Commonhold is another option from long-leasehold as an ownership strategy regarding a block of flats or an estate.
In such an arrangement, individual flat owners (known as ‘unit holders’) will own the freehold of their flat and reserve the right to become a member of a ‘Commonhold Association’, which owns and manages the common parts of the building, essentially acting as an RMC would in a Right-To-Manage arrangement.
Advantages of Commonhold
In theory, commonhold has advantages over the feudal leasehold system:
- Leasehold ownership will depreciate over time, as the length of a lease is limited, as this lease duration decreases, the cost to extend becomes ever-more expensive, commonholds, however, can last forever.
- Unit holders do not need to seek permission when selling their flat, and they can dispose of the flat’s freehold without facing any restrictions.
- If the terms of the lease are broken by a tenant, they face the risk of lease forfeiture from the freeholder/landlord, this threat does not exist in a commonhold arrangement.
Regardless of these alluring advantages over the leasehold system, after almost two decades of implementation, commonhold has barely seen any use; it is simply not being taken up by developers for new estates, or even seeing transferal from leasehold to commonhold setups.
There are many estimated reasons for this, such as hesitancy from mortgage lenders to lend to commonhold setups, and a general lack of awareness from property advisors/investors.
However, there are more fundamental issues which affect commonhold and restrict it from greater use.
Criticisms of Commonhold
One regular criticism of the commonhold system is of its nature, in that it relies on unit holders cooperating and participating in the management of the property.
As property owners in leasehold arrangements are oftentimes reluctant to accept a property management role, this same tendency may carry over to Commonhold Associations.
Another criticism of commonhold is in relation to its ability to enforce rules upon unit holders, unlike leasehold, where failure to comply with the terms of the lease can result in forfeiture of the lease.
Unit holders in a Commonhold Association who do not comply with the rules can be sued if they do not pay what they owe, for example, but there are not any more realistic solutions.
A popular commonhold critique is in relation to its ‘incoherent’ feel regarding its approach to resolving disputes within a Commonhold Association.
The legislation states that disputes in relation to commonhold [Associations] should be referred to, and overseen by an ombudsman, but one has never been created.
An undeniable issue facing commonhold viability is the lack of real commonhold setups for evidence of how it can indeed function in practice, as so few exist.
What is clear is that many are reluctant to voluntarily enter a commonhold setup, and this is unlikely to improve, so the introduction of commonhold incentive or even compulsion (in certain cases) is required to boost the levels of participation before it can become truly viable and an alternative to the leasehold system.
Leasehold vs Commonhold in Context
In the same vein as commonhold viability and incentive, it can be helpful to compare both leasehold and commonhold, for example, from the perspective of a property developer looking to sell some flats:
Historically, a developer would have two options:
Option 1 – Sell flats as Commonhold – There is no ground rent, few mortgage brokers willing to lend, and little understanding from many estate agencies, as well as the actual buyer.
Option 2 – Sell flats as Leasehold – Can charge ground rent (Now in accordance with the Ground Rent Act), ample mortgage providers, knowledgeable estate agents, and an eager buyer.
What’s more is that the freehold can then be sold on for a large figure, naturally, this doesn’t exist with a commonhold setup, so from a financial perspective, there is no real reason to choose commonhold over leasehold, from the perspective of a developer selling a block of flats (even after Leasehold Reform).
An Experienced Opinion
Former Residential Property Advisor and leasehold property expert Bernie Wales speaks on this matter further, commenting on how commonhold is simply not equipped enough to compete with leasehold in its current condition.
He states that there is “Not a level playing field between leasehold and commonhold”, adding that “No self-respecting developer would give up the additional figures, for no additional work or expense.”
In relation to the system itself, Bernie states that “It’s a great system and will work well…if everyone does what [they] should do when they should do it”. In reference to how unit holders function through a Commonhold Association, and how it requires everyone to participate in order to work correctly.
Bernie adds that “Commonhold has very little legislation and absolutely no case law.” Which makes it “unsatisfactory” to properly be utilised by a block of flats.
Looking Forward
In the eyes of many, commonhold will become more frequently utilized in the future, likely through a mandate for new builds, however, it is likely that this date will not come for a long time.
As mentioned earlier, commonhold is still widely unknown across the property sector, and in order for legislation to be passed, all manner of property professionals must be in agreement, including lawyers and financiers – to which Bernie adds “the chances of all of them agreeing are virtually nil.” So, a lot of work needs to be done to improve the system.
What are your opinions on commonhold? Do you see a future where it is more frequently used? Let us know on social media.