Commonhold and Leasehold Reform: what it means for developers and leaseholders
The publication of the draft Commonhold and Leasehold Reform Bill (the Bill) at the start of this year has the potential to mark a watershed moment in the evolution of property law in England and Wales.
Those of us of certain age will remember that commonhold was introduced with fanfare in September 2004 under the Commonhold and Leasehold Reform Act 2002. I recall attending detailed training sessions in anticipation of spending much of my career as a property lawyer setting up and generally advising on commonhold structures. All that time freezing in an overly air-conditioned seminar room was to no avail as I have not dealt with a single commonhold structure. I feel confident that I’m not the only professional in this position as to date there are less than 20 commonhold schemes in England and Wales.
Successive Governments have agreed that leasehold structures do not work for residential property. So, to avoid a repeat of the millennial damp squib that followed commonhold’s launch, the Bill proposes to ban new leasehold residential flats except in limited instances.
The commonhold model of home ownership will mean that single flats in a commonhold development will be owned outright, as opposed to the flat owner’s interest being time-limited as is the case under the leasehold model. Each commonhold flat owner will also become a member of a commonhold association and will jointly control communal areas with other flat owners within the development.
For developers, the introduction of commonhold will mean that they will lose traditional income streams from the leasehold structure, such as ground rents, service charges, lease extension premiums and the ability to sell the freehold. This may raise concerns about the financial viability of residential and mixed-use schemes as developers will be forced to maximise returns at point of sale rather than relying on longer-term revenue to offset development costs. This comes at a time when the development of tall residential schemes is already subject to additional up-front costs and delay because of changes to building control permissions introduced by the Building Safety Act 2022. The cumulative effect of these changes is unlikely to help the Government to meet its target to build 1.5 million additional new homes by Summer 2029.
One of the barriers to the earlier adoption of commonhold was the inflexibility of its structure, which could not be adapted to meet the requirements of phased or mixed-use schemes because there was no scope to allow the retention of units by developers or the management of different services and heads of expenditure. It is now proposed that there will be mechanisms to allow developers to create sections within the commonhold so that voting and cost-sharing can be compartmentalised. Developers will also be able to reserve the rights they need to complete the development of a site, including adding new units in later phases or reconfiguring the site in the Commonhold Community Statement (CCS), which is the overarching document replacing individual flat owner’s leases. However, this must be drafted into the CCS at the outset as subsequent changes would need the unanimous agreement of flat owners.
Developers will need to spend time and money adapting their financial appraisals and site set up process to take account of commonhold. The Government says that the ban on new leasehold flats will only come into force after the new commonhold framework has been introduced. The current timeline anticipates that this will happen in 2029.
It is therefore critical that developers engage now to understand how commonhold will work as it will take long term planning to adapt their business models so that they continue to be competitive and profitable.
How will conversion to commonhold affect existing leaseholders?
There was also no ability to grant long leases in commonhold developments which meant that shared ownership arrangements and Islamic finance structures could not be implemented.
The advantages of the commonhold model are that:
individuals are directly involved in the upkeep of their flats and their building, making it more akin to freehold ownership. So, rather than a landlord taking decisions on expenditure and maintenance for leasehold flat owners, under commonhold the flat owners will take part in those decisions directly from the outset so they can control costs before they are incurred;
if changes are needed to the rights and responsibilities of the flat owners, these are easier to implement as they are subject to a single Commonhold Community Statement (CCS) which may be amended to include local rules specific to the residential scheme. Under the leasehold structure, each lease in a development would need to be individually changed making the adaptation of mature residential schemes administratively time-consuming, costly and very difficult; and
there is no right of forfeiture, which is being replaced by a proportionate enforcement regime which allows a Court to order a remedial order, an order for sale and/or a costs order.
For large residential schemes, it seems unlikely that all of the flat owners will want to spearhead the management and maintenance of their building directly, perhaps preferring to appoint a professional manager. The reality may be that there is no practical difference between the experience of a leasehold flat owner and a commonhold flat owner where their flat is part of a large residential scheme which is professionally managed.
Beth Margetson is a Partner at Davitt Jones Bould
Beth Margetson
Partner
T: 020 8050 5443
M: 07949 013663
E: beth.margetson@djblaw.co.uk
Beth Margetson is a Partner at Davitt Jones Bould specialising in commercial property matters. She advises clients on a wide range of property issues and brings extensive experience of the legal and commercial challenges facing owners, investors, occupiers and public sector organisations. Beth is particularly interested in the evolving legal landscape affecting commercial real estate and regularly provides commentary on significant developments in property law.
