Can Commonhold replace Leasehold as the preferred form of ownership of flats in England and Wales? A report recently published by liberal think-tank CentreForum recommends that the system of Commonhold ownership should be promoted. But do their proposals go far enough?
Unless you are a Conveyancing Solicitor you will probably ask ‘what on earth is commonhold – I have never heard of it!’ In fact most Solicitors would be hard-pressed to give you a detailed reply without looking up the law. This lack of knowledge is hardly surprising, as despite the fact that this alternative form of owning flats was introduced nearly ten years ago, only 15 developments use this form of tenure.
Unsatisfactory English law on leasehold flats
English law has been very slow to come to grips with the problems of owning flats and similar properties. It is perfectly possible to have freehold titles for separate units in a block, i.e. freehold flats. But there have always been problems in setting up satisfactory schemes to enable each owner to enforce repairing and other obligations against other unit-owners.
Because of this most mortgage lenders are not prepared to lend on freehold flats, which makes them difficult to sell. (Somewhat peculiarly, freehold flats happily exist in Scotland, and lenders who operate in Scotland lend on them!)
So when property owners wanted to sell flats, rather than renting them out short term, their lawyers came up with the long residential lease. This had the advantage of giving the freeholder a regular income in the form of ground rents, as well as the prospect of getting the property back when the leases expired.
Property and management companies make money out of leaseholders
Freeholders and their managing agents also discovered that you could make money from management fees, manipulating service charges, and various other crafty charges which owners have to pay.
Although there have been various attempts to give leaseholders some protection from the worst abuses, and also give them rights to extend leases, little thought was given to a complete overhaul of the leasehold system.
But after complaints from various sources, the Law Commission was asked to look into the situation. They took some years to consult and investigate the situation in other countries, and produced a report. This recommended introducing a new form of land tenure, to be known as Commonhold. The proposed system was enacted in the Commonhold and Leasehold Reform Act 2002, and is generally similar to the condominium system found in the United States.
What is Commonhold – how does it differ from Leasehold?
The freehold of a block of flats is owned by a special form of company set up in accordance with the Act. This is known as a Commonhold community association. Individual flats or ‘units’ then have separate titles, and each flat-owner would become a member of the association.
Common parts of the building remain the property of the company, and a ‘community statement’ sets out the arrangements for maintenance and repair of the fabric of the building. The flat-owners can decide for themselves how and when work should be carried out, rather than this being at the whim of a property-company freeholder.
Conveyancing Solicitors should find the transfer of flats easier, as there will be no need to wade through a lengthy lease each time to find out what it contains. Instead community associations and statements will have to be in standard forms in accordance with the 2002 Act.
Regrettably these reforms in the 2002 Act have had little impact. This has been partly due to the fact that many mortgage lenders refused to lend on commonhold units, so Conveyancing Solicitors had to advise clients that they could have problems selling them.
Also property and management companies were no doubt unwilling to forgo the money they could make out of leaseholders in the form of ground rents, profits from service charges and management fees, and other charges.
Make Commonhold compulsory
CentreForum has suggested that commonhold should be used for all new flats after 2020. Surely there is no reason why this should not be done much earlier. The legislation is all in place, all that is lacking is the political will to make it compulsory.