Exciting times: the Commonhold White Paper

In a commonhold building, each owner owns the freehold of their unit. They are also the members of the commonhold association (the "CA"), which owns the freehold of the common parts of the building (such as the reception, roof, lift, corridors and garden) and is obliged to organise the repair, maintenance and insurance of these areas.

The CA is a company limited by guarantee and the directors are volunteers from amongst the unit owners. They must comply with all the requirements for company directors in the Companies Act 2006 (such as avoiding conflicts of interest, not accepting benefits from third parties, and filing annual reports and accounts), the obligations on directors arising from general law (for example maintaining confidentiality) and directors' statutory duties (such as such as health and safety laws, employment laws, and rules about avoiding fraudulent trading). The directors will also have to ensure that the CA meets its obligations under property legislation (such as fire safety duties under the Building Safety Act 2022 and service charge rules in the Leasehold and Freehold Reform Act 2024).

The commonhold regime is contained in the Commonhold and Leasehold Reform Act 2002 and supplementary regulations.  The system is similar to forms of property ownership for flats in other jurisdictions such as the US, Australia, New Zealand and Scotland.

The Law Commission carried out a detailed analysis of commonhold which resulted in a report published in 2020 called "Reinvigorating commonhold: the alternative to leasehold ownership" containing 121 recommendations.  The White Paper intends to implement the majority of these recommendations, some of which are highlighted below:

2.1 Introducing ‘sections’ to support mixed-use development

Once this amendment has been made to the regime, it will be possible to divide a building or estate into different sections to separate out the management of different areas or groups of units within a commonhold. This would mean that only the unit owners within a particular section will be able to vote on matters that only affect that section, and only those who benefit from a particular service or upgrade will be responsible for paying for it.

2.2 Allowing certain permitted leases including shared ownership

The current legislation does not permit the grant of any leases out of commonhold units if they exceed 7 years or involve the payment of a premium.  The Government proposes to amend this to enable shared ownership leases to be granted out of a commonhold title.  Shared owners will be able to take part in decisions on the management and costs of running their building and benefit from the rights and protections of the commonhold system.

2.3 More development rights for developers

The legislation will be amended so that developers have more rights during the construction process for the completion and sale of units on the site.  Developers will be able to reserve in the CCS the rights that are best suited to the size and needs of their particular development but will only be permitted to exercise these rights for a purpose connected with the completion of the development, or the marketing of the units.

2.4 Safeguards for local rule changes

At present, local rules can be changed if more than 50% of the unit-owners at a meeting of the CA vote in favour of the change – this will be increased to 75%.

2.5 Improved processes for appointing and replacing directors

The Government will implement the Law Commission’s proposals to set out a clear process for a CA to follow when appointing directors, and to include a mechanism to allow interested parties, such as lenders and unit owners, to apply to the Tribunal to appoint directors if no directors (or insufficient numbers of directors) have been appointed. New rules will also mandate an annual election for directors and allow for the replacement of existing directors in cases of mismanagement.

2.6 Insurance

It will be compulsory for CAs to take out public liability insurance and buildings insurance (which is required under current legislation) and optionally directors’ liability insurance.

2.7 Unit owners' repair duties, and rights to make minor alterations

The Government will change the commonhold system so that the CA will be able to vote on the standard of repair required by the unit owners, through setting their own local rule, which (as with all local rules) could be amended or removed at a later point to reflect the experience and wishes of unit owners.

2.8 Agreeing the commonhold budget

Under the new regime, the unit owners will have to vote in support of the commonhold’s budget every year.  If a budget fails to pass, the previous year’s budget will roll over.

2.9 Mandating reserve funds

This is a very important provision as it meets many of the historic worries about commonhold. Under the new version of commonhold, it will be mandatory for CAs to establish one or more reserve funds into which unit-owners regularly pay, so that there are funds available to cover unforeseen events and repair costs. The White Paper suggests that the CA could for example set up one such fund for general costs and one fund dedicated to a specific item such as the replacement of the lift after 10 years.  These funds will have to be held on statutory trust for these purposes.

