In England, properties are normally owned as either a leasehold or a freehold property. A freehold property is one that is owned outright, whereas a leasehold property is owned by a leaseholder for a set number of years. This is granted by virtue of terms contained in a lease, as granted from the freehold interest in the property.
First introduced in England in 2002, commonhold ownership is an alternative form of ownership of flats and other properties where two or more units share a building, communal area or services.
In 2020-21, there were an estimated 4.86 million leasehold dwellings in England. This equates to 20% of the English housing stock. In contrast, there are less than 20 commonhold-owned buildings in England and Wales, equating to less than 1% of English housing stock.
Commonhold ownership is similar to a freehold ownership whereby the commonholder owns their property indefinitely without landlord involvement.
However, a difference from freehold properties is that commonholders become a member of the company which manages the shared areas and buildings. This means that the collective commonholders in a commonhold building will have a say in how the building is managed. This allows commonholders to have greater transparency and control over their properties and the costs associated.
This is unlike a leasehold property where buildings are usually managed by the residential landlord or managing agents appointed by the residential landlord. Also, commonholds are not subject to a lease term. Therefore, there is no reduction of property value as the term reduces, such as with leasehold ownership.
Where leaseholds are subject to leases which are individually drafted, which could arguably be drafted poorly containing defects which often require rectification on sale of the property, commonhold documentation are largely standardised. This reduces the risks of errors in drafting, and there is only one set of commonhold documentation for each commonhold property. This makes the management of the commonhold property and individual units much easier.
There are various advantages associated with commonhold ownership as discussed above. However, in comparison to leasehold ownership, there are many speculations as to why commonhold units are not more commonly used.
This includes the complicated procedure to convert existing leaseholds into commonholds, as conversion requires the unanimous consent of the freeholder, all other leaseholders in the building and their lenders, which can be burdensome, costly, and time-consuming to obtain.
Also, it is argued that there has not been enough Government encouragement and incentives for there to be more commonhold properties created or converted. Therefore, commonhold ownership is left to compete with the more established leasehold ownership model.
Additionally, developers or investors appear more inclined to proceed with leasehold projects as these generate additional income, such as through ground rent, lease extensions and providing consents. Nevertheless, the change in legislation requiring new leases to be granted with peppercorn rent is suggested to make commonhold buildings more attractive.
Even so, prospective buyers fear that they will find it difficult to obtain finance to support them in purchasing a commonhold property. This is because lenders are unable to assess risks associated with this form of ownership without it being more widely used. This barrier to funding suggests that there is not enough interest and commitment in the market from lenders for commonhold ownerships to be encouraged and therefore achievable for prospective buyers.
It remains to be seen whether commonhold legislation will be improved or incentivised to encourage the uptake of commonholds. However, the Law Commission is seeking to make it the preferred alternative to leasehold ownership.
For more information please contact our Residential Property department here.
The above is meant to be only advice and is correct as of the time of posting. This article was written by Zeliha Sari, Trainee Solicitor in the Residential Property team 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 2023.