Commonhold model ‘poses challenges’ for ‘later living’ providers

James Long and Sarah Barlas of Pinsent Masons, who specialise in real estate advice for retirement homes and other later living property, said the proposals contained in the government’s recent commonhold white paper could serve to disincentivise investment in later living accommodation and impose burdens on the elderly people who reside in that property.

Commonhold is a form of freehold property ownership, which enables individual apartments, or ‘units’, within a building or larger development to be owned on a freehold basis. The government wants to encourage a shift to a commonhold ownership model after identifying problems with the leasehold model, which is in operation for most flats in England and Wales currently. Its white paper sets out broadly how it envisages a commonhold model operating and how it plans to incentivise the shift to a commonhold model by banning the sale of new flats on a leasehold basis – something it intends to consult further on later this year. 

Under the government’s plans, individual ‘units’ within a block would be owned outright by their occupiers while communal areas would be jointly owned by those unit holders. Responsibility for managing the property would fall to a ‘commonhold association’, which would be established as a limited company governed by the Companies Act 2006. Its directors would typically be the unit holders themselves who would be subject to the same scrutiny and obligations as any other company directors. The rules governing the running of the building would be set out in a commonhold community statement (CCS), supplemented by any local rules agreed by unit holders.

The commonhold model envisaged would therefore operate in a significantly different way to the leasehold model that is currently operated, since the property would be owned by, and responsibility for how it is managed would fall to, the occupiers themselves rather than a landlord.

Long said that one of issues with the government’s proposals in the context of later living is the intended operation of 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. While there are some exceptions envisaged, there won’t be an exception to the seven-year rule for later living leases, though the government is looking into how later living commonhold could incorporate “event fees”. 

“Event fees are based upon the sale price of a property and therefore any investor relying upon event fee income is keen to ensure that sale prices are as high as possible,” Long said. “There is a risk that if residents are in charge of the upkeep of communal facilities and buildings, they would take a short-term view in order to minimise expenses during their lifetimes.”

“There is potential for disagreement in the association over, for example, carrying out expensive and long-term repairs or enhancements. In the event of a dispute, as all residents would have to sign up to the rules of the commonhold association, they would also be the people having to take enforcement action against their fellow neighbours. There is no ability to forfeit a lease under commonhold, which makes this more difficult,” he said.

Barlas said there will also be real concerns for later living operators that residents in the later stages of their lives would not wish to take on the burden of having to be part of a commonhold association: “A number of residents would have to be directors, which comes with significant responsibilities. Also, given the age profile of residents, there would likely be a fairly regular need for new directors to be appointed, which could delay decision making.”

“Whilst a management company could be appointed to alleviate some of these issues, ultimately, it is the residents who are responsible for appointing and instructing that company,” she added.