Commonhold vs leasehold
Many properties, particularly flats or maisonettes, are held on long leases. The Law Commission, in three detailed reports, proposes substantial reforms to the leasehold regime and recommends that commonhold should be the preferred method of owning flats.
The commonhold regime was introduced by the Commonhold and Leasehold Reform Act 2002, but has not been popular.
Historically, the leasehold regime was thought to have the following benefits:
- There would not be any element of flying or creeping freehold. The freehold to the entire estate would be owned by one legal entity.
- The leases to all the properties on the estate would be in identical form, and would include appropriate mutual rights.
- The obligations contained in the leases would be enforceable by the freeholder even if the freehold changed hands.
- Some leases would allow tenants to enforce directly against each other without involving the freeholder.
- A long lease was thought to be almost as valuable as a freehold title.
The approaches of lawyers, lenders and surveyors have changed over the years, and difficulties have arisen as a result. For example:
- Leases that had only 50 years left to run used to be acceptable to most lenders and to buyers. Now, only leases that have at least 80 or 85 years left to run are considered acceptable.
- In certain areas of the country, leasehold houses are the norm. This was – and still is to some extent – commonly accepted. However, in recent years, developers started to grant long leases of new houses instead of selling the freehold. This led to confusion amongst buyers who thought that they had purchased the freehold and to consternation amongst lenders and valuers.
- Ground rent provisions became more sophisticated and unfair. Instead of charging a nominal ground rent throughout the term, landlords would seek to charge a more substantial initial ground rent, which would escalate during the lease period. It would sometimes double every 10 or 25 years, resulting in unaffordable ground rents and arguably more extensive rights for the landlord to retake possession of the property.
- Management of the estate would be farmed out to a managing agent, who would sometimes charge excessive fees for providing information and would not always maintain the estate to an acceptable standard.
The commonhold regime was introduced to deal with the perceived unfairness of the leasehold regime. Commonhold involves:
- Each flat owner owning the freehold of the individual unit.
- Shared ownership and shared responsibility of the remainder of the estate
The proposed reforms will:
- Introduce a process for converting leasehold ownership to commonhold ownership.
- Introduce 990 year lease extensions, rather than the current 50 or 90 year lease extensions.
- Abolish ground rent on extended leases.
- Make it easier for leaseholders to collectively acquire the freehold.
- Promote commonhold as the preferred method of owning flats and an acceptable method of owning houses.
- Make it easier to set up a right to manage company.
- Introduce more flexibility.
The Law Commission is to be applauded for tackling this difficult area of law and for writing three detailed reports. However, the proposed reforms will only work if lenders agree to lend on commonhold properties without qualification.
Additionally, the proposals might overlook the fact that currently, even in cases where (a) management companies own the freehold of the estate and are collectively owned by the tenants, or (b) right to manage companies have been set up, the tenants find the management responsibilities overwhelming and appoint managing agents, who sometimes charge excessive fees and do not always maintain the estate to an acceptable standard. Any reforms must recognise this, and must contain safeguards against abuse by managing agents, coupled with effective powers of enforcement and sanctions for non-compliance.