5 key takeaways from Devonshires' Breakfast Briefing on the Commonhold White Paper

Earlier this week, we were pleased to hold a breakfast briefing on the Government’s Commonhold White Paper (CWP).  The briefing represented an initial foray into the wide-ranging issues which CWP raises.  

We have offered below some key takeaways from the session:     

Overview - Commonhold (CH) was first introduced in England and Wales in 2002 but has failed to be taken up in the living and wider real estate sectors.  In 2020, the Law Commission published a report on reinvigorating commonhold as an alternative to leasehold ownership (Law Commission - Commonhold).  The Government intends to establish CH as the default tenure in England and Wales for new housing and mixed-use developments.  To achieve this, in addition to announcing a proposed ban on long leases of flats, CWP sets out how the existing CH model will be reformed (for the most part) in line with the Law Commission’s recommendations. 

Next steps – Draft legislation is to be published, under the title “The Leasehold and Commonhold Reform Bill”, later this year.  Allied to this will be the launch of formal consultations on some aspects of the proposals, including on the banning of new leasehold flats and updating the CH conversion process (in respect of existing leasehold schemes).  There is, as yet, no fixed date for this to happen.

A Call to action - The Law Commission’s report contains considerable detail (well over 600 pages of text!).  Given that it feels that the wind is very much in the Government’s sails for the ‘launch’ of the new CH, something needs to shift to ensure that RPs, together with other stakeholders and key players in the industry now engage with CWP, especially with regard to how it affects mixed-tenure development and management.  This ought to include the following three steps:

• Understanding, within each team within organisations, what the proposals are and establishing what the (potentially far-reaching) effect would have on those teams and the way affordable housing is delivered and managed
• Armed with that information, engaging substantively with the forthcoming consultations and draft legislation
• Engaging effectively and meaningfully, with relevant parties sharing information and joining forces, including with industry bodies, to establish a commonality of response.

The sector has often adopted such an approach to achieve wide-ranging objectives.  The team at Devonshires will assist, particularly when it comes to the technical, legal and practical challenges which need to be resolved, a few examples of which are set out below, but there are many more. 

New Developments – the changes proposed (in light of the detail in the Law Commission’s report) are all on the face of it laudable and, to a certain extent, functional.  However, scratch the surface and there appears to be more thought needed as to how, in practice, developments will in practice come forward under the proposed new rules.  We have concerns about how a CH development will be undertaken in stages (or ‘sections’, to use the language of CWP), and how, for example, matters like infrastructure and statutory adoption processes will need to be adapted to cater for the scenario where the person who owns the whole or part of the relevant infrastructure is a Commonhold Association, rather than the developer.        

Shared Ownership leases – the good news is that these are to be preserved under the new CH arrangements.  So far, the view is that this is the only way to deal with them (and other similar interests, such as Home Purchase Plans that reflect certain religious norms or equity release products).  However, we are not wholly persuaded by this approach which would leave the leasehold and CH systems in place within the same building - it may be that the sector would be well advised to lobby government for an adaptation of the CH ownership system that allows for specific ‘shared ownership commonhold units’ to be created, and we intend to explore this proposal further with key contacts.              

Fundamental Flaws?  The reforms intend to address concerns about management costs.  The solution?  Doing away with a feudal leasehold system and empowering individual (CH) owners in a block (through membership of a Commonhold Association (CA)).  It is however questionable whether or not this approach will result in a better financial position for homeowners – does empowerment automatically equate to responsibility and accountability?  The sector has long championed resident involvement and empowerment, but the ideal is often more difficult to achieve in reality.  In the (long) leasehold context, giving owners the power to manage, does not mean that they will want or have the time/inclination to manage.  Administration of the CA entity and putting into effect the decisions it makes, including in areas such as procurement of insurance etc., is often not straightforward and will be time-consuming in all but the most straightforward of buildings.  In more complex mixed-tenure and multi-use developments, including issues such as fire safety and infrastructure/communal heating and power, a group of residents will struggle to keep afloat.

Let’s all become a managing agent – aside from the greater role of the Lands Tribunals within the new CH system, CAs will be able to appoint professional directors and/or managing agents to plug the gaps that we have alluded to above.  The new CH system, as is currently being articulated, represents a boom time for property managers, but there are concerns about the ability of that part of the property industry to deliver on these significant areas of responsibility and at scale.  As CH does away with ‘the landlord’ role, does this that RPs and other parties will look to develop property management arms, as a core business case but also by way of continuing to fulfil their wider social objectives.

Rights to buy/acquire – conversion to CH, by an existing group of leasehold owners is already possible in the existing CH system, but the current process does not really work.  The new regime is to allow for conversions to go ahead quite easily, but for any non-consenting leaseholders to keep their leases in place within the new CH structure.  There are concerns about the practicality of this approach.  On a technical point, the proposals do not currently take account of what happens to existing right to buy/right to acquire rights, which in the context of a block means the acquisition of a long lease by the relevant resident – after a ‘conversion’ process the whole building will be CH and new long leases of flats are (or will be) banned in CH buildings.  We will raise this issue during the statutory consultation process.                           

This is only the beginning, and we will be updating our briefings as we continue to engage with parties and as further details about the proposals emerge.  In the meantime, we would encourage you to discuss the commonhold reforms and wider leasehold reform agenda with us – to do so, please get in touch with Jonathan Corris, Mark Foxcroft or your usual Devonshires contact. 

Resources:

Our article following the publication of CWP can be found here: The Government has announced the beginning of the end of the ‘feudal’ leasehold system

CWP can be accessed at: Gov.uk - Commonhold White Paper