The difference between leasehold and commonhold

What is commonhold?

Leasehold is a way of dividing a property up, often into flats, and ensuring that the owner of each part has to abide by particular rules and pay their fair share of any communal costs, but without having ownership of the whole building. The main problems with them are that;

• they don’t last for ever so flat values decrease over time;
• flat owners have to pay ground rents to the building owner; and
• there is a lot of scope for argument over how the building is run because the flat owners pay for it but don’t necessarily get to decide how the money is held or spent. Where an investor or business owns a building there can commonly be mistrust amongst flat owners that it is being managed in their best interest. Even where the residents own their own building together there can be major disputes and division about how it is managed and the interests and priorities of different owners don’t always align.

Commonhold ends up in mostly the same situation, but with different terminology. With Commonhold the individual parts of the building are called “units” and the owner (called a “unit holder”) becomes a member of a commonhold company (a “Commonhold Association”) which owns the building. Instead of a lease setting out what the unit holders each own there is one central document called a “Community Statement” which sets out what is contained in each unit and the company, like all companies, has rules about how it is run and makes decisions.

There isn’t a time limit on owning a commonhold unit and there aren’t any ground rents, so the first two of the problems with leasehold mentioned above don’t exist with commonhold. The freehold is owned by the residents which means that the building won’t be owned by an investor or business, which cuts out some of the common disputes between building owners and flat owners.

What commonhold cannot change is people, and the people in each unit will still have different priorities and ideas about how the building will be run, which costs should be incurred and when, and what they should and should not be free to do with their respective units. Similar systems are used in many countries like the Condominium system in the U.S.A or the Strata title system in Australia, and you won’t have to search far online to see the disputes owners have in those systems.

Commonhold exists already in England and Wales but only a few buildings use it. The Government is consulting on changes to the system to make it more attractive for flat owners to change their building from leasehold to commonhold, and also has suggested that it will amend the law to force all new blocks of flats to be commonhold past a certain date.

Should I be worried?

For first time buyers in years to come, commonhold looks promising. The leasehold system in the UK has been widely criticised in recent years, and commonhold could, over a period of time, mean that leasehold properties no longer exist and the complications associated with that legal system would fall away.

If you’re happy with your leasehold flat, commonhold probably looks worrying. It isn’t clear whether commonhold units entering the market will be more or less attractive to buyers and lenders than leasehold flats. If the new system impacts the values of existing flats, flat owners will not be pleased. For some flat owners who own their own buildings, they have already arranged very long leases, and in some cases ground rents are not considered a problem but are used to better manage the site without additional service charges. Having an income means buildings owned by flat owners can borrow from banks to purchase nearby land, or build up a fund of money used to improve their building or to defend litigation, or to challenge planning applications made for nearby land which would disadvantage their flat owners. Those existing leasehold communities may not want to switch over, and particularly may not want to pay to switch over, from a very similar system they have already paid to reach.

From the perspective of investors who buy buildings with flats, this will be a move in a familiar direction of closing down that market, very few new ground rents could be created since 2022. Since that time. many developers have already moved to selling flats with very long leases and transferring building ownerships to companies made up of the owners, which is already quite similar to a commonhold arrangement, so being compelled to use a similar system when building new blocks is unlikely to have much impact at this point.

For anyone with a leasehold flat who is unhappy with the system, commonhold might be appealing but it will depend on the specifics and how the market for flats treats commonhold units versus leasehold flats. They would still have to buy the freehold in order to create a commonhold though, so it begs the question of whether that is much more worthwhile than the current options available for leaseholders to purchase their blocks. People in that boat will need to weigh and re-weight the current reforms to the leasehold system against the potential benefits and costs of a commonhold system as time goes on and the current consultations progress.

Many leaseholders I speak to have been watching the proposed leasehold reforms since 2018 with bated breath, and seven years on are desperate for some certainty to be able to make good decisions about what to do with their flat. New proposed reforms have already created new uncertainties, and the prospect of a further wait to find out how the commonhold consultation unfolds will be a worry in itself.

David Gibson specialises in leasehold reform legislation, lease extensions, freehold sales and purchases and leasehold advice. He also deals with lease variations and consents, including leasehold matters for companies and individuals who own flats or freeholds subject to long leases. If you would like assistance on anything mentioned in this article, please contact David on 020 8290 0440.