A decisive moment in the history of land ownership

Answer

Commonhold (CH) was first introduced in England and Wales in 2002 but failed to be taken up in the living and wider real estate sectors. 2020 saw the publication of a detailed Law Commission report on reinvigorating CH as an alternative to leasehold ownership. The government now wants 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 newbuild flats, the Commonhold White Paper (CWP) sets out how the existing CH model will be reformed (for the most part) in line with the Law Commission's recommendations.

What’s commonhold?

There are many good explanations of what CH is, including within the Law Commission’s formal report summary, the CWP and also on the Leasehold Advisory Service’s website. CH can be summarised very briefly, as follows:

• CH is a type of freehold ownership.
• In the CH building each owner owns the freehold of their unit. 
• Each CH owner is also a member of the CH association (CA), which owns the freehold of the common parts of the building (eg, the roof, corridors/entrance lobby and external areas such as roads/parking and garden/open space) and must organise the repair, maintenance and insurance of these areas.
• CA will be a company limited by guarantee. In practice, the directors are either volunteers from among the CH unit owners or will be professional directors and/or with the director’s responsibilities passed down to a third-party manager. So, the CH system also includes an understanding of corporate law and governance.
• (Freehold) CH tenure is similar to forms of property ownership for flats in other jurisdictions, including the US, Australia, New Zealand and Scotland.
• The rules for each CH are contained in a CH community statement (CCS). The CCS imposes obligations on the CH unit owners, including the requirement to contribute to management costs incurred by the CA. The CCS is a prescribed form document set out in Schedule three to the Commonhold Regulations 2004; however, “local rules” can be added to reflect the specifics in a building.
• Broadly, as with existing leasehold buildings where leaseholders have a share in the freehold or where the right to manage has been exercised, in CH, the CH unit owners vote at meetings of the CA to decide collectively about how their building should be managed and to enforce the CCS rules within the building.  

What’s next?

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’s still no fixed date for this to happen.

Déjà vu?

As was the case in a more famous reformation, which took place at the end of the Middle Ages, major upheavals that seek to challenge dissatisfactions with an existing system are not without their controversy. The Law Commission's report contains considerable detail (well over 600 pages of text!) and the wind is very much in the government's sails for the launch of a new CH. However, there’s growing concern that, within the material published to date, there remains a lack of insight about the complexities of delivering and managing more complicated and sophisticated housing and mixed-use schemes, and how this is dealt with in the existing legal frameworks and the relationships that surround them. Arguably, potential failings that would arise from a poorly conceived new CH framework will only add to, rather than reduce or remove the current problems, which the government has identified in CWP and seeks to address.

What are the areas that the new CH needs to finesse?

Some of the technical, legal and practical challenges that need to be resolved are set out below, but there are many more:

• One of the key drivers for the reforms is rising management costs and mismanagement generally – this is a laudable objective. The government wants to do away with what it perceives as the ‘feudal’ leasehold system and instead empower individual CH owners in a block through their membership of the CA. It’s, however, questionable as to whether this approach will result in a better financial position for homeowners, and whether owner empowerment automatically equates to the same individuals taking on responsibility and accountability. Evidence suggests that it doesn’t, or that, once any initial impetus has run its course and/or a particular group of ‘interested’ residents has moved on, problems can then re-present themselves. There may be good reasons why management by homeowners is unlikely to be taken up successfully, such as:
  • individuals may not have the time/inclination to manage;
  • administration of the CA entity and putting into effect the decisions it makes, such as in areas like procurement of insurance, isn’t straightforward and will be time-consuming in all but the most straightforward of buildings; and
  • 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.  

Arguably, rising service costs are caused as much by external matters, such as rising inflation and global energy crisis, and not by the fact that buildings aren’t controlled by the owners of the units within them.

• New developments – more thought is needed as to how, in practice, developments will come forward under the proposed new CH rules. There are 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 (eg, roads, sewers and utilities) 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 that needs to be implemented/adopted is a CA, rather than a developer.       
• Shared ownership leases – 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, this approach will leave both leasehold and CH systems in place within the same CH building. Other areas of the living sector, including later life housing mean that by the time the draft legislation has become law, these issues may well be dealt with differently.
• The government’s view is that some of the ways of mitigating current concerns, and also concerns with the role of landlords being removed in the CH structure, is:
  • to provide an enhanced role for the Lands Tribunal;
  • for CAs to be able to appoint professional directors and/or manage agents to plug the gaps that we’ve alluded to above; and
  • for property managers to plug the gap created by the loss of the ‘landlord’ role; however, there are concerns about the ability of that part of the property industry to deliver on these significant areas of responsibility and at scale, meaning, therefore, that registered providers (RP) and other parties ,may look to develop property management arms as a core business case but also by way of continuing to fulfil their wider social and corporate objectives within CH.
• The government also intends to make it much easier/attractive for existing buildings to convert to commonhold ownership. We mention this for completeness, but the government has indicated that at present it’s prioritising the reinvigoration of CH for new developments. This isn’t surprising given the amount of work involved across the board when it comes to the CH agenda.    

A call to action?

The draft legislation and formal consultations will provide an opportunity for scrutiny and amendment. However, there’s increasing awareness that those with the right experience and knowledge – including RPs of social/affordable housing, together with other stakeholders and key players in the industry – now need to engage with CWP, especially with regard to how it affects mixed-tenure development and management. Ideally, this engagement, and feeding back to the powers that be, needs to happen before the publication of the draft bill. So there’s not a lot of time for this to happen.

Your career goals?

From a housing and wider real estate lawyer’s perspective, the current position provides an opportunity to step back from transactional work and engage with client executive teams and their governance boards to help them understand what the new proposals are and what the (potentially far-reaching) effect would have on the way housing is delivered and managed.Armed with that information, one can help clients to engage substantively with the forthcoming consultations and draft legislation – this will likely be received positively from any client base and usually help to enhance the overall relationship and a firm’s market presence.

Ben Halsey is a knowledge development lawyer at Devonshires Solicitors.