Why has a property ownership system with manifest advantages over leasehold so far failed to take off?
People have had the option to buy homes in England and Wales via a commonhold structure since 2004. But since then, only 20 developments have been created. By contrast, there are currently around 4.2 million properties owned as leaseholds in England alone, according to the Department for Communities and Local Government. Now the Law Commission wants to know why take-up of ownership has been so low.
The commonhold property structure allows the purchaser of a property to own a freehold “unit” – usually a flat within a block of flats – without any kind of time limit on that ownership (as opposed to leasehold properties, which are leased for a set period of time from the freeholder). Owners of a commonhold flat then become members of a management company, similar to a residents’ association, that looks after the shared areas and buildings in the way that a freeholder traditionally would.
There are several benefits to buying on a commonhold basis, most of which boil down to avoiding the negatives of leaseholds. Firstly, you don’t have to pay ground rent, a charge imposed by freeholders, which has little purpose beyond the satisfaction of a contractual agreement. Many freeholders came under fire last year for imposing onerous ground-rent clauses in leasehold agreements which increased charges over the duration of a leasehold to unsustainable levels.
Next, you avoid the expense of having to extend a lease, or the problems of selling a property which doesn’t have many years left on its lease. Finally, you get a say in the maintenance of the building, meaning you will (hopefully) know that you are not being overcharged for repairs, a complaint often levied at freeholders. (And if you’d rather not do this yourselves – coordinating such work in a block of flats can be tricky – you can always agree to outsource it to a managing agent.)
It was assumed that, once in place, commonhold would become the standard form of tenure for new-build blocks of flats, note Wendy Wilson and Cassie Barton in a government briefing paper on the subject. But “in practice, it has failed to take off”. Why? Firstly, as conversion from leasehold to commonhold requires unanimity from everyone with an interest in the property, it has proved difficult to convert blocks.
Secondly, developers have not been keen to build new commonholds, as there are no incentives to do so – indeed, the opposite is the case, as housebuilders can make a great deal of money from selling flats on a leasehold basis (through not only the service charge and ground rent, but also through selling on the freehold to a freehold investor).
Time for a change
The Law Commission has appealed for anyone “with an interest in commonhold” to submit their opinions (until 19 April) as to why the structure has failed to take off, and what changes to the law might make it more popular. We suspect that wider awareness would help – commonhold is clearly a superior form of tenure for the average homeowner. Yet it’s unlikely that house hunters will see any big changes in the near future.
Although the government plans to ban the sale of new-build leasehold houses and the use of ground-rent charges above zero, this won’t stop developers from selling leasehold flats. The development of commonhold blocks is unlikely to rise until builders get an incentive or a legislative nudge from the government to do so.