Back to the future? The prospects for commonhold

It is anticipated that the King’s Speech on Tuesday will include reference to leasehold reform. The indications so far is that that reform, whilst severely restricting the use of long leaseholds as a way of selling houses, will be less radical when it comes to flats.  And not everybody is happy about that.  The CIH’s Head of Policy and External Affairs has described it as a “significant omission”. Instead, it looks like a policy of reforming commonhold, to make it more attractive, will be adopted. 

To be fair to the Government, moving England away from the use of long leases to regulate the ownership of flats is fraught with difficulties.

For almost all of the last century, English property law has recognised just two ways of owning land. Freehold (which is, for practical purposes, full ownership of the plot of land forever) and leasehold (which is ownership for a limited period of time, with someone else owning the forever freehold above). 

When the choice was just between straight freehold and leasehold, there was no real contest when it came to how to structure the ownership of a block of flats. That is because of the difficulty, in English law, of making positive obligations ‘run with the land’ (i.e. bind everyone who owns that land).  Whilst there are mechanisms which can be put in place within freehold ownership to achieve that, those mechanisms are fiddly and can easily break down. Within a leasehold ownership structure, it is easy to make positive obligations automatically bind anyone who owns the flat, in favour of their landlord, and anyone who owns the freehold, in favour of the flat owner. And in a block of flats, where you need to agree who will maintain the common parts and insure the building and who will pay the cost of doing that, the ability to make positive obligations run is essential. 

But leasehold ownership is not without its problems.

• One of the fundamental aspects of a lease is that it must have a fixed term.  Historically that was often 99 or 125 years.  When the lease is first granted that seems like a long time.  But the clock is always counting down and, with it, the value of the leaseholder’s interest. 
• And within a leasehold structure it is the landlord who gets to make the fundamental decisions in relation to the block.  Who to insure with, how often to clean the stairwell, when to decorate the hallways and whether to replace the leaking roof. Whilst the terms of the leases and statutory requirements will influence what the landlord is required to do, it is the landlord who will be making those decisions within those constraints. That means that the voices of the leaseholders, who actually own the flats (which is the main reason for the building), are somewhat muted. 

Commonhold was intended to be the solution.  Commonhold is, in fact, a type of freehold ownership rather than a new tenure altogether. It was introduced in 2004 by Part 1 of the Commonhold and Leasehold Reform Act 2002.  The main concepts are:

• Each flat (or ‘unit’ using the language of the Act) is owned by a unit holder as a freehold. So that is forever. 
• Each unit holder is a member of a Commonhold Association.  That is a company limited by guarantee.  It is the Commonhold Association which makes the decisions which would formerly have been made by the landlord. And so, it is the flat owners who get to control those decisions.  There is no one ‘above’ them.
• For each commonhold scheme there must be a Commonhold Community Statement. And, like any company, the Commonhold Association must have Articles of Association

Broadly speaking, the CCS is the document that deals with the obligations of the unit holder (such as paying costs, using their flat as a home, not causing a nuisance) and of the Commonhold Association (such as insuring the block, maintaining the structure and cleaning the common parts). 

The Articles of Association then govern how the Commonhold Association is run and takes decisions.  Thus, giving a voice to the unit holders. 

The Act is pretty prescriptive about what both the statement and articles say – not just what issues they must cover but actually what they provide for in respect of those issues.  That is intentional.  The rules are intended to ensure that there is, to the extent possible, uniformity across all commonhold schemes.  The theory being that that will be simpler than where we have ended up with leases, with each block having a bespoke set of terms. 

All that sounds great. So, what’s the problem?

The difficulty with commonhold is that, whilst its been an available option for almost two decades,  it would be fair to say that it has not been widely taken up.  Out of the 26 million registered titles maintained at His Majesty’s Land Registry only around 20 commonhold schemes have been established. That is, roughly speaking, 0%. There are various reasons why that might be. 

Whilst some leaseholders actively and vocally want to control the decisions taken about their block, there are many others who would rather, in practice, not to have to put in the effort that that would take.  That silent majority may change their mind if a particular issue they care about crops up, but on an average day they don’t want to engage. 

No one wants to be first. For most people, buying a property will be their biggest purchase. And when faced with the choice of buying a tenure which, whilst it has its problems, has been marketable for the past few hundred years or a tenure which is novel and has little to no track record, they will plump for ‘safety’.

The mortgage industry in the England did not warmly welcome commonhold.  Many of the big lenders will simply not lend on it. Whilst the Law Commission is adamant that it, in fact, provides lenders with better security than a traditional lease, the lenders remain reserved. 

Commonhold definitely has its plus points.  And, if you were designing a legal system from scratch, it would probably be seen as obviously superior to leasehold structures when it comes to the ownership of a block of flats.  But we are not starting from scratch.  We live in a country where  leasehold structures are near ubiquitous for blocks of flats. If the Government wants to change that, without making commonhold compulsory, then the reform which has been hinted at will need to be significant.  The King may signpost that on Tuesday, but we’ll need to wait to see the detailed legislation before we can make a genuine assessment.