Industry voices must be heard in move to commonhold

The UK government’s recent white paper proposals mark the latest step in what it said it hoped will be commonhold becoming “the default tenure”, with the government insistent that commonhold will not merely offer an alternative to leasehold ownership but be “a radical improvement on it”. The commonhold proposals form part of a wider package of properly law reforms.

However, as we explore below, shifting to a commonhold model entails new challenges and risks, which require further thought from and action by policymakers and stakeholders in the residential property market.

What is commonhold?

In its white paper, the government described commonhold as “a form of freehold ownership where individual property owners each own their unit outright, with no expiring term.” It added: “Like leasehold, these units could be flats, a shop, or an office unit. Together, they share ownership of the communal areas through a ‘commonhold association’, which is a company that they are all members of and jointly control. Commonhold is specifically designed to be owned, managed and looked after without the involvement of a third party, so there is no landlord.”

The commonhold association would be a limited company governed by the Companies Act 2006. Its directors would typically be the unit holders themselves and would be subject to the same scrutiny and obligations of any other company directors.

The rules governing the running of the building would be set out in the commonhold community statement (CCS), which is a prescribed form of document, meaning any commonhold development in any part of England or Wales would have the same CCS. The CCS would include many of the provisions typically found in a lease agreement, such as obligations not to carry out alterations without consent, the obligations on the commonhold association to repair, maintain and insure the common parts of the building, and the obligation of the unit owners to pay a service charge.

The CCS can be supplemented by local rules, which would be agreed by the unit owners at meetings of the commonhold association.

Background to the planned reforms

The commonhold model, or its equivalents, is in wide operation in a number of countries, including Australia, South Africa, Scotland, the US and Canada. In the UK, the previous Labour government provided for commonhold ownership through the Commonhold and Leasehold Reform Act 2002. The Act took effect in 2004, but the concept has never taken off.

The politicians say this is due to inertia in the legal community and the greed of landlords who want the ground rents, but a more measured review by the Law Commission of England and Wales in 2020 found that there were a number of real practical barriers to commonhold being adopted. It put forward 121 recommendations for reform. All bar one of those recommendations have been accepted by the government in its white paper in so far as they relate to new developments. The separate question of how existing leasehold schemes are to be converted to commonhold is subject to further consultation.

The barriers to adoption and the plans to address them

The Law Commission’s recommendations, and the government’s plans to implement them, reflect practical concerns that developers, lenders and unit holders have about the existing commonhold model.

Developers

There is a widespread view that the current commonhold arrangements are only suitable for small, simple developments. To address this and make commonhold suitable for more complex developments, the Law Commission suggested several measures that the government has endorsed. These include:

• the introduction of the concept of separate sections so that different parts of the development could be subject to different local rules and could pay for discrete services. For example, in a mixed-use building, the retail units could be an individual section and they would not pay towards the gym or the lifts and would not be subject to ‘tenant’ rules such as not to carry on a business at the property. They would pay for the loading bay which the residents don’t use and be subject to additional rules around the storage and disposal of waste. In its white paper, the government acknowledged that getting the detail and balance on this right is going to be critical and so further thought into how sections are defined and identified needs to be given;
• addressing the rights developers need to construct and sell the rest of the development in phased developments. The proposal is that, in the CCS, developers will be able to reserve the rights they need to carry out the rest of development, although they will only be able to exercise these for the purposes of completing the specified development. Again, the devil will be in the detail, but the issue is acknowledged. What the developer will not be able to do is keep a “golden share” so that they can control the commonhold association until they exit the development – the proposal is that they have same voting rights as other unit holders and, as the development nears completion, their influence over the commonhold association would wane;
• changes to the seven-year rule. The seven-year rule means that in commonhold, developers cannot grant leases for more than seven years or take a premium. This restriction precluded many types of social housing which developers are required to include as part of their planning obligations. The government therefore plans for there to be a specific exception for shared ownership leases. A similar exception is included in the Leasehold and Freehold Reform Act 2024 (LAFRA) but this does not work for all models of shared ownership so again we need to see the detail. There won’t be an exception to the seven-year rule for later living leases, but the government is looking into how later living commonhold could incorporate “event fees”. 

