Thursday, 23 July 2020

Reinvigorating Commonhold - Law Commission Proposes a Dramatic Shake-Up of Home Ownership

On 21 July 2020, the Law Commission published three reports on Commonhold, Leasehold Enfranchisement and Rights to Manage.

The aim is to make each process simpler and to offer a better deal for leaseholders.

The most eye-catching recommendation by the Law Commission is that the residential leasehold system should be replaced by commonhold, a system that could also be used in mixed use schemes.

This not only means the creation of new commonhold schemes in future, but could also include the conversion of existing leasehold schemes to commonhold.

Its proposals are contained in a lengthy document called “Reinvigorating commonhold: the alternative to leasehold ownership”.

Commonhold was introduced in 2004 (when a law passed in 2002 came into force) as a new way to own and manage interdependent properties.

It allows a person to own a freehold ‘unit’ – like a flat within a building – and at the same time be a member of the company (the “commonhold association”) which owns and manages the shared areas and structures.

Commonhold has several potential advantages over leasehold. These are:

·       Freehold ownership that doesn’t run out – unlike leases which expire and can be costly to extend. There’s no ground rent and no forfeiture.

·       Standard rules and regulations apply – which should make conveyancing simpler and cheaper. Each commonhold constitution (CCS and articles) must contain terms that are prescribed by law.

·       Owners have a stake in the wider building and don’t have a landlord – instead, owners run the shared areas together.

But despite these advantages, commonhold didn’t catch on for the reasons outlined in my blog post in 2018 following the Law Commission’s call for evidence.

The Law Commission has sought to address these concerns. It suggests that commonhold should not be looked at through the lens of leasehold as it involves a “culture change”, moving away from an “us and them” mindset, towards “us and ourselves”.

It’s an attempt to move towards the kind of system of “condominium” or “strata” ownership used in other countries and away from the often antagonistic relationship of landlord and tenant, where the “tenant” is meant to be the owner of its most valuable asset, rather than a diminishing term of years.

This is the impetus behind the recommendation to reinvigorate commonhold, so that leasehold is no longer needed.

The report makes 121 recommendations, which aim to make commonhold “not just a workable alternative to residential leasehold ownership, but the preferred alternative”.

The recommendations include allowing the conversion of an existing leasehold building to commonhold if only half of the leaseholders agree and without the need for consent from the freeholder.

The Law Commission recommends that the government works with lenders to ensure they will accept the automatic transfer of their mortgages from the leasehold title to the new commonhold unit, since it offers greater security than a lease that is running out and which can be determined by a landlord.

The proposals would also enable commonhold to be used for larger, mixed-use developments consisting of residential units and shops, restaurants, and leisure facilities.

These developments could be divided into “sections”, enabling developers to manage separately the different types of use. This could ensure that only unit-owners within each section are able to vote on matters relating to that section, and that only those who benefit from a particular service end up paying for it.

Here is a link to the full report and the summary.

Will this ever happen?

The Law Commission acknowledges in its report that it does not believe commonhold will take root on its own.

It will not be used unless adequate incentives are put in place to make it more attractive to developers than leasehold, or unless it is made compulsory – which is clearly the Law Commission’s preferred option.

That would be a dramatic shift in the law of property, arguably the biggest since 1925.

Making commonhold compulsory would require strong conviction from government and would take up a huge amount of parliamentary time, which is unlikely to be forthcoming any time soon I would think.

The track record of recent governments in implementing Law Commission proposals for land law reform isn’t promising either.

Back in 2011 the Law Commission made excellent proposals for modernising and simplifying land law that included reforming the law on covenants to create a new legal interest in land, called a “land obligation”, that could be either negative or positive and would be enforceable against successors in title without the current problems inherent in the law relating to covenants.

This would have solved, or at least simplified, many of the problems encountered on dealing with positive obligations on freehold estates.

On 18 May 2016 the government announced that it would bring forward proposals to respond to the Law Commission’s recommendations in a draft Law of Property Bill.

Since then…nothing.

So, I’m sceptical about what will happen next with these latest proposals.  If the government thinks there are votes in it; it has support from the tabloid press; and it can be parcelled up into an irritating three-word slogan, then it’s game on.

But I wouldn’t bet your house on it.

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