Do all roads lead to commonhold?

The Law Commission’s message to the government from its three reports published on 21 July is clear: to achieve the stated aim of tipping the balance of power in the favour of homeowners, the way forward is commonhold.

Many practitioners eagerly attended training about commonhold when the system was first introduced in 2004, only to find their new skills languishing as the tenure failed to take-off. The Law Commission says that adopting its proposed changes will make commonhold not only a viable alternative, but a preferable one. This could be the start of the biggest shake-up of home ownership in history.

Enfranchisement and right to manage

To deal with perceived issues in the existing residential leasehold system, the Law Commission has also proposed dramatic modifications to the enfranchisement and right to manage procedures.

While the goal of simplifying and clarifying these complicated areas of law is a laudable one, there are some tricky decisions to be made in connection with enfranchisement premiums and landlords’ legal costs to achieve the government’s goal of reducing the cost to leaseholders.

The Law Commission presented a menu of options and sub-proposals to the government in January 2020 and the report confirmed that premiums must sufficiently compensate a landlord for interference with their property rights. Separately, if the proposals are adopted, the jurisdiction of the First-tier Tribunal (Property Chamber) in England will be significantly expanded to deal with all disputes in these areas.

This seems sensible but it remains to be seen whether the FTT will have the capacity and resources to deal with the increased workload.

Another practical suggestion is for the government to provide free training for leaseholders acting as company directors of residential management companies; a positive educational move to increase leaseholders’ awareness of their rights and obligations – although it will be interesting to see how popular this is in practice.

Conversion to commonhold?

Aside from the extensive measures to “improve” residential leasehold, there is a vigorous push towards commonhold. The Law Commission has attempted to solve the fundamental technical problems with the existing regime, but no other commonhold jurisdiction in the world has 4.3m existing leasehold properties. This means that the government must consider tackling the Rubik’s Cube of conversion if it is to avoid having a twin-track system of home ownership.

For commonhold to flourish, as identified in the reports, the government would either need to introduce compulsory commonhold for new flats or financial incentives for developers. Reducing the threshold to 50% leaseholder consent and removing the need for mortgagee consent will undoubtedly remove two of the main obstacles for conversion to commonhold but, without freeholder consent, the leaseholders will first need to collectively enfranchise. While the Law Commission proposals will extend enfranchisement to more buildings, there will inevitably be buildings which remain outside of its scope.

Mortgage lenders may have concerns that a charge over a leasehold flat could be automatically transferred to the commonhold unit. Their security may be enhanced over a freehold interest which is no longer susceptible to forfeiture. However, if there were arrears and a court ordered a sale of the commonhold unit, the costs of sale and arrears would be paid in preference to the charge, potentially reducing the value of their security.

A conundrum remains with the non-consenting leaseholders on any conversion to commonhold. The Law Commission recommends that those leaseholders should be forced to take a commonhold title with equity loans from the government. This is no doubt a political issue which relies on the government playing the role of the banker. The alternative is a novel hybrid commonhold/leasehold structure which could cause more problems than it solves.

Benefits of commonhold include the ability for unit holders to approve the building’s expenditure for the forthcoming year, but there is no guarantee that a collective approach means less expense and different attitudes to expenditure will remain.

The proposal that unit holders indemnify the other unit holders for the costs of enforcing a breach of the Commonhold Community Statement is a familiar battleground in the leasehold arena. So, ultimately, disputes between co-owners are unlikely to be stamped out by the commonhold regime.

Commercial tenants

While these proposals are aimed at improving the position of homeowners, they will necessarily impact commercial tenants located in mixed-use properties.

A radical departure from the position put forward in the original consultation is to expand the qualification criteria for collective enfranchisement, so buildings comprising up to 50% commercial floor space could qualify (increased from 25%).

This accords with the Law Commission’s goal to improve access to enfranchisement so that many more mixed-use buildings fall within the scope of the new regime. This proposal moves the goalposts significantly for investors and commercial occupiers.

Under collective enfranchisement, the residential leaseholders will be responsible for the control of any commercial units, unless the leaseholders require the landlord to take a leaseback. With right to manage there is also a proposal to increase the threshold to 50% but the RTM company does not manage the commercial parts.

Turning to commonhold, the Law Commission has proposed a solution to the fundamental issue of one commonhold association dealing with decisions affecting mixed-use and multi-block commonholds by creating “sections” within the commonhold association. However, difficulties may remain in balancing the nature of the different interests in residential and commercial properties and it remains to see whether the commonhold structure, with greater involvement in management issues, will hold any appeal for commercial occupiers.

The Law Commission makes 324 separate recommendations in the reports which cover an extraordinary amount of ground. It is evident that there are complex issues and delicate balances at play.

There is currently a strong political impetus to revolutionise the residential leasehold sector, but there is an enormous task before government and parliament and it may be some time before commonhold overthrows leasehold. The direction of travel appears to be set – but it may be a long and bumpy road.

This article was first published in Estates Gazette on 28 July 2020.

For more information, please contact Lauren Fraser on +44 (0)20 7427 6418 / lauren.fraser@crsblaw.com or Laura Bushaway on +44 (0)20 7438 2261 / laura.bushaway@crsblaw.com.