A direct comparison between leasehold and commonhold

Commonhold is an alternative form of property ownership to freehold and leasehold. Whilst commonhold has existed since 2002, it has proved to be hugely unpopular, with only 20 commonhold buildings currently existing in England and Wales.

Perhaps the greatest issue with commonhold, however, is a lack of understanding.

Not all mortgage lenders, for example, will currently lend on commonhold, which can make commonhold unattractive to potential buyers, but as knowledge and understanding increase, this reluctance to accept commonhold will invariably dissipate.

The government’s ambitious plan is to move away from leasehold, making commonhold the default tenure through the introduction of the Commonhold and Leasehold Reform Bill later this year.

The Housing Minister, Matthew Pennycook, however, made it clear in a speech on 29 April that existing leasehold flat owners will not be forced to convert to commonhold, although they will be encouraged to do so where possible.

Leasehold vs commonhold

As for a comparison between the two, the leasehold system is hierarchical; the whole building is owned by a freeholder who then leases, or grants a right to use, individual flats inside the building to a leaseholder.

Each flat has its own lease, which sets out the terms of its occupation. This often includes a requirement to pay ground rents to the freeholder.

The freeholder is often a third party unconnected with the leaseholders, such as an investor or developer.

It is, however, possible for leaseholders to buy their freehold from their freeholder, a process called enfranchisement.

A lease is also what is known as a depreciating asset, because the lease is granted for a fixed number of years.

Therefore, as the lease gets shorter, the flat becomes less valuable.

In some cases, it is possible to extend the lease via a lease extension.

What is commonhold?

The commonhold system is structured differently.

The Commonhold Association, a company owned by the building’s occupants, owns the freehold of the common parts.

Individual units are owned by individual commonholders, under a freehold, not leasehold, tenure. Instead of each unit having a lease, there is one legal document for the whole building, the commonhold community statement.

As there is no lease, a commonhold unit is not a depreciating asset in the way that a leasehold unit is.

Similarities between them

Whilst the two forms of tenure are structured differently, there are several similarities: the building still needs to be maintained, repaired and insured by the freeholder or commonhold association, and the occupants are required to contribute towards the costs of those obligations.

Similarly, both leases and commonhold community statements will typically contain restrictions on how units can be used, such as requirements to obtain consent before carrying out alterations.

Both forms of tenure put in place mandatory sales procedures for when a unit is sold.

Both will therefore have a list of fundamental rights and obligations, which are not tenure specific.

But this is where the similarities stop: the different legal frameworks result in key differences in how rights and obligations are managed in practice.

Take for example, the case of major works being required. In leasehold, there is a prescriptive statutory process involving the service of Section 20 notices.

If there is no reserve fund (a pot of money which leaseholders pay into over a long period of time to pay for one off major works), leaseholders will receive a major works bill, which can be substantial.

The process and the works themselves can be challenged by the leaseholders via the tribunal.

Commonhold associations

By comparison, all commonhold associations must have a 10-year building report which identifies works needed over the course of the next 10 years.

The commonhold associations must hold a reserve fund to pay for the works identified in the building report.

When major works are needed, commonholders will usually be of the upcoming cost and the reserve fund should contain the funds needed to pay for the works.

As a result, the process should feel different from the current leasehold system.

Instead of relying on a formal notice procedure when major works are proposed, commonhold places greater emphasis on forward planning, transparency and collective budgeting through the commonhold association.

The aim is that major works are anticipated, costed and funded over time, rather than dealt with only when they become urgent.

Overall, commonhold affords homeowners autonomy over their building.

For those who are put off from being leasehold because of the lack of control, this can be an attractive prospect.

Which is better?

Professionals are often asked if they think commonhold or leasehold is better.

Currently, there are too few commonholds in existence to answer this question.

Theoretically, if a homeowner seeks autonomy, a more transparent system and fewer regulations, then commonhold is undoubtedly the better model.

Not all homeowners crave autonomy, however, and may prefer the certainty of leasehold.

Time will tell if the government is right in believing commonhold to be the better tenure.

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