupancy building, but with shared responsibility for common services. The Commonhold White Paper intends to further align the previous government’s 2017 intention to reform property law and provide leaseholders with greater rights, powers and protections over their homes under the Leasehold and Freehold Reform Act 2024 by implementing recommendations made by a Law Commission 2020 report to move from leasehold to Commonhold.
Commonhold is not new. The Commonhold and Leasehold Reform Act was introduced in 2002 but it failed to establish itself and is now out of date, leaving leaseholders, many argue, too much at the mercy of often powerful freeholders, such as pension funds, private equity, insurance companies and property companies, that have increased ground rents, management costs and service charges well beyond the financial means of leaseholders over the past 25 years. Just this week, a group of 25 MPs “have demanded that the National Audit Office (NAO) scrutinise councils, housing associations and private landlords for their service charges, citing inaccurate bills, overcharging and a failure to provide residents with evidence for costs.”
Better protection
The move to commonhold, the government argues, will give people who live in flats: a direct stake in their upkeep; own them; and have the right to manage them. The interests of homeowners will be preserved in perpetuity removing the need to buy expensive new leasehold terms when leaseholds start to run down towards the end their term.
Reform will remove another unfairness, which is the “mafia-like” element of leasehold law that is “forfeiture”. In its current form, forfeiture allows freeholders to take back the lease and evict the leaseholder if a leaseholder is in breach of the lease, subject to certain conditions. But, stories abound over how freeholders have used small disputes to literally take a leasehold property and all equity in that property, back. For example, where contracts include a forfeiture clause, just one missed service charge or management fee can lead to forfeiture.
It already works overseas
Commonhold is nothing new. It has been used in the US and Australia (since the 1950s), in Canada, Germany, Scotland, Norway, South Africa, Denmark, Italy, Brazil, Argentina and France.
Benefits for leaseholders
The reforms aim to provide flexible rules to accommodate changing needs; improve democratic decision-making; allow easy conversion to freehold ownership; allow flat owners self-management with greater control over costs; and remove the risk of forfeiture, outlined above. They will also give leaseholders more control over who lives around them. For example, while short-term lets will be permitted in commonholds, commonhold associations will have the right to use local rules to restrict certain short-term uses, such as holiday lets and other short-term letting arrangements.
Buyers will also be protected from taking on management costs, service charge arrears etc as conveyancers will be provided with an improved CUIC (Commonhold Unit Information Certificate) which sets out any arrears due on a property they are looking to buy. The government suggests a maximum cost of £50 with the fee waived if not provided within 14 days of a request.
Benefits for developers
The government argues that moving away from leasehold to commonhold will provide developers with: improved development rights; allow a mix and match of new development sections to allow for different groups’ interests; a better design to accommodate shared ownership; provide separate heads of costs to allow for greater service provision and varied use; and permit home finance leases.
Benefits for lenders
The government argues that lenders will be better off too: lender equity will be secure with the removal of forfeiture, the technical implications of which, when enforced, can remove lender controls; new emergency measures will be introduce to reduce the risk of commonhold insolvency; property maintenance plans will be “robust”; reserve funds, public liability insurance and will be mandatory
What will change?
Commonhold to be default the tenure with public liability insurance, building insurance and reserve funds compulsory. It aims to remove the need and expense of renewing leases which often require lawyers and for multiple flats, may mean that each individual lease needs to be amended if, for example, a financial contribution is requested via service charges to improve energy efficiency.
How will commonhold work?
Leaseholds will apply for a commonhold and crease a commonhold association in the form of a Limited Company (which is made up of all the unit owners) which owns and manages the common parts of a building and is required to seek input from all unit owners on how they should go about this. The white paper suggests that the commonhold association will provide “both the governance and management of the building, unless it decides it wishes to buy-in external help, such as a managing agent to do so. But, unlike in a traditional leasehold model with a third-party landlord, where a managing agent is employed, they will be accountable to the unit holders directly.”
What about commercial property?
The government argues that commercial property can also operate within commonhold, with owners of commercial units having much the same rights as owners of residential flats. Business leases can be granted “for commercial units on a development blending flats and shops, for example, or flats and light industrial units. Developers may retain such units as an investment or sell them to investors once they have been let.”
What about existing leaseholders?
Leaseholders who wish to convert (with a threshold of at least 50% agreeing to) will need to buy out their existing leases and then the conversion before commonhold can take place. Non-consenting leaseholders and their former freeholders will “be subject to different rules and requirements” yet to be confirmed by the government, but two options are in the White Paper:
Option 1 (mandatory leasebacks): non-consenting leaseholders would be allowed to continue living as leaseholders but their leases will be phased out over time and replaced with commonhold on certain triggers: choosing to move over to commonhold; on selling up; or when needing to buy a lease extension.
Option 2 (equity loan): non-consenting leaseholders would be automatically converted to commonhold and given an upfront equity loan funded by the government to pay for the conversion. “The loan would be calculated as a percentage of the value of the property, and this would be the amount required to be paid back to the government when the property is sold. This loan would be offered on a voluntary basis to all leaseholders participating in a conversion.” This approach is preferred by the Law Commission because all homeowners in the building would be “unit owners”.
Intergenerational fairness
Whatever option is chosen, freeing the 5.3 million leaseholders “trapped” in leaseholds to be able to own their own homes should be welcome news for largely younger generations and activist organisations. The government intends to introduce a draft Bill later in 2025 and will be seeking input. Overall, on intergenerational fairness grounds, leasehold to commonhold is a policy win for younger and future generations.