Commonhold White Paper | Lester Aldridge

The way you own property in England and Wales is evolving. Prior to the Commonhold Leasehold Reform Act 2002 (CLRA), you could only hold property in two forms, as freehold (indefinitely) or leasehold (for a fixed period of time). The CLRA was introduced into law in September 2004, when the government put forward commonhold as an alternative form of property ownership.

Take up of commonhold has been low and lenders have been generally unwilling to mortgage commonhold titles. However, the government has now produced a white paper which seeks to overhaul commonhold, so that owners and lenders have confidence in this form of property ownership.

What is commonhold?

Commonhold is a system of collective freehold ownership for flats or other independent units and is an alternative to leasehold property ownership. Owners of commonhold units become members of a commonhold association and hold a freehold interest, rather than an interest which is ultimately owned and controlled by a landlord.

How can property become commonhold?

There are two ways in which a property can be or become commonhold:

1. New homes can be sold as commonhold; or
2. Current leaseholders can convert their property’s tenure to commonhold.

The current process of converting a building from leasehold to commonhold is arduous and requires the agreement of the freeholder, all leaseholders and every lender with a mortgage secured over the properties. The white paper seeks to change this. There

How are commonhold properties managed?

Commonhold owners become members of a company limited by guarantee (Commonhold Association) which owns and manages the common parts of the development. This means that all unit owners collectively control how their building is managed, including any costs and responsibilities which arise when managing the building.

Any disputes which arise between the commonhold owners are resolved using the commonhold dispute resolution procedure.

Current position:

It is understood that only 1/3 of lenders are willing to finance commonhold properties. Concerns include:

• What happens if the commonhold is brought to an end?
• What happens if the commonhold association becomes insolvent?
• If there is no landlord, who enforces non-payment of communal charges?

Government proposal:

The government is keen to persuade more lenders to sign up to the proposals, and to have confidence that “commonhold offers a more secure form of asset than leasehold”.

The white paper sets out some of the key benefits of commonhold ownership over leasehold, which include:

• No threat of forfeiture, ensuring that the Lender’s security is secure;
• No unregulated and unaffordable ground rents;
• Leases are ‘wasting assets’. With commonhold ownership, the interests of homeowners are preserved in perpetuity rather than their value depreciating over time;
• Detailed protocols clarifying how the property will be managed;
• Flexibility and ability to adapt to change and be future proofed; and
• Mandatory reserve funds in place of service charges, to cover the cost of future one-off or major works required to the property.

Addressing concerns:

• What happens if the commonhold association becomes insolvent?

Associations will be given additional tools to enable them to respond to the threat of insolvency, including by way of charge. Lenders will have the opportunity to set out any objections before a decision is made., and should automatically have the standing to make an application to the court during the insolvency process, to protect their interest.

• If there is no landlord, who enforces non-payment of communal charges?

Lenders will be given aright to be notified when a debt reaches a level that triggers an expedited order for sale. The Lender would then be entitled to:

1. Repossess the property in accordance with the terms of the mortgage (provided the unit owner is also in default on their mortgage payments); or
2. Pay off the unit owner’s debt and add the amount to the mortgage balance.

Final thoughts?

The government is set to ban leasehold property ownership and, for that to happen, it is essential that the draft Leasehold and Commonhold Reform Bill (to be published later this year) deals with any reservations lenders may have in granting funding for commonhold property. Whilst some concerns, discussed above, have began to be addressed, there is still a way to go in order to convince the remaining 2/3 of lenders that commonhold is a secure way of owning property in England and Wales.