Commonhold – new and improved?
The Ministry of Housing Communities and Local Governments (MHCLG) have this week issued their white paper on Commonhold. The paper outlines proposals which will form part of a leasehold and commonhold reform bill, announced in the King’s Speech, likely to be published later this year.
The shift towards commonhold was anticipated and aligns with the Labour manifesto which sought to eradicate leasehold. A similar promise was advocated by Michael Gove, but the Conservatives quickly u-turned when they understood the complexities involved in dismantling hundreds of years of legislative refinement and the potential impact on the residential property market. Labour, however, have begun from less radical starting blocks with a ‘no new leasehold’ approach, with proposals intended to strengthen and improve commonhold legislation. This means the difficulty of adopting commonhold is likely to be felt first by developers seeking to sell units. This pain will be shared by a supporting cast of buyers, estate agents, valuers, lenders and conveyancers who will be seeking to understand their role (and their liability) in this new world. Of course, this assumes they wish to be involved and it is possible that some of these key players may reject commonhold outright in a similar way they reacted to the Building Safety Act 2022, where we saw some conveyancing firms refuse to take on new leasehold matters.
Notwithstanding the general adoption of commonhold, for leaseholders currently dealing with high service charge, absent freeholders and extortionate management costs, the proposals in this white paper offer no improvements and fall short of labour promises.
The Proposals
The white paper, issued on 3rd March 2025, incorporates the majority of the recommendations made by the Law Commission in the 2020 report “Reinvigorating Commonhold: the alternative to leasehold ownership” and include:
Greater flexibility on the commonhold model, introduced by way of ‘sections’ and ‘head costs’. ‘Sections’ relates to separating out particular areas of the estate, for example separating commercial and residential property in a mixed-used development. ‘Head costs’ refers to the separation of costs depending on who uses the facilities. For example, if only some units in a block have the benefit of parking spaces, only those unit-holders will have a say in the budget and decision-making process relating to the car park.
Making commonhold applicable to a wider range of properties. At present, schemes such as shared ownership, rely on an interaction of leases and headleases. The details of the draft legislation are needed to explain how commonhold can work in these cases.
The original legislation lacked detail as to how a developer can hand over a commonhold and retain ‘developer rights’, namely the right for a developer to build neighbouring blocks as often happens when large estates are developed on a phase-by-phase basis. The draft legislation will provide a new framework to support developers, with a view of making commonhold more commercially viable.
In the white paper, commonhold is described several times as a democratic form of ownership, allowing unit holders to collectively decide on repairs, maintenance and budgets. Commonhold associations, consisting of units holders and with directors, elected from amongst the unit holders (or professionals appointed in extreme circumstances) , agree amongst themselves a set of ‘local rules’ which define what is and what is not permitted within the building. Unfortunately, this leaves some uncertainty. For example, if you purchased a unit to be let out to a tenant or as a holiday let, and then the other unit holders decides to change the local rules prohibiting properties to be used for that purpose. Current legislation requires 50% of the unit holders to vote for a change, but the proposals will increase this threshold to 75% and allow any minority who are unfairly affected by the changes to apply to the Tribunal. The jurisdiction of the Tribunal and how they will approach such decisions will hopefully be fleshed out in legislation and guidance.
Greater transparency and sharing of the Commonhold Community Statement (a document used to create the commonhold structure), local rules and insurance policies promise to make conveyancing more straightforward. One section of the white paper proposes information relating to service charge accounts, showing arrears and financial information about the commonhold, should be provided for £50 and that the fee will be waived if the information is not provided within 14 days of the request. This puts significant pressure on commonhold directors to respond quickly to requests and the low fee may put managing agents off becoming involved in managing commonhold units.
Exit fees, normally a percentage of the sale price, are often used in retirement blocks and used to offset large maintenance costs. However, other leasehold blocks have tried to introduce them. The proposal will include a provision to prevent commonhold local rules including exit or other event fees, unless the units are to be used exclusively as retirement properties.
Proposals also include annual elections for directors and a requirement for public liability insurance. From a conveyancer’s perspective, there may be additional work to check the policy and to explain to the unit purchaser what their potential role and liability may be as a commonhold director. There is also a process for unit holders and other interested parties (such as a lender) to appoint a director if no-one comes forward, although the white paper suggests this will only be in ‘exceptional cases.’
More control over the standard of repair and how this can be governed by local rules is another proposal and more flexibility on consents for small alterations, with the directors having powers to grant such consents without reference to the wider community.
More control over the budget and voting requirements to pass a budget, but with a failure to stop that if a new budget cannot be agreed, the previous year’s budget will roll over. This may cause financial woes as the unit-holders wish to keep the budget low conflicts with the director’s obligations to keep the block in good repair.
Mandatory reserve funds, but no prescription on the level of contributions or the purpose the funds can be used for. In an attempt to avoid mismanagement, these funds are to be held on statutory trust, which will safeguard them from creditors to some degree.
Allowing commonhold associations to obtain credit by way of a loan, secured on the building or future payments by the unit-holders. However, it is unclear whether there are investors in the market who would be willing to make such loans or how they could recover their security if the commonhold association was to default on the payments. However, the proposals also allow the commonhold association to sell parts of the building (subject to 80% of unit holders agreeing). Again, it is unclear whether investors would be interested in buying part of a commonhold block or how part of a commonhold could be split to create a freehold interest.
Proposals on dispute resolution, particularly between unit holders also call on the involvement of the association to assess the strength of the resident’s claim.
Enforcement of service charge payments from unit holders is also addressed. Alongside the current provisions of charging interest or having any tenant pay rent directly to the commonhold association (which may be difficult to achieve), the proposals also allow associations to apply to court for an order to sell. This is perhaps forfeiture by another name and although promises an ‘expedited order’, it is likely the courts will not have the resources to deal with such claims any quicker than the current forfeiture procedure. In turn, this may leave associations with a shortfall for repair and maintenance. However, there is an equivalent mortgage protection clause, with lenders being notified when debts reach a certain level which would trigger the association’s claim for sale. However, the exact level of the debt which triggers the claim has not been set out in the white paper.
The new model will have set voting levels for certain association activities, such as changes to the Commonhold Community Statement, creation of sections and budget approval. As well as a means to challenge such decisions. However, this will be subject to strict deadlines. This will also mean additional cases for the Tribunal and surely some guidance for them on how to decide such matters.
There are also proposals on how to wind up or terminate a commonhold if the association becomes insolvent.
These proposals seem extensive and aim to strengthen the legislation which has been criticised and proven lacking. However, this does shake the current leasehold market, especially with unhelpful headlines which indicate leasehold is to be abolished, which isn’t strictly true, as these proposals are only for new developments initially.
Otherwise, these proposals, and the particular case studies set out in the white paper, hold up a vision of communal living and democratic process which may seem unrealistic to leaseholders. This utopian view seems based on a property ownership without absent landlords; where everyone will attend meetings and unit holders happily step forward to take on the heavy responsibilities which now belong to freeholders. In the commonhold world it is easy to see how the conflicting interests of unit-holders can escalate; how some unit holders will protest any increase in service charge while others will want more services and higher levels of maintenance which comes with a price tag.
The draft legislation may add more weight to these proposals and the discourse around it will show whether the market is happy to accept this new version of commonhold.
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