Commonhold, The Law Commission's final report
The Law Commission has today published its three final reports on leasehold reform and the future of home ownership. Their recommendations about leasehold enfranchisement and the right to manage are aimed at improving the existing system of leasehold ownership, whilst the third report about commonhold seeks to create a viable alternative to leasehold ownership, with a view to its widespread use in the future.
Arguably the greatest change suggested by the Law Commission is their recommendation that commonhold become the preferred alternative to leasehold ownership. This would be a huge change to the status-quo given that many practitioners will never have come across commonhold.
In summary, the Law Commission's recommendations look to:
- make it easier to convert to commonhold ownership
- improve the management of commonhold ownership
What is Commonhold?
In brief, commonhold is where each person owns the freehold of their unit, which could be a flat, a house, a car parking space etc. That unit owner then becomes a member of the Commonhold Association which owns and manages the common parts of the block or estate. The Commonhold Community Statement is the document which sets out the boundaries of the common parts and the rights and obligations of the unit owners and the Association. The Commonhold Community Statement has a number of prescribed terms which are determined by Government to provide consistency. The intention is that there is no landlord in charge, instead the unit owners run the block or estate for themselves.
Making it Easier to Convert to Commonhold
The Law Commission's recommendations intend to make it easier for leaseholders to convert to commonhold. They main proposals are, in summary:
- Allowing conversion without freeholder's consent by a streamlined "acquire and convert" process which will entail the leaseholders acquiring the building by a collective enfranchisement process as a first step.
- Reducing the required number of leaseholders that support the process to 50%.
- Government to work with lenders to ensure they will accept the transfer of the mortgage to the commonhold title.
- Making the registration process easier at the Land Registry and providing that the leaseholders as well as the freeholder can register the commonhold.
- Developers should be able to register the development as commonhold in phases and they should be able to reserve rights in the Commonhold Community Statement to allow completion of the development.
- Shared ownership leases and lease-based home purchase plans are permitted as under the current commonhold scheme they are not.
One particular area of difficulty arising from the above is what happens with those leaseholders that do not participate in the conversions to commonhold. The Law Commission have suggested that non-participating leaseholders' units should also convert to commonhold and they will become members of the Association on conversion. The funding for such non-participating leaseholders will be provided by Government equity loans, similar to the Help to Buy scheme, which will rank after any existing mortgage and would be repayable on sale. It is also suggested that these loans are made available to the participating leaseholders as well. However, the Law Commission appear to accept that this may not be viable as they have also suggested that if the Government is not able to provide these loans, there should instead be a two-tier ownership where non-participating leaseholders will continue to hold their unit on leasehold after conversion on the remainder of the block to commonhold. It is proposed that leaseholder ownership will then be gradually phased out by replacing the right to a lease extension with a statutory right to convert to commonhold.
Improving the Management of Commonhold
The Law Commission has also made various recommendations to improve the way commonhold is managed moving forward. The main recommendations in this regard are:
- To facilitate the management of mixed-use buildings, "sections" can be created to allow for management of different areas to be separated where necessary.
- Any change to the Commonhold Community Statement would require 75% of those attending to agree to the change.
- It should be possible for a Commonhold Community Statement to restrict certain short-term lettings. This is specifically intended to allow commonhold owners to prohibit lettings such as Air BnB should they wish to do so in their block.
- "Event fees" (sums payable on the occurrence of an even such as a sale or letting of a unit) should be prohibited.
- The Association should have the power to apply for the sale of a defaulting owner's unit if they are in arrears, subject to certain safeguards.
- Directors of the Association should be elected on an annual basis by ordinary resolution. If unit owners are unwilling to be directors, an affected party can apply to the Tribunal for a professional director to be appointed. Furthermore, there should be a right to apply to the Tribunal for the temporary appointment of a replacement director where it is considered that they are failing in their duties.
- Various recommendations are made to avoid disputes in relation to service charges and to make the payment regime fairer. In particular, unit owners will be given the opportunity to vote to approve the annual budget. The commonhold will also be able to set an expenditure threshold for the amount they can spend without challenge. It will also be compulsory for an Association to have a reserve fund.
- Allowing sale or mortgaging of common areas to raise emergency funding for large projects that the unit owners are unable to fund.
- There are a number of recommendations in relation to dispute resolution, including giving the Tribunal jurisdiction to deal with disputes and providing that when a unit owner is in breach that they must indemnify the other unit owners and the Association for any loss.
- A minority protection regime is suggested to provide some protection where the majority decision impacts upon a minority that does not agree. The minority will be able to apply to the Tribunal where they are concerned about: variation of the Commonhold Community Statement, the creation or combination of a "section" or the approval of a budget in excess of a cost threshold.
- Clarity on insolvency of the Association by making it clear that a liquidator cannot demand contributions from unit holders but they will have the power to sell saleable common parts.
- The Courts should be given a discretion to decide whether a voluntary termination of the commonhold should be allowed.
Next Steps
There may certainly be some benefits to the commonhold system. It is clear that the Law Commission's recommendations have sought to take the lessons learned from the issues that arise in leasehold ownership to improve the way commonhold ownership is regulated. However, it remains to be seen whether these proposals will result in the dramatic change that a shift to commonhold ownership would require.
Lucy Zaremba is a Senior Associate in our Property Litigation team.