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Commonhold - has it caught on?

publication date: May 11, 2006
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On the 27th September 2004 a new type of property ownership came into existence: Commonhold. Now, under the Common and Leasehold Reform Act 2002, residents in flats or houses are legally entitled to convert their property from a leasehold to a commonhold tenure, dispensing with their landlord and obtaining a share of the freehold in the process.

The government brought in the commonhold reform to try and get rid of the archaic and confusing system of leasehold, currently the most common form of ownership of flats. At the moment, it is not compulsory to convert to commonhold, it is done on a voluntary basis, and both the flat or house owner plus the freeholder has to be in agreement to it for it to be possible.

For this reason, the reality of the situation is that existing properties are unlikely to convert to commonhold – for the freeholder must agree to proceed in existing properties, an unlikely scenario. New builds are therefore far more likely and indeed, so far they are the only type of properties that are seeing conversions from leasehold to commonhold.

The advantages of commonhold are clear: the property is owned outright and there is no lease, meaning that it is no longer a declining asset, dependent on the number of years on the lease for its value. Plus, owners no longer have to worry about landlords and the cost of renewing their lease.

Should all the owners in a block of flats club together and decide they want to convert to commonhold, a company would be formed between them – the Commonhold Association – and they are obliged to manage the block of flats between them, either themselves, or by employing a managing agent. Members of the Commonhold Association have to sign a “Commonhold Community Statement” replacing the lease in effect. This details what the leaseholders can and can’t do (noise, pets, subletting), plus how the service charges will operate. There is a template Community Statement prepared by the government, with room for deviation on certain points.

Of course there is, as with leasehold, potential for disagreement among the leaseholders. Though with commonhold it gets more complicated as there is no freeholder to intervene and arbitrate. “Commonhold only works if the lessees act sensibly,” adds Jonathan Turton, partner at Boodle Hatfield law firm, specialising in property law, in London. “If they don’t the system breaks down, although there is a mediation service. At least a traditional landlord could sometimes bang a few heads together.”

While most of us would agree that the leasehold system is out of date and in need of changing, it doesn’t look like the commonhold system, as it stands, will be much of an alterative. The reality, in many people’s opinions, is that the whole thing is a bit of a damp squib, with little to no uptake among property owners. “It’s not a live issue as far as I’m concerned,” explains Robert Orr-Ewing, partner at Knight Frank. “It hasn’t really caught on, and there are two main reasons. One: in an existing building you are not going to get conversion unless everyone agrees. This includes the freeholder. And they will never agree to it – why would they? Two: In new builds we would need to win over the hearts and minds of developers, convince them that it is in their interest to sell their developments as commonhold rather than leasehold, and at the moment they aren’t convinced it is”. Orr-Ewing adds there may be one or two isolated cases of flat owners converting to a commonhold, but no more than that.

Perhaps there is not a great deal of awareness among the general public, and this in turn, is making it less of a selling point for developers. Nigel Wilkins, of the Campaign for the Abolition of Residential Leaseholds (CARL), argues that until property developers realise that commonhold flats can sell at a premium over leasehold, the situation is unlikely to change. Wilkins adds that the takeup has been so poor that legislation is now needed for it to succeed, saying, “All new blocks of flats should be sold on a commonhold basis” He also suggests that the government should allow conversion of a block of flats if the majority are in favour – and not necessarily every single flat owner.

Those against the way commonhold tenure has been implemented had some powerful figures brought to light by the BBC at the end of last year to back up their case. The government had hoped that 6,000 homes a year would be registered as commonhold, including both old and new build. And according to the BBC in October last year, over a year later, only 165 new built homes had at that point ever been converted (their figures were from the Land Registry). Speaking to lawyers and relevant parties, they are surprised the figure is even that high.

Indeed, on asking Turton about the costs involved in converting to a Commonhold, he wasn’t sure. When asked if that was because he hadn’t dealt with one, he replied that it virtually no one he knew had - among his firm or others. “I would imagine the costs are not terribly different to setting up a traditional leasehold scheme. It could be around £10,000 - £15,000 set up costs.”

More popular alternatives to the commohold tenure, both of which were made possible in the 2002 Common and Leasehold Reform Act, are the Right to Enfranchise, or the Right to Manage. As Turton explains, the qualifying rules are broadly similar for the two. To qualify, at least 75% of the internal area must be residential; twothirds of the flats it he building must be held under longer leases (20 years and above); and the claim must be brought by at least half the lessees in the flat.

“With Right to Manage, all lessees with long leases in the flat have to be given the opportunity to participate. The lessees then take over the service charge without finding to money to buy the freehold. A freeholder is still involved. With collective enfranchisement, the lessees have to find money for the freehold”.

He adds that generally the Right to Enfranchisement, in his experience, is a bit of a nightmare, and quite complicated to organise, but Right to Manage works well.

So, with the response to the commonhold looking underwhelming to say the very least, will the government take steps to change it? Unlikely. A spokesperson for the Department for Constitutional Affairs, responsible for commonhold, recently commented that the department hopes the take-up will improve but it has no plans to introduce more legislation to make it more appealing.