Law Commission’s call for evidence on commonhold

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In August 2017 we explained that the Government was consulting on perceived unfairness in the leasehold market, including the sale of new leasehold houses and onerous ground rents; the recovery of possession for arrears of ground rent; and the inability of freeholders on shared estates to challenge the reasonableness of service charges. In December 2017 we reported on the Government’s response.

Part of the Government’s response was a proposal that it would do what it can to get commonhold off the ground across the property sector, including working with mortgage lenders.

On, 22 February 2018, the Law Commission launched a call for evidence on commonhold home ownership, which closed on 19 April.

What is commonhold?

Commonhold is a type of ownership which is created by a further registration at the Land Registry. It combines freehold ownership of a single property within a larger development, with membership of a company limited by guarantee that owns and manages the common parts of the development. It therefore allows the owners of each unit within a development to be in control of the development, without a landlord or other party able to make decisions about how the development is run.

Commonhold is commonly referred to as suitable for residential owners of flats, but it can also be used in a commercial context, for example between individual shops in retail parks or between offices in a block.

Commonhold was created by the Commonhold and Leasehold Reform Act 2002, primarily as an alternative to leasehold ownership. It is governed by the Commonhold Regulations 2004.

Ripe for reform?

The law in relation to residential leaseholds was one of the areas identified by the Law Commission in 2016 as part of its “13th Programme” of law reform. In December 2017 the Law Commission announced that commonhold would also form part of the 13th Programme, alongside the work on leaseholds.

The Law Commission has identified three principal potential advantages that commonhold ownership has over leasehold ownership:

  • The lack of a time limit on the ownership of the property, because a commonhold interest is capable of lasting forever.
  • Commonholds are subject to standardised rules and regulations which should, in theory, make conveyancing easier and cheaper.
  • Owners have a stake in the building and do not have an overarching landlord.

The Commission has cited evidence gathered in 2015, however, showing that, despite these perceived advantages, fewer than 20 commonholds have been created since the law came into force.

A number of problems or barriers to commonhold ownership have been identified, including (non-exhaustively) the difficulties of converting an existing development to commonhold (anecdotally described to the Law Commission as almost impossible); commonhold owners having to comply with onerous and complex companies law; the degree of flexibility allowed, for example to allow each individual community to make its own decisions about repairing obligations; the ability to split costs payable based on the services provided; and problems surrounding enforcement for non-payment by individual owners; and insolvency of the commonhold company.

The Law Commission has also identified that in order to work for developers, commonhold ownership must be more flexible and allow for mixed-use developments.

The recent call has sought evidence from lenders to identify why many are not currently willing to lend on commonhold properties.

The Law Commission has also sought views on three broad themes:

  • What are the difficulties in creating or converting to commonhold?
  • What issues make commonhold unattractive to homeowners?
  • What issues make commonhold unattractive in the wider property sector?

As part of its remit to consider reforms in the law, the Law Commission’s consultation will set out proposals for the reform of commonhold. Where the call for evidence raises wider issues (for example the need to make consumers more aware of this type of ownership), responsibility will fall to Government rather than the Law Commission.

WM Comment

This Law Commission call for evidence forms part of a wider Government initiative to deal with perceived unfairness in the leasehold market. The Law Commission’s consultation, to be published later in 2018, along with the Government’s own consultation in relation to leasehold, is likely to result in some significant market and practice changes for housebuilders/developers, mortgage lenders and homeowners alike.  Walker Morris will continue to monitor and report on developments.

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 Louise Power or Rachel Elgar.