I haven’t posted anything for some time, because I retired in January and haven’t been keeping up with recent legal developments as I hoe my cabbages and mow the lawn. However, something caught my eye last week that I really want to say something about, especially as it covers an area of law that I dealt with extensively when I was in practice. This is the Law Commission report on Commonhold, published on 21st July 2020. There is a link to the full report here. They also published reports on Leasehold Enfranchisement and on Leasehold Home Management which I may cover in the future.
Virtually all flats in England and Wales are held as long leaseholds. They may then be sublet as Assured Shorthold Tenancies, (which can also be granted out of a freehold by say dividing a house up into flats) but we are looking at the basic form of ownership here. As long ago as 2002 the concept of Commonhold was created by the Commonhold and Leasehold Reform Act 2002 but the idea was stillborn as there have apparently only been 20 developments created as commonhold in the 18 years since then. The Law Commission is looking at the matter again to see if they can get it off the ground this time.
The idea itself is fairly straightforward. A leasehold has a freeholder (the landlord) who owns the development and a tenant or number of tenants who have time-limited leases of the various units making it up – for instance the flats in a residential block of flats. This gives rise to friction because the leases will eventually run out (although normally after 99+ years), there is rent to pay, and the landlord generally manages the block and deals with the repairs etc, but at the cost of the tenants. Many foreign jurisdictions have forms of co-ownership which do away with the landlord, and the Law Commission was looking at how to set this up here. Commonhold was their first idea, and this is a second attempt at basically the same solution.
I am not going to go through these in detail, but the Commission provides various summaries as well as the full report on the link above, and the matter will no doubt be covered by other experts before long. My comments are broader and more practical ones.
The general idea of commonhold is that the residents own a freehold of their flats, which runs on permanently, with no rent to pay. The common parts of the buiding are owned by a commonhold association, to which the freeholders appoint directors, and they are responsible for managing the block. The residents have obligations similar to those under a lease (maintain their flats, pay for the cost of common maintenance, not disturb the neighbours etc), but with the commonhold association rather than a landlord. These are set out in a commonhold agreement. The directors can either manage the block themselves or appoint agents to do so, presumably subject to their overall control.
The report does not decide whether commonhold should be compulsory for new flats, or an alternative to leasehold. However, there are firm proposals to limit future ground rents to zero, and simplifying and cheapening the process for buying the freehold, or taking over management from the landlords. The Commission says that the final decision on which path to take is a political one which must be left to the Government. But you can see which way they want things to go.
I hope that this has been thought through, because it is an extremely complicated subject, and the Commission are proposing a radical change to a system of leasing which has run, with various amendments, since medieval times and before. Every so often there have been tweaks to correct perceived difficulties, and, once the courts have determined what the new law means, everybody knows where they are and they system runs on in its new way. Starting from scratch, which is broadly what is being proposed, is a bold step. There are any number of considerations which need to be addressed. And remember, when this was first introduced in 2002 it met a resounding raspberry from the construction and legal communities and has been virtually ignored ever since.
A few potential difficulties come to mind:
- Who sets up the commonhold association, and drafts the commonhold agreements to start with? Presumably the developer, who then will have no further involvment in the scheme. They are unlikely to have a lot of interest in what is produced, so there are likely to be standard prescribed forms to follow. These may not suit all cases, so individual drafting will be needed for this. There is a lot of scope for difficulties here.
- Developers will get no further income from the block once sold off – no rent or fees. So the prices of the original flats are likely to be higher to compensate. Or the development will be less attractive to the developers.
- If there is the option of commonhold or leasehold – and there certainly be for a time, while existing leases run through, even if new leases are prohibited – how will mortgage providers behave? Will they be prepared to lend on an entirely new and untried form of land tenure?
- Most of the disputes between flat-owners and their landlords relate to maintenance and service charges – does the work need to be done, is this a reasonable price, what do we do if some of the residents don’t pay up? These problems will still be here, only it will be with the commonhold association rather than the landlord. It isn’t a magic bullet to end all argument.
- Who will actually run the commonhold associations? The proposal seems to be that the directors are elected by the freeholders, and presumably re-elected (or removed) from time to time. Now for a little block of 4 flats this shouldn’t be an issue. But if you are in a block with 100 flats the job could be pretty onorous, and more so if a serious issue arises, such as a major refurbishment, or repairs following say a fire. Will a director be able to manage things better than a professional freeholder, who does at least have a direct financial interest in keeping the block in good condition?
- And how will they deal with disputes between residents? Most of the freeholders will probably pay little interest in the elections and those appointed will be the pushiest, and those with the time to spare. Or with friends in the building and maintenance trades. Is this really going to be progress? And remember that many residents will be sub-tenants and have no vote in appointing the directors at all.
I am sure that you can think of many more potential problems. Unfortunately I have no real confidence that the Government, indeed any Government, will pay sufficient attention to the details when the scheme is set up, or when problems come to light, to provide a proper solution. We are talking about peoples’ homes, and their largest-ever purchases and assets, so it is of the utmost importance to get things right.
The report is just out so the commentators are only just starting to comment. The best I have seen so far is the blogger Alrich but I am sure there will be more. But as well as the theory you need to look at the practical issues. If you don’t then unexpected things happen – see the difficulties in paying for maintenance on housing developments that lead to the Estate rentcharge problem that I dealt with in my last peice, many months ago.