All change in leasehold home ownership?
Helena Bannister explores the Law Commission’s commonhold report.
21 July 2020 was a busy day. The Law Commission published three reports on commonhold; leasehold enfranchisement/freehold acquisition and the Right to Manage (RTM). There is a large amount of information to digest for those involved in the residential leasehold sector, and the Government will have a huge legislative task ahead should the entirety of the Law Commission’s recommendations be adopted. The trio of reports are long, with hundreds of recommendations. This article will focus on the commonhold report.
The Commonhold and Leasehold Reform Act 2002 introduced commonhold as an alternative tenure to leasehold, enabling flat owners to retain the freehold of their properties. However, it has never really taken off. The new report makes recommendations to make commonhold a workable and preferred alternative to residential leaseholds, including:
Conversion from leasehold to commonhold
- That the previous requirement for unanimous agreement from all leaseholders to convert to a commonhold be removed. Upon conversion of existing leasehold to commonhold all leaseholders, even non-consenting leaseholders, would be required to take a commonhold unit. As compensation on conversion is to be paid to the existing freeholder, non-consenting leaseholders would not be required to contribute to those costs. Instead, participating leaseholders would be expected to ‘find a way of financing non-consenting leaseholders shares of acquiring the freehold’ with a charge being placed over the units of non-consenting leaseholders. On subsequent sale a repayment would need to be made to the leaseholders who financed the acquisition of the freehold. The law commission recommends equity loans are made available to non-consenting leaseholders, and optional ‘help to buy loans be offered to participating leaseholders.
Mixed use schemes
- Effective management via a new tool called “sections”, in order to separate out management of different types of interest within a commonhold. Sections for areas such as commercial vs residential or separate blocks could be created, with “section committees” established to represent unit owners within each section, having been delegated powers by the directors of the commonhold.
- That rights for developers are included to allow phased completion of a scheme after some, but not all, of the commonhold units have been sold. Registration of the commonhold could be done in phases, whereby a developer would register the commonhold phase one and then apply to extend the commonhold upon the completion of phase two. If the developer needs to make changes to the phase one commonhold it should not interfere ‘unreasonably’ with the phase one unit owners’ enjoyment of their units. Unit owners would have the right to apply to the tribunal if they believe these limitations have been contravened.
Management and financing
- That directors of the commonhold association to be elected annually. If no unit owners wish to serve as directors, it should be possible for an affected party to apply to the tribunal for professional directors to be appointed.
- That to address concerns that unit owners with short-term views could lead to a reduction in building maintenance quality, powers of commonhold associations are extended from merely maintaining to being able to replace where repair is not possible. It also proposes a duty be placed on unit owners to keep in repair ‘relevant services’ and not allow any other part of the unit to fall a state of disrepair such that it adversely affects other unit owners. Emphasis is on the need to keep expenses at reasonable levels and prevent ‘excessive expenditure’. Expenditure above a certain threshold would need to be voted on by a majority of unit owners.
- That different pools of funding or “heads of cost” be created so as to prevent commonhold owners contributing to expenditure that they do not receive benefit from. Also unit owners would be given the right to challenge their share of expenditure if allocations are not proportionate to the benefit received. The tribunal would hear such cases. It recommends the introduction of a code of practice for both residential and mixed-use commonhold schemes, to assist with these issues.
- That every commonhold must maintain a fund towards future repairs, which will allow the cost of major works to be budgeted for over the years and reduce the risk of large and unexpected bills.
- To make it harder to change the rules of the building, whilst ensuring that important changes can still be made. Where a change is made that particularly affects one of the owners, they could apply to the tribunal.
- That any disputes are resolved quickly and informally, through commonhold’s bespoke dispute resolution process when owners or the association fail to comply with the rulebook.
Responding to emergencies
- Where safety concerns have arisen, notably around cladding and fire safety, commonhold unit owners are suggested to be ‘in a better position’ than leaseholders to deal promptly and effectively with emergencies to raise finances for remediation. It is proposed commonholds be given three ways of raising emergency finance, with tribunal approval being required, including selling off the common parts, borrowing money secured by a fixed charge over the common parts, or taking a floating charge over the commonhold’s future income stream.
Looking to the future of leaseholds, the implementation of the recommendations on commonhold reform will not be sufficient on its own. The Government must now decide whether commonhold should be made compulsory, so that flats cannot be sold on a leasehold basis in the future, or whether developers should be left to choose between leasehold or commonhold and if so, how commonhold should be incentivised, or leasehold disincentivised.
In terms of current leaseholds, changes are now afoot in light of the Law Commission’s recommendations on the enfranchisement and RTM regimes, reform of ground rents and regulation of property agents. These all herald a period of real change for all those involved in the world of leaseholds, if the Government’s will to implement these reforms now gathers pace.