Commonhold boomerangs back

The commonhold White Paper published on 3 March announced that the sale of new leaseholds will be banned. Commonhold, which was first introduced in England and Wales in 2004, will be reformed with the intention that it replaces leasehold as the default tenure.

What is the new version of commonhold?

Commonhold provides for the freehold ownership of individual units. In a mixed-use development the units could be both flats and commercial space. Shared facilities such as the structure and communal areas will be owned by a commonhold association. 

Shared ownership will be permitted with the housing provider as the unit owner. 

It is suggested that commonhold could also be used for shopping centres plus retail and industrial parks, although the focus of the White Paper is on blocks of residential flats and home ownership.

Every unit owner will be a member of the association with a right to vote and get involved in its management. Most decisions will be made by simple majority with protections for minorities. The association could decide to appoint managing agents to manage the buildings on its behalf. For buildings with facilities reserved for the use of certain unit owners, for example parking, only those with rights to use those facilities will be able to make decisions about how they are managed. 

Associations will be mandated to operate reserve accounts to improve their financial robustness and prevent unit owners having to pay large and unexpected maintenance bills. They will also be able to obtain loans to help with the cost of major works.

With standardised commonhold rules combined with the ability to set and amend local rules, the government hopes there will be increased transparency and accountability. A tribunal will handle any disputes.

What about existing leaseholds?

It is proposed that the threshold for conversion should be reduced to 50% of leasehold owners being in favour. However, not all leaseholders will have the funds or desire to participate in the purchase of the freehold for its conversion to commonhold. The White Paper lacks detail, but suggests that they will remain as leaseholders bound by the terms of their existing leases with the original landlord taking an overriding lease of these flats. This two-tier approach will create a complex structure and have the potential to create tensions between classes of owners with different management ideas. 

How will it affect lenders?

It is hoped that stringent financial stability requirements will give lenders confidence to develop new lending criteria and accept commonhold units as security. It will, however, depend on the resources available to the association as well as the effectiveness of its management.

Lenders will be notified if maintenance arrears reach a level where the association has a right of sale. At that point a lender can decide whether to repossess the property or pay off the arrears to add to its loan. If the unit is sold by the association the mortgage will be repaid from the proceeds.

What happens next?

A draft bill with more details will be published later this year. With the government stating that it is keen to minimise disruption to house building, there will also be a consultation on the best approach to take banning residential leaseholds. 

Conclusions

The current version of commonhold was not been taken up for many reasons, some of which have been addressed in the White Paper. It will remain to be seen if the government has the determination to bring about a commonhold revolution. If it does, will home owners step up to the challenge of managing their buildings harmoniously and effectively?