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Commonhold – has its time finally come?

21 May 2018 • Julie Loggenberg

Back in 2002 a new form of tenure was heralded as ‘the answer’ to the problem of leasehold in England and Wales, with the passing into law of the Commonhold and Leasehold Reform Act. Much excitement and commentary followed, but it disappeared almost as quickly as it had appeared, with just a handful of sites being registered with the Land Registry since 2004.

The reason isn’t rocket science - commonhold brings no financial incentive for a developer. There are no ground rents to benefit from or sell on to an investor, no residual control over the use of the land once sold, and no system to value commonhold units.

Major deficiencies in the legislation, and no appetite for a review, kicked commonhold into the long grass, and seemingly consigned it to the dusty shelves of the law library.

Back on the agenda

Fast forward 14 years and commonhold is back on the agenda. But why? Media focus on unscrupulous practices and landmark legal battles have made leasehold toxic, with the mention of it sending buyers and lenders into a blind panic, and headlines branding developments as “fleecehold” turning public opinion against the tenure.

Reform is high on the agenda, and many developers have been forced into capping or abolishing ground rent increases and reducing the cost of enfranchisement in an attempt to save themselves from direct government intervention, with the promise of legislation if landlords don’t put their houses in order.

Mindful of the bad press surrounding leasehold, the Government has asked the Law Commission to report before the summer recess on commonhold and enfranchisement. The Law Commission will be considering:

  • Creation/conversion to a commonhold
  • Improving flexibility
  • Corporate structures
  • Developers’ rights
  • Enforcement powers and dispute resolution
  • Insolvency

Commonhold has its issues

Legal and property professionals alike recognise that the current legislation does nothing to encourage the take up of commonhold by the market. The lack of flexibility within the commonhold rules is perhaps the single most important obstacle preventing developers from buying into this tenure, as it does not allow for the complexities of mixed used development to be accommodated within the legal structure.

Commonhold can only be registered with a plan, which it is hard to change. New build developers need to sell off plan, and if these change during the development period then it’s very difficult to amend. With no residual interest in the site, developers can be tempted to build and dump, leaving buyers with no redress.

A single rule book cannot cater for the different interests generated on such schemes as it is not possible to charge different service charge rates or to grant a long leasehold interest, which would preclude shared ownership, for example. Under the Commonhold Assessment every owner of a unit has to be charged the same, which is clearly a problem.

The Law Commission is considering the idea of applying a layered or a “flying” commonhold title to be registered to allow for phased development, and setting of separate service charges which would sit under a parent commonhold association. We can still end up with complex legal structures under this arrangement, not dissimilar to headlease/underlease/sub-underlease situation.

Finding the right corporate structure

The current legislation also means that the Commonhold Association has to be a company limited by guarantee, so if the company fails then the commonhold will collapse, with the obvious question being where that leaves lenders and unit holders.

With the company model not being the most appropriate corporate structure to hold the commonhold a different or special form of corporate vehicle, that cannot be struck, off needs to be considered, or at least a form of substitute management appointment/ guarantor/government backed safety net to satisfy lenders should be agreed. The insolvency provisions in the legislation will also need to be re-written if lenders are to feel comfortable.

Furthermore, there is no forfeiture for non-payment of charges and breaches of the commonhold rules other than sanctions or reduced voting rights. All disputes have to go to the courts, so an ombudsman system, such as they have in Australia, may need to be created.

Tinkering round the edges is not enough

So where does this leave leasehold. Those in favour of sticking with the status quo are proposing a form of ‘leasehold-lite’, advocating reform of the existing system to redress the imbalance and abuses. Those in favour would argue that it would be easy for government to simply abolish ground rents, or set a cap, and have all residential leases for a minimum term of 999 years with the freehold owned by the leaseholders.

This is certainly attractive and averts attention from the wider conversation, but would not be the root and branch reform the public seems to want, and will do little to restore faith in our land ownership system in their eyes. Abolishing ground rents, for example, will grab headlines, but a landlord can easily create a fixed service charge in new leases which is outside the scope of S20, and would be, in effect, ground rent by the back door.

The Law Commission has got its work cut out but commonhold as a tenure is gathering momentum and seems is here to stay. And while the Commission report is to be welcomed, how much will be enacted into law and by when?

Tinkering round the edges is not going to satisfy developers, investors or buyers, but whether there will be a landmark piece of legislation on residential leasehold remains to be seen.

 


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