Lenders

Lenders have also expressed concern about the commonhold model. The lender’s remedy for non-payment of the mortgage debt will remain repossession, but a commonhold unit is not a lease. Their main concern is around the financial viability of the commonhold association and what its insolvency might mean. A complex raft of changes is proposed to give lenders comfort:

• lenders, along with unit holders, will have a right to apply to the First-tier Tribunal (Property Chamber) or Leasehold Valuation Tribunal (the Tribunal) to appoint directors, which can be paid professional directors;
• a mandatory general reserve fund is proposed for commonhold property, with the commonhold association having a right to also set up specific reserve funds for major expenditure, such as lift repairs. Whilst the aim is to ensure that the commonhold association has sufficient funds to meet its obligations, the level of contribution will need to be approved by the unit owners, so there are still concerns that the amount the owners are prepared to pay may not be sufficient;
• to help manage finances, the commonhold association will also be allowed to borrow against the common parts and future income. To exercise this right, the commonhold association will require the unanimous approval of the unit holders. Alternatively, where at least 80% of unit holders approve, the commonhold association can go to the Tribunal for approval. If borrowing is for emergency repairs, as is envisaged by the white paper, there is a question over how quickly the tribunal will be able to give any approval necessary;
• if a unit owner fails to pay its contributions to the commonhold association there is no right of forfeiture, something that could further undermine the association’s financial viability. To help overcome this in cases where debt of a unit owner to the commonhold association reaches a certain level, the commonhold association will have the right to apply for an order allowing it to sell the unit. Once the debt reaches that level, there will also be an obligation on the commonhold association to notify any mortgage holder and the lender will have the option to: repossess, if there are also mortgage arrears; pay the debt on behalf of the borrower and add it to their mortgage; or step in and manage the sale process.
• if the commonhold association becomes insolvent, there will be much better protections all round – including powers for the court to appoint a successor association which steps into the shoes of the outgoing association, although it is not clear where the new association would get its money from.

Unit holders

A central aim of the commonhold reforms is to improve the experience of the unit owners – to give them greater control over how their buildings are managed and ensure the interests of homeowners are preserved, as Matthew Pennycook, minister for housing and planning, put it in his foreword to the white paper, “in perpetuity”.

Practical changes to achieve this aim were set out in the white paper. These include:

• increasing the threshold for changing local rules from 50% to 75% of unit holders;
• including duties on the commonhold association to take out public liability insurance as well as building insurance and to at least consider director’s liabilities insurance;
• allowing local rules to permit minor repairs and alterations without consent, if that is what the unit holders vote to provide for;
• requiring a service charge budget to be set annually and voted on annually – if it is not approved, the old budget would automatically roll forward;
• more emphasis on alternative and out-of-court methods for dispute resolution;
• additional protections for unit owners that feel they are unfairly impacted by decisions made by the commonhold association.

Risks to consider and more detail to follow

In relation to the proposals outlined in the white paper, a lot of detailed drafting remains to be done – and soon: the government plans to publish a draft Bill in the second half of 2025 for pre-legislative scrutiny.

The draft Bill, it said, will provide for a commonhold model that is “very different to the model which is in place today”, adding that it will be made “suitable for operation in a much wider range of settings and be a credible replacement for leasehold for new housing”.

The draft Bill will not only seek to implement the recommendations endorsed by government in the white paper, it will also include proposals for converting leasehold tenures to commonhold – details that will be of major interest to existing landlords, in particular.

In tandem with the draft Bill, the government is planning to issue a ban on the sale of new flats on a leasehold basis – something it intends to consult further on later this year. This, it envisages, will further incentivise the shift to commonhold.

Change is coming, and with that there are risks and new potential liabilities to consider – the government is envisaging, for example, that commonhold associations with automatically be the principal accountable person (PAP) for Building Safety Act purposes in respect of ‘higher risk’ buildings. Those are serious obligations that commonhold associations would need professional advice on.

The detail of these reforms will be important, to ensure the property market at large delivers on the needs of people and businesses – and the government too, at a time when it is committed to ensuring 1.5 million new homes are built during the current parliament.