The Law Commission has begun its project on residential leasehold reform, which will also include a review of the law on leasehold enfranchisement and the regulation of managing agents, with a call for evidence on commonhold.
Commonhold was introduced in 2004 as an alternative from of ownership to residential leasehold ownership. Whilst commonhold was presented to the market as having several advantages over the current leasehold structure, a number of key issues with the commonhold model have meant that the residential market has not, to date, embraced commonhold. Indeed, to date, fewer than 20 commonholds have been registered.
The call for evidence seeks feedback from those involved in the residential market to establish the reasons why commonhold has failed and how the law might be changed to improve the position and make commonhold more attractive to developers, homeowners and lenders. In particular, it asks for views on three key areas:
How the process of creating new commonholds or converting existing leasehold developments to commonhold might be improved:
- The low number of existing commonholds perhaps speaks for itself. This is perhaps best attributed to reluctance in the market to be first to adopt a new and seemingly not fit for purpose form of ownership, rather than any real difficulties in the actual process. The view of the majority of commentators, practitioners and developers to date has been that the present form of commonhold simply doesn’t work and needs a significant overhaul before it is likely to be an attractive proposition.
- Given the limited take up for new commonholds, it is perhaps unsurprising that there has been little interest in converting existing leaseholds to commonhold. To convert to commonhold under the current commonhold regime would require the unanimous consent of all long leaseholders and their mortgagees making it, in practice an impractical proposition.
How the set up and management of commonholds might be improved for homeowners:
- The call for evidence identifies a number of issues that may need to be addressed to make commonhold work. These include the complex rules and corporate structure currently required to set up a commonhold, the lack of flexibility in the application of the commonhold community statement, the method for recovery of the costs of managing and maintaining a commonhold and the limited protection given to homeowners in the event of disputes or insolvency. Respondents are asked which, if any, of these areas may have deterred the use of commonhold and are invited to put forward other examples of issues that may make commonhold undesirable for homeowners.
- Respondents with experience of the current leaseholder owned management companies are invited to share their experience of how the problem areas outlined above are currently addressed under the leasehold regime.
How commonhold might become more attractive to developers, mortgage lenders and others within the property market:
- Respondents involved in creating residential or mixed use developments are asked to give examples of schemes where commonhold may have been considered and discounted and are asked to provide details of the factors that influenced this decision. This may include the factors highlighted in the call for evidence, namely, inflexibility, incompatibility with shared ownership or other factors such as the fact that commonhold does not cater well for mixed use developments.
- Lenders are also asked to confirm whether or not they currently lend on commonhold and the factors that may have influenced this decision.
The call for evidence applies to England and Wales and will close on 19 April 2018. A full consultation will be launched later in the year, outlining the technical reforms that may be required to for commonhold to succeed. The feedback from the call for evidence will be used to obtain views and evidence that will guide the future consultation. We are therefore some considerable way from being in a position to reassess the suitability of commonhold, but it is encouraging to note that the views and experience of developers and their advisors are being invited.
The call for evidence, (including a useful summary setting out the basic structure of commonhold) and the response form can be viewed here: www.lawcom.gov.uk/project/commonhold/.