Commonhold Ownership – Proposed Changes by the Law Commission

The Law Commission has been holding consultations with professionals on the proposed changes to the commonhold conversion process and the commonhold structure. We look at the key proposed changes and what it will mean going forward.
For a breakdown of what commonhold ownership is please read our previous article on commonhold ownership.

_{What is the current commonhold conversion process?}

Under the 2002 Act, conversion to commonhold requires the consent of:
1. The freeholder;
2. All long leaseholders; and
3. All mortgagees of long leaseholders.
If the freeholder does not agree to the conversation, then collective enfranchisement may be necessary to change the freeholder and enable the process.

_{What are the proposed changes for residential developments?}

The key proposal is reducing the requirement for 100% of long leaseholders to agree to the commonhold conversion. Two options have been initially proposed:

• Option 1 – Reduce the requirement to 50% and allow leaseholders who object to retain their leasehold interest after conversion.
• Option 2 – Reduce the requirement to 80%. This will require the Tribunal to approve the conversion and require the leaseholders who object to acquire a commonhold interest.

Feedback concerning Option 1:

• It is less intrusive to those who do not want to convert to commonhold.
• It tries to integrate two different systems of ownership which is certain to create unforeseen difficulties.
• It creates a similar situation to collective enfranchisement where some leaseholders do not participate and do not become members of the freehold entity.
• It continues the problem of leasehold ownership within the new system by having two-classes of owners.
• It allows for commonhold ownership to be forced on a block where there is not a majority of support for it.

Feedback concerning Option 2:

• It is more intrusive to those who do not want to convert.
• Management is simpler as everyone is acting under the commonhold community statement.
• It requires the leaseholders who do not want to participate to either contribute to the purchase cost of the freehold, or have these costs deducted from the value of their property when they come to sell/convert.
• It requires owners to accept the commonhold community statement which may remove protections they specifically agreed to when buying the lease e.g. removes a requirement to use the flat as a home for the owner of the flat.

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_{What are the proposed changes for mixed use developments?}

In a mixed use block the residential flats and commercial units are all part of a single commonhold unit. There is therefore a risk that if the commercial units want to install CCTV which would only benefit the commercial units, they could be outvoted by the residential flats.

The key proposal would be to divide management of the building. Three options have been initially proposed:

• Option 1 – Create flying commonholds dividing the ownership of the different sections.
• Option 2 – Create layers within the commonhold e.g. a sub-commonhold for the residential flats and a sub-commonhold for the commercial units and an umbrella commonhold comprising the sub-commonholds. For issues which only affect a sub-commonhold only the members of that sub-commonhold can vote on it. For issues which affect the entire block all owners would be consulted.
• Option 3 – Create a management structure within one commonhold and different “sections”.

Feedback concerning Option 1:

• A flying commonhold has serious drawbacks and does not provide an adequate framework to regulate areas shared between more than one interest e.g. the foundations or roof.

Feedback concerning Option 2:

• It is difficult to ensure unit owners are fairly represented e.g. if each sub-commonhold elects a director to the umbrella commonhold one group may be unfairly represented where the commercial sub-committee contain 2 voting units, but the residential sub-committee contain 40 voting units.
• With larger estates multiple sub-commonholds can lead to the duplication of filing, and general administration.
• Each sub-commonhold would require at least two directors which may be a difficult position to fill.

Feedback concerning Option 3:

• It enables the management of shared areas and reduces the disadvantages present in Option 2.
• The commonhold community statement would need to be more detailed which is the opposite of its original purpose.

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_{What’s next for commonhold?}

The deadline for feedback for the consultation process has now closed. The above proposals will be developed further before a formal report is made. We will continue to update this article as this process continues. It seems that professionals will need to get to grips with commonhold ownership as the Law Commission is keen for it to become more mainstream and more accessible to the public.

_{​​More information}

Our Residential Property Litigation Team have experience of assisting both landlords and leaseholders in this area. Contact us for further advice on your particular circumstances.​

This article was written by Stephen Eccles, Partner at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of March 2019.