As evidenced in its publication of the Commonhold White Paper in March, which we discussed in an earlier briefing, the Government intends to replace leasehold tenure for flats with commonhold tenure. This allows for the freehold ownership of land in multi-occupancy developments with shared common areas and was established in England and Wales via the Commonhold and Leasehold Reform Act 2002 (the "2002 Act") and brought into law in 2004, but has rarely been utilised in practice.
Nonetheless, the Government intends to go ahead with this transition, so the real estate sector needs to engage with the process and use its knowledge and expertise to help improve commonhold in order for it to work well for everyone. With that in mind, and in light of the Government's intention to publish a consultation and draft legislation this Autumn, this briefing sets out a basic overview of commonhold and then poses five questions about the Government's proposals, to highlight areas where more thought and advice will be required.
Overview
In a commonhold scheme, each unit owner owns the freehold of their unit, and is a member of the commonhold association (the "CA"), which owns the freehold of the common parts of the scheme such as the roof, lifts, corridors and gardens.
The CA is a company limited by guarantee whose directors are volunteers from amongst the unit owners, and it is obliged to organise the repair, maintenance and insurance of the whole development. This means that the directors of the CA take on the responsibilities and duties of company directors under the Companies Act 2006 (such as acting within their powers; exercising reasonable care, skill and diligence; avoiding conflicts of interest; not accepting benefits from third parties; filing annual reports and accounts); from general law (such as a duty of confidentiality) and from statute (such as health, safety and welfare at work of its employees; and avoiding fraudulent trading).
There are also specific statutory obligations that relate to real estate ownership and management (such as fire safety duties under the Building Safety Act 2022 and the rules relating to the management of estate service charge systems contained in the Leasehold and Freehold Reform Act 2024).
The rules for the property are contained in the commonhold community statement (the "CCS"), and amongst the obligations it imposes on owners is a requirement to contribute to the costs incurred by the CA by way of commonhold contribution. The CCS is a prescribed form document set out in Schedule 3 to the Commonhold Regulations 2004, to which "local rules" can be added to reflect the unit holders' wishes.
The Law Commission analysed commonhold in depth and this led to the publication of its 2020 report "Reinvigorating commonhold: the alternative to leasehold ownership") intended to make commonhold not just a workable alternative to residential leasehold ownership, but the preferred alternative. It contains 121 recommendations which seek to tackle the primary issues with the existing commonhold system which the Government intends to implement in full.
1 QUESTION ONE: WHY NOT REQUIRE LARGER COMMONHOLDS TO INSTRUCT PROFESSIONAL PROPERTY MANAGERS?
The 2002 Act requires the CA to repair and maintain the common parts. This is a potentially huge responsibility, and the Law Commission recognises that "the management of a block is undoubtedly more complex than that of an individual house. It is not suggested that commonhold unit owners themselves will personally take charge. In all but small blocks, where self-management is a realistic choice, the expectation is that professional managers will be appointed." This is echoed in the White Paper, which says that the Government expects "that managing agents will continue to be used to run all but the smallest commonhold blocks". However, they did not translate this expectation into a requirement to employ agents, which would be a sensible step. This would follow the approach in jurisdictions where equivalents to commonhold have already been implemented, for example in Scotland, under the Tenements (Scotland) Act 2004, developments are required to appoint a professional property manager. Similarly, in Australia, it is mandatory under the Owners Corporations Acts for larger blocks to be managed by professionals.
2 QUESTION TWO: WILL COMMONHOLD UNIT-OWNERS BE AS WELL-PROTECTED AS LEASEHOLDERS?
Despite the allegations of widespread mistreatment of tenants under the current leasehold system, there is a robust and wide-ranging system of statutory protections under landlord and tenant law which will be increased once the Leasehold and Freehold Reform Act 2024 ("LAFRA") is implemented in full. Commonhold unit owners will be able to participate in annual votes to approve the CA's budget for that year, and owners who feel they have been disadvantaged by being outvoted on that budget (or any other matter) will have the right to apply to the Tribunal for redress. However, they will not have the detailed rights that tenants enjoy (such as the right under s.21 Landlord and Tenant Act 1985 to view information about the individual items that comprise the service charge expenditure) and commonhold contributions are expressly excluded from the protections set to be introduced for tenants and freeholders under LAFRA. The White Paper promises consumers that commonhold "is not merely an alternative to leasehold ownership, but a radical improvement on it", so it makes sense to ensure that unit-owners have the same protections in relation to their CAs as tenants do against their landlords.
