Commonhold could revolutionise the way flats are owned

Sarah Osborne, Partner and Head of Leasehold Enfranchisement at law firm Hart Brown, explains how commonhold works, and if it is for the common good.

Commonhold is receiving a lot of attention due to the recent Law Commission paper on resurrecting this process. This is part of a long (and some would say overdue) reform of the law concerning leasehold properties and, in particular, flats. Commonhold is not new and has been around since 2002. However, fewer than 20 commonholds have been created since the legislation came into force.

The idea of commonhold is to revolutionise the way that flats are owned. Currently, a flat owner owns their property as leasehold. This means ownership is for a limited time (for example a 99-year lease) and only owns part of that property (usually the internal areas). The structure of the building and external areas, such as the communal hallways, roof, etc are owned by the landlord or sometimes referred to as the freeholder.

As the lease term shortens, the value of the property decreases. This means that the lease is by its very nature a wasting asset. The flat owner will have to, at some stage, extend their lease to prevent this from happening and thus incur additional costs to prevent their property depreciating in value. If the lease term becomes too short (i.e. less than 80 years) it becomes very expensive to extend.

There is also often tension between the relationship of the landlord and the flat owner with a “them and us” attitude being fostered. Often there are competing interests, with some landlords seeing the building as an investment opportunity which competes with the flat owners’ interests of wanting their home and their surroundings in the hands of good management which they often do not control.

Commonhold eradicates both of these elements by the flat owners being the “landlords” of their flat and communal areas and are referred to as “unit holders” The unit holder will be responsible for a proportion of the cost towards the management of the building and will agree to abide by obligations set out in a commonhold community statement (CCS) which all flat owners must sign up to through a commonhold association. The idea is to democratise flat ownership with the flat owners being in control of the maintenance of their building. This way of ownership has been adopted in other countries including Australia (known as the strata system) and the USA (condominiums).

If this sounds like property utopia why have very little commonholds been adopted? Some of the reasons are you need 100% agreement with all flat owners over decisions (i.e. management) which can be unrealistic; it is ineffective with those developments that contain commercial premises or houses. There are also very few lenders who are reluctant to lend on a commonhold property as there is lack of certainty over the protection of the lender’s security (the mortgage) should the commonhold association become insolvent.

It remains to be seen if commonhold will become a way of ownership in years to come as this will mean a cultural as well as a legal shift away from the leasehold way of ownership that has existed in England and Wales for centuries.

Kindly shared by Hart Brown Solicitors