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Commonhold: The Comeback Kid?

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Way back in the summer of 2001 I remember going to London for the day to hear a talk all about what was then the Commonhold and Leasehold Reform Bill. There were several eminent speakers from the Government and representatives of those involved in the residential property market. They all talked enthusiastically about how the concept of commonhold was going to radicalise the ownership of flats (although it can also be applied to houses) and overcome the problems which had long been associated with leasehold, such as ground rents, diminishing lease terms and property management. Much was made of the fact that similar legal structures had been successfully adopted in other countries for some years.

The Bill duly received the Royal Assent and became law on 1 May 2002.

What has happened since then?

Very little! The Law Commission (the statutory body which reviews the law of England and Wales and recommends reform where necessary) has recently reported that less than 20 commonhold developments have been established and that flats have continued to be sold on a leasehold basis!

Why is this?

There are several reasons. Some high street mortgage lenders will not even consider a mortgage application where any part of the property comprises of commonhold. Others will but subject to conditions. Probably for that reason, and because of the benefits to a developer that can still be gained from selling a property as leasehold, developers have not been prepared to take any chances with new commonhold developments. Furthermore, although commonhold can be applied to existing developments it has proved to be unpractical because of the cost and the conditions that have to be satisfied.

What does a commonhold property involve?

Using the example of a block of flats:

The “commonhold” would consist of the freehold of the building together with the associated land, such as a car-park, access drive and gardens. This all must be registered together at the Land Registry as a commonhold.

The estate is then divided into freehold “units” and communal areas.

The units will be the flats, and the flat owners will therefore own their flat effectively as a freehold – it will not be limited to a number of years as is the case with a lease.

The communal areas will be owned by a “Commonhold Association”, being a company limited by guarantee, of which the flat owners (IE the unit owners) will be the members. The unit owners then pay a share of the cost of maintaining and insuring the communal areas.

There will be a “Commonhold Community Statement” which will set out the rights and obligations of the unit owners and the Commonhold Association.

Finally, there will be “Articles of Association”, which set out how the Commonhold Association will operate, and the management provisions.

As they will in effect own the freehold of their flat the unit owners, unlike the owners of leasehold flats, will not have to worry about such potential issues as diminishing lease terms, ground rents, or third-party landlords. It also follows that their flat will be more saleable.

So after all of the hype and expectation with which commonhold was promoted twenty years ago the property market has continued to rumble on with leasehold flats. However, this may all be about to change.

Last year the Law Commission reported on residential leasehold and commonhold property. It made comprehensive recommendations to not only make commonhold stand out as a more workable form of ownership but to also possibly replace leasehold for the sale of flats. The recommendations would hopefully make commonhold more attractive to developers. The Commission has also written to mortgage lenders to stress the benefits of commonhold and to address their concerns in order to hopefully get them onside.

The Commission has also made recommendations to make it easier for existing leasehold developments to be converted to commonhold.

Subsequently, when the Ministry of Housing Communities and Local Government announced its plans for the reform for residential leasehold property earlier this year, those plans included the establishment of the Commonhold Council. The role of the Council is to advise the government on the implementation of a reformed commonhold regime and to deliver solutions to prepare homeowners and the residential flat market for the widespread take up of commonhold.

It remains to be seen whether commonhold will become compulsory for the sale of flats or left as optional, and the Government’s further response is currently awaited. However, given the widespread concerns that exist regarding residential leasehold property, and flats in particular, it seems inevitable that there will be some very interesting changes.

For an initial consultation or quotation regarding advice about commonhold property, please contact the Feldon Dunsmore team on 01926 954694.