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Consultation on Commonhold

In April 2018 we explained that the Law Commission had launched a call for evidence on commonhold home ownership as part of the UK Government’s wider aim to overcome the perceived unfairness of the leasehold market (which we covered in August 2017).

The appetite for leasehold reform has put commonhold back on the political agenda. The release on 10 December 2018 of The Law Commission’s Consultation Paper on commonhold reform, ‘Reinvigorating Commonhold: the alternative to leasehold ownership’, outlines proposals for addressing some of the key issues with commonhold in an attempt to make it a more popular form of ownership.

What is commonhold ownership?

Commonhold is an alternative form of ownership to leasehold or freehold. It combines freehold ownership of individual flats or commercial units with ownership of the common parts through a commonhold association. The commonhold association controls the management of the shared parts in accordance with a ‘commonhold community statement’ (CCS) agreed between the freeholders, and is funded with the payment of a ‘commonhold assessment’ paid by each of the freeholders (which is similar in nature to a service charge payable under leasehold ownership).

Consultation on commonhold reform

The Law Commission’s commonhold project, of which the current consultation forms part, seeks to address a number of shortcomings in the law governing commonhold. The Commission has proposed various reforms, some of the most pressing of which are outlined below.

  • The difficulties of converting an existing development to commonhold. Specifically, the requirement to obtain consent from all leaseholders in a development, which the Commission describes as “almost impossible…in all but the smallest blocks.” The proposals in Chapter 3 of the consultation explore possible methods of converting to commonhold ownership without the consent of all leaseholders, in order to make the conversion of existing developments a more viable option.
  • The degree of flexibility allowed in amending the CCS. Proposals in Chapter 8 look at whether the voting threshold for amending the CCS needs to be altered to provide certainty for commonholders.
  • The ability to split commonhold contributions based on the services provided. Chapter 5 of the consultation proposes the creation of separate ‘pools’ of costs, based on which services are provided to each commonholder, and consequently what proportion of the commonhold contribution each commonholder should pay. This more complex structure may provide more flexibility for commonhold owners and make this method of ownership more attractive.
  • Enforcing commonhold contributions. Chapter 14 proposes the introduction of a statutory charge over the commonhold units for the payment of commonhold costs in order to ensure the commonhold association is able to enforce payment of commonhold contributions against those who fail to pay their share. The paper explains that “these provisional proposals are designed to reduce the risk of the commonhold becoming insolvent, or the risk of other owners having to meet the shortfall.”
  • Mixed use and multi block developments. The view to date, particularly from developers, has been that commonhold is not sufficiently flexible to cater for larger developments which combine residential and commercial units. The Commission proposes, at Chapter 5, the introduction of ‘sections’ within commonhold which would allow different interests within the same development to be separated out, and for residential and commercial commonholders to retain control over the CCS for their respective sections.
  • Protection of lenders in the event of insolvency. When responding to the Commission’s call for evidence on commonhold, lenders reported a lack of certainty about the effect that a commonhold association’s insolvency would have on a lender’s security. Chapter 10 of the consultation explores options for preserving the solvency of the commonhold association.
  • Other key issues for homeowners, developers and lenders are explained in the Law Commission’s summary document.

The Law Commission has also noted that a number of factors outside the scope of legal reform are likely to affect the popularity of commonhold ownership, including the limited awareness among consumers of commonhold as an option; a wariness on the part of mortgage lenders to lend against commonhold properties; and the wider role of government in incentivising commonhold schemes.

Next steps

The Law Commission’s consultation is open for comment until 10 March 2019, after which the Commission will publish a final report and assist with the implementation of their recommendations. Walker Morris will continue to monitor and report on key developments in this area.

If you would like any further advice or assistance in relation to this Law Commission project or any of the issues raised, please do not hesitate to contact Steve Nixon or Rachel Elgar.

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