In England and Wales, there are two ways of owning a property: as a Freehold, or as a Leasehold. However, there is also Commonhold, which is a method of ownership of the freehold in a building or an estate.
What’s the difference between freehold and leasehold?
Freehold: you own the property outright, forever.
Leasehold: your ownership of the property is for a limited period (e.g. a 99-year lease) and control of the property is shared with and limited by the freehold owner.
What is commonhold ownership?
Commonhold is a method of ownership of the freehold in a building or an estate.
A freehold estate is divided into “units” and “common parts”. The units are typically a flat and owned by a “unit holder” and the common parts, which may include stairways, lifts and outdoor spaces, are owned by a “commonhold association”.
What is a “commonhold association”?
A commonhold association owns the remainder of the building or estate and is managed by the unit holders. It must comply with the Commonhold Leasehold Reform Act 2002 and Commonhold Regulations 2004.
The association must have a “commonhold community statement” which will set out the obligations and rights of the unit holders and of the association. The community statement may also require the association to establish a commonhold assessment, which will include the costs of managing (e.g. insuring, maintaining, cleaning and repairing) the building.
Can I convert a property from a leasehold?
A building can be converted to a commonhold from a leasehold, provided there is agreement by the freehold owner, every leaseholder and every lender that has a charge over the properties.
Commonhold was introduced in 2002 as a method to enable the ownership of property as freeholds to avoid the issues that typically arise with long leases. However, there has been limited use of them due to a reluctance by mortgage lenders to lend against them and a lack of incentive for property developers, who typically benefit from the receipt of ground rents and other premiums under a lease.
What are the benefits?
There are several advantages to commonhold:
- Each unit holder has a freehold interest. This means that you own the property in perpetuity rather than for a set term e.g. 99 years;
- There is no obligation to pay ground rent;
- Your interest in the property cannot be forfeited; and
- There are no restrictions on the owner of a unit selling the whole of their interest in the commonhold.
However, one of the main disadvantages is that they are dependent upon the commonhold association existing. As the association will be a limited company, it is possible that they could be struck off the register at Companies House.
This is why lenders have not typically been willing to lend against them, as it puts their security at risk if the association ceases to exist.
Commonhold associations can also terminate a commonhold, in specific circumstances.
Law Commission Report
In July 2020, the Law Commission published a report to examine how commonholds can be better utilised. This included:
- A recommendation that if the freeholder’s consent is not provided to convert the property from leasehold, then the leaseholders can carry out a collective freehold acquisition claim;
- A recommendation that the unanimous consent of leaseholders is not required and that conversion can take place without the consent of lenders so that eligible leaseholders of at least 50% of flats support the decision to convert; and
- A recommendation for the government to consider whether to ban the sale of leasehold flats, making it compulsory for them to be sold on a commonhold basis.
It remains to be seen whether the recommendations of the report are implemented and whether they encourage the uptake of commonholds. However, the Law Commission is seeking to make it the “preferred alternative” to leasehold ownership.