Commonhold explained: What agents should tell buyers and sellers

The reform debate is moving quickly and consumers are increasingly asking what commonhold is, what it changes and what it does not change.

For many years, the practical answer was that commonhold was an alternative form of property ownership which existed in law but rarely appeared in transactions.

It was introduced more than two decades ago, but it has been used only sparingly. According to the government’s Commonhold White Paper fewer than 20 commonhold developments have been built in England and Wales, comprising fewer than 200 units – which explains why many buyers, sellers, lenders and conveyancers have had little direct experience of it.

That position is changing. The Commonhold and Leasehold Reform Bill, which was announced in this year’s King’s Speech would modernise commonhold and establish it as the default tenure for new flats.

Many leaseholders have reported poor management, rising costs, opaque administration and too little control over the homes they own, and leasehold reform has firmly been on the agenda for the last decade.. But it would be a mistake to tell buyers that commonhold is simply leasehold without problems. It is an entirely different form of ownership and it carries its own responsibilities.

What commonhold is

The simplest explanation is summarised in government guidance: commonhold provides freehold home ownership for flats or other interdependent buildings. Instead of owning property as a leasehold for a fixed period of time, commonholders own their properties as freeholders, indefinitely. A crucial difference is that commonholders jointly have a say in how their building is managed, including the costs and responsibilities that come with this.

Under leasehold, the buyer owns a lease. That lease gives the right to occupy the property for a fixed term, which depreciates with time, subject to an often long list of conditions in the lease. The building itself is owned by a freeholder, who may be an entirely separate entity from the leaseholders. The leaseholder may pay ground rent and almost always a service charges and the lease will normally set out rules on alterations, use, assignment and other matters.

Under commonhold, the unit-holder owns the freehold of the unit. The common parts – such as the structure, roof, hallways, lifts, gardens and other shared facilities – are owned and managed through a commonhold association. The association is a company made up of the unit-holders. Instead of each flat having a separate lease, the commonhold is governed by a commonhold community statement. This sets out the rights and obligations applying to the building and to each unit.

What commonhold is not

For agents, one of the most important points is to avoid describing commonhold as freehold with no strings attached.

A commonhold building still needs to be insured, maintained, repaired and managed and fire safety requirements have to be met. The cost of that work is still borne by the people who benefit from the building.

The difference is that the obligation sits within a collective and equal ownership structure, rather than in the traditional hierarchical landlord and tenant relationship. The commonhold association must budget, collect contributions and make decisions. The commonhold community statement will usually contain rules about what unit-holders can and cannot do: there may be restrictions on alterations, use, pets, nuisance and other matters which are familiar in leasehold buildings.

Neither is commonhold the same as share of freehold. Many flats sold as share of freehold are still leasehold flats, which comes with the rigidity of the lease; a share of freehold does not mean that the lease obligations can be ignored. The flat owner may also hold a share in the company which owns the freehold, but the lease remains central. Commonhold is different because the unit itself is held on a freehold basis and the building is governed through the commonhold structure.

The attraction for homeowners

The main attraction of commonhold is control or autonomy. Many leaseholders are frustrated not only by cost, but by the sense that decisions about their building are made elsewhere. They may have limited influence over managing agents, long-term maintenance, insurance or the timing and cost of major works.

Commonhold is designed to give owners a direct stake in those decisions. It should create a clearer relationship between ownership, responsibility and control. There is no lease ticking down and no ground rent payable to a third-party landlord. The commonhold association should provide a more transparent structure for budgeting and longer-term maintenance.

The proposed reforms also place greater emphasis on forward planning. The model discussed by government includes building reports and reserve funds, so that major works are planned and paid for over time rather than arriving as a sudden demand. That will be attractive to many consumers, particularly those who have had difficult experiences with service charge disputes or major works bills.

The caution for buyers

None of this means commonhold is effortless, because a commonhold building will only function well if it is properly run. Owners need to understand the accounts, the rules, the reserve fund and the condition of the building. They may need to vote, sit on committees or take an interest in management decisions. Apathy, disagreement or underfunding can potentially create problems, in the same way that it does where leaseholders own or manage their freeholds.

While some consumers want autonomy and are willing to engage with the management of their building, others prefer the certainty of a more familiar leasehold structure, particularly if it is well managed and the lease is long, clear and free from onerous terms.

Estate agents should be aware of the way in which this may impact sales. Because commonhold has been rare, some lenders and conveyancers have had limited experience of it. That should improve as the system becomes better understood, but consumers buying early commonhold properties may need to allow extra time for mortgage and legal checks. That is not a reason to be deterred, but it is a reason to be prepared. Commonhold has great potential, but it needs time to develop properly as a tenure.

What agents should check

Agents will need to fairly quickly acquire the necessary knowledge to inform consumers of these differences, advantages and disadvantages, and to spot when specialist advice is needed.

When a flat is put on the market, agents should check whether the property is commonhold or whether it is a leasehold flat with a share of freehold. This would require sight of the commonhold community statement, the commonhold association’s details, current budget information, details of contributions, any reserve fund, any planned works and any known disputes or arrears. If the buyer intends to let the property, carry out alterations or use it in a particular way, the rules should be checked before assumptions are made.

This is where agents can add real value. The reform debate is often political, but the consumer conversation is practical: buyers want to know what they own, what they will pay, who makes decisions, what could go wrong and what documents their solicitor needs to review.

The wider reform question

The current system has produced too many cases in which homeowners have lacked control, clarity or fair routes to redress. Commonhold may well provide a better framework, particularly if lenders, developers, managing agents, conveyancers and consumers all understand how it works.

But a rushed transition may create confusion without proper implementation. Poor communication could leave consumers expecting more from the reforms than the law can deliver. In the meantime, existing leasehold buildings will continue for many years and many leaseholders will need improvements to their current position, whether or not they ever convert to commonhold.

For estate agents, being precise with any advice given in respect of commonhold and also balanced when comparing it to commonhold, will be of most use currently. Consumers will be better served if that distinction is explained early and accurately.

Mari Knowles is a solicitor at Commonhold and Leasehold Experts Limited and a member of ALEP (the Association of Leasehold Enfranchisement Practitioners)