3 QUESTION THREE: HOW BEST TO AVOID A TWO-TIER MARKET FOR FLATS?
Although the White Paper stresses the Government's desire to resolve the vexed question of how to manage the conversion of leasehold flats into commonhold flats, in reality it is likely that new commonhold flats are built before existing leasehold flats are converted to commonhold. The potential problem with this is that not only may many existing tenants feel that they have lost out on the benefits of commonhold, but also that a gap could also open up between the respective values of leasehold and commonhold flats. It makes sense for the Government to take further advice on this aspect of their proposals, and explore more ways to make it easier to convert existing leasehold schemes into commonholds. It will also be interesting to see whether more tenants choose to exercise their recently-enlarged rights to collectively enfranchise or to acquire the right to manage their buildings, in advance of the new legislation.
4 QUESTION FOUR: IS THE PROPOSED "SECTIONS" STRUCTURE GOING TO WORK FOR MIXED-USE BUILDINGS?
The White Paper confirmed the Government's decision to modify the commonhold tenure to allow for the creation of "sections" to separate out different interests within the same commonhold, such as the commercial and residential elements within a mixed-use scheme. The idea of this structure is to correctly allocate the costs of upkeep and decision-making powers within a building, without the duplication that would be necessitated by setting up separate commonholds within the same scheme. However, there are various aspects of this proposal which may cause alarm:
4.1 the separate sections can later be combined by a vote of the CA, albeit by high voting thresholds;
4.2 the CA would sit above the section committees and the CA's directors would be able to decide (i) whether to delegate their powers to those committees collaterally or exclusively and (ii) to revoke or alter the section committees' powers as they wish, subject to certain requirements;
4.3 it is unclear how the different elements within the scheme would be represented in the CA, eg by value/ floorspace/ one unit one vote; and
4.4 there will be governance issues for commercial entities working alongside private individuals, for example if one of the personnel from a corporate occupier were to act as a director of the CA alongside residential unit owners.
Until the section proposal is clarified and refined, it is likely that any newbuild scheme that will include flats and commercial units will separate out those use-types.
5 QUESTION FIVE: HOW COULD COMMONHOLD BE ADAPTED TO SUPPORT SPECIALIST FORMS OF HOUSING SUCH AS RETIREMENT HOUSING?
It is imperative to think carefully about how commonhold tenure would impact on operational real estate and retirement housing is an obvious area of concern, with the current under-supply of this much needed housing sub-sector and its unique features including:
- the vulnerability, advanced age and frailty of its
residents;
- the provision of often complex services (sometimes including
regulated care) alongside housing; and
- the operation of large communal spaces.
Whereas the existing structures would probably work well for age-restricted housing alone, the models of retirement housing which involve assisted living and care will not function within the commonhold system as it is presently drafted. This is because it does not recognise the role played by the operator and the investor, or the residents' potential need for protection, which would make the 'sections' suggestion inappropriate.
In Autumn 2024, we co-authored a report with McCarthy Stone on commonhold and the retirement sector. As the UK's leading developer and manager of retirement communities, McCarthy Stone has been keen to view the opportunities in commonhold for all parties, as well as looking at the further reforms it would need to support a flourishing retirement sector. The report suggested various ways in which commonhold could be modified to better protect the interests of all three parties. In particular, we considered how to give residents the democratic benefits of commonhold whilst meeting their expectations of living in a retirement housing scheme. One suggestion is that the operator is given a defined role and status within the CCS to provide its services via a standardised contract for a minimum guaranteed period of time while the scheme sells out and is successfully established, say three to five years, which is the case in Scotland. Other recommendations are for the operator to retain the freehold to the amenity areas within larger housing with care schemes, while the contractual duties between the operator and the residents are enshrined within the CCS. The operator could alternatively run the amenity areas under the terms of an operating lease granted by the CA (however this is likely to be the least desirable outcome for the parties involved).
None of these proposals are necessarily the finished product and some have suggested an exemption from commonhold for retirement schemes altogether. However, it is important to recognise that commonhold is a new way of setting up land ownership and the rights and responsibilities that go with it in England and Wales. As in other jurisdictions which have used forms of commonhold titles for many years (such as the US, Australia and New Zealand), it is likely that there will be teething problems and that the system will need to be tweaked before it works for everyone. This is not a reason to shy away from commonhold and instead the sector should offer its insights and expertise in making it work.
6 CONCLUSION
The introduction of commonhold is a good opportunity to reflect on what works well in our housing system and what needs replacing. The existing system of commonhold (as amended by the Law Commission's recommendations) is a good start, but will need fine-tuning. We await with interest the Government's forthcoming draft legislation and consultation paper.
This briefing is based on an article that first appeared in the Estates Gazette
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
