Thirty years after the Labour party started pushing “commonhold” ownership in 1995, and two decades after the first legislation introducing it, Sir Keir Starmer’s government this week set out plans to revamp the tenure in hopes of actually getting the system off the ground.
Fewer than 200 properties currently use commonhold. Its take-up has been hampered by scepticism from lenders and developers. In England and Wales, the vast majority of flats are leasehold, where people own their home on a long lease, with overall control of the building in the hands of a landlord called a freeholder.
The government has promised to ban new leasehold properties within this parliament — and is looking at ways to convert existing buildings to commonhold. That means the largely untested commonhold system could see widescale use within the next few years.
“Government seems to be very focused on moving this forward as soon as they can. They have moved very quickly,” said Sarah Walker, partner at Travers Smith, a law firm.
FT Money breaks down the key points of commonhold and whether Labour’s reforms will be enough to make it viable for property owners.
What is commonhold?
Under commonhold, people can own their flat outright while the shared parts of the building — such as entryways, roofs and amenities like gyms or gardens — are owned by a commonhold association, in effect a special type of corporation. The system is modelled on similar structures in continental Europe and North America, such as condominiums.
Most of the rules for how commonhold associations are run will be standardised by the government — which it sees as an improvement over leases where terms can vary widely. Owners will each have a vote, and can set “local rules” for their building, such as limits on short-term holiday lets.
What’s wrong with the leasehold system?
The centuries old leasehold system is rife with problems. Uncooperative freeholds have held up critical fire safety measures in some buildings. There are many cases of freeholders setting up excessive “ground rent” payments, overcharging for running buildings and even paying themselves kick backs on contracts. The process for leaseholders to challenge their freeholder, or gain control of the building, is complex, expensive and slow.
Current “share of freehold” arrangements are in effect a workaround using a mix of leases, limited companies or joint freehold title to facilitate shared control, but without consistent rules for how to manage these buildings.
What is Labour changing in its reforms?
The government says the original commonhold legislation was “not fit for purpose and has held the commonhold back”. It is taking forward a 2020 Law Commission review of how to improve the legal set up. The government needs to convince developers and mortgage lenders that the system will be viable. Otherwise, a lack of financing and new construction could sink its reforms.
The key changes are aimed at strengthening associations’ governance and finances. The changes will make it mandatory to pay into a reserve fund to cover big ticket expenses, increase insurance requirements, add annual votes to elect directors and approve budgets, and tougher powers for associations to force the sale of a property if its owners do not pay their fees.
There are new rights for developers, including flexibility to divide up control of large properties that have a mix of commercial and residential units, or where only some units share certain facilities. There will also be new procedures to appoint directors in case no one volunteers to serve, and for how to handle insolvencies.
How will commonhold buildings be managed?
Under the reforms, commonhold associations will need at least two directors, elected by the owners. The associations will have to hold an annual meeting, where owners will approve a budget which sets the fees for upkeep and amenities. The owners can choose to hire a managing agent to run the building, and to have some of the directors be professionals. “We expect that managing agents will continue to be used to run all but the smallest commonhold blocks,” the government proposals said. But unlike the current system — where managing agents report to the freeholder — owners will be able to fire a poor performing manager. The government has also promised more regulation of managing agents, including minimum qualifications.
Will current leaseholds convert to commonhold — and when?
The government says it wants “to make it easier for leaseholders to convert” their building to commonhold, but admits the process is cumbersome and needs more work. Currently, the leaseholders, freeholder and even lenders against a particular building, all need to agree. Typically, leaseholders will first have to buy out their freehold, and then convert the ownership structure.
Carolyn Milligan, partner at law firm Herbert Smith Freehills, said conversion would bring “the elimination of ground rent and greater involvement in property management decisions”.
The current proposal calls for the threshold to be lowered from 100 per cent to 50 per cent approval from current leaseholders, but the government admits that isn’t currently possible. Another issue is that some leaseholds may not have the money to buy out their leases, even though recent legislation will make this cheaper. The government said it is working on policies to tackle this, including potentially allowing conversion to go ahead with the commonhold association leasing back particular properties to owners who choose to remain leaseholders.
Walker cautioned this could create problems for those “left behind in that legacy leasehold tenants . . . You don’t want to end up having a two tier system”.
What happens next?
The government has promised to publish a draft bill this year to implement these commonhold changes and provide details on how it will handle thorny issues such as conversion and tall buildings with a greater fire risk. There will also be a consultation this year on how the ban on new leasehold flats should be introduced, and any exceptions.
The government acknowledges the new commonhold system needs to be up and running before the ban on new leasehold properties comes into force.