2.10 Borrowing for emergency funds

Another new provision intended to ease financial strain on the CA will allow the CA to take out a loan using a fixed charge against the building or a floating charge against the income stream from unit owners' commonhold contributions, or sell parts of their building if necessary. Any such measures would require either a unanimous vote of the CA or 80% support plus the approval of the Tribunal.

2.11 Settling disputes

The Government will introduce new mechanisms into the commonhold system to promote mediation and other out-of-court methods to resolve disagreements.  They will not make membership of an ombudsman scheme or regulator mandatory for commonhold at the moment.  Unresolved disputes will be referred to the Tribunal.

2.12 Enforcement and recovery of debts

At present, a CA can charge interest on late payments by unit-owners.  These powers will be increased to include the ability to apply to the Court for an expedited order to sell a unit if its owner fails to pay their bill to the CA.  There will be a minimum arrears threshold so that this power is not abused, and the unit-owner's lender will be granted step-in rights.

2.13 Protection of minority unit-owners

The current commonhold regime does not offer much protection for owners who are outvoted on decisions that impact them. The Government will implement new protection for them to challenge CA decisions by applying to the Tribunal if they feel they have been unfairly impacted, in relation to decisions about varying the terms of the CCS; creating or combining one or more sections; or approving a budget above a cost threshold set out in the CCS.

2.14 Insolvency of the CA

This is another very important provision as it recognises historic concerns about whether commonhold is workable in practice.  The Government will adopt the Law Commission's proposals to clarify and improve the process whereby the Court can appoint a ‘successor association’ where an existing CA becomes insolvent. This will allow the new association to assume management of the commonhold so it can continue to operate. The Government will also take forward the Law Commission's recommendations on improving the processes whereby the CA can undergo a voluntary termination where, for example, the unit-owners decide to sell the building to a developer for a profit.

Current leaseholders will not be affected by this White Paper, although the White Paper stresses that the Government intends to streamline the current complex process for converting leasehold schemes to commonhold. There is therefore a danger in the meantime that a two-tier market may develop whereby flats in leasehold schemes could be devalued.  However, leaseholders benefit from a range of protections under current leasehold laws and there are more protections due to be implemented under the Leasehold and Freehold reform Act 2024.  Leaseholders already have the statutory right to take over the management of their buildings via the "right to manage" regime in the Commonhold and Leasehold Reform Act 2002, and can also compel the landlord to sell the freehold to the tenants collectively under the Leasehold Reform, Housing and Urban Development Act 1993 (for flats) and the Leasehold Reform Act 1967 (for houses).

At present there is no change for landlords of existing residential buildings or their lenders, although they should be aware that the Government plans to focus on devising a better system for converting leasehold flats to commonhold flats than the mechanism in the current legislation.  The White Paper indicates that the Government prefers the "mandatory leaseback" form of conversion outlined by the Law Commission, which would require the freeholder to take a leaseback and become the head-lessee in respect of flats whose owners did not consent to the conversion to commonhold.  Their interest would sit between the CA and the leaseholder under a 999 year lease, under which they would receive any ground rent but would be unable to participate in decision-making because they would not be a unit owner.  Landlords should therefore consider taking advice on what this could mean for them.

Developers of residential schemes will need to get to adapt to the new commonhold regime.  The Law Commission's recommendations include several suggestions that are intended to balance the unit-owners' rights to run their own buildings as against the developer's need to have some control over the scheme while it builds out subsequent phases, and these proposals will be implemented by the Government.

Tenants occupying under short-term lets such as assured shorthold tenancies will not be affected by this change.  Their landlords will not be affected either unless they are long leaseholders themselves in which case paragraph 3 above will apply to them.  The commonhold regime permits leases granted for less than 7 years without a premium being paid, so it will still be possible to sub-let a commonhold flat unless the CCS for a particular building says otherwise.

These proposals represent a seismic change for land ownership in England and Wales. A consultation will be published later this year, and subsequently a draft Leasehold and Commonhold Reform Bill. All interested parties should engage with this process so that the legislation works as smoothly as possible for everyone involved in flat development, investment, financing, ownership and management.