The UK government plans to ban the sale of new leasehold flats in England and Wales, as revealed in a commonhold white paper published this year.

Parminder Sidhu, head of the residential property team at Wedlake Bell

This is clearly a significant move by the Labour government and in line with its commitment to modernise homeownership. Whether Commonhold is the answer I cannot say, having practiced the intricacies of the leasehold system for all my conveyancing days and as always, the devil will be in the detail of the legislation. The key question to ask is how this will work in practice. It is likely to be some years before we see this take shape. Commonhold was first introduced in the Commonhold and Leasehold Reform Act 2002, but it never really took off.

The government will need to involve all sector bodies, from the developers and investors to the lenders, who will need to ensure that there are mortgage products in available to buyers of the commonhold units, and not to mention the legal professions who will need to assist in the commonhold company set up and incorporation, down to the conveyancers who will be handing the transactions.

Although at first glance homeowners might think it a benefit to have direct control over their buildings, what we have seen with some ‘share of freehold’ buildings is quite the opposite. There are several countries who have well-established alternatives to the leasehold system, but they are not without their faults. Scotland is replacing leasehold with a system of tenement management schemes that set rules for shared responsibilities. Australia uses a strata title system, and the United States has adopted the condominium ownership model. Overall, these systems seem to work well and certainly offer homeowners control over their properties, but their downfall often seems to be in respect of disputes over fees and maintenance.

The government will need to ensure that there are robust rules and regulations in place for homeowners to follow in addition to remedies available when disputes arise, or maintenance payments and insurance contributions remain unpaid. If a building is mismanaged or not sufficiently funded essential maintenance could be delayed, affecting property values, and living conditions.

John Midgley, partner in the property disputes team and head of the specialist leasehold enfranchisement team at Seddons

• How will the transition to commonhold work (i.e., any legal challenges, etc.)?

The transition may be eased if they are concentrating on providing a new framework for new blocks but there may be challenges to address in connection with mixed use buildings, the mortgagability of residential units and possible insurer’s concerns. According to the White Paper these will ideally be addressed. The devil will, of course, be in the detail, though, and it will be important to bring developers, mortgage providers and insurers along.

• Without a central landlord, how will disputes over shared building management and service charges be resolved? 

It’s proposed that a commonhold association (whose members will generally be the flat owners) will be responsible for maintenance and the like. The owners will have a vote on the annual budget (reflected in their individual ‘service’ charges). A commonhold community statement (possibly supplemented by so-called ‘local rules’ specific to the block) will set out the communal and individual obligations within such a set up. If a dispute does arise the aim will be to use ADR so as to avoid using the court system. If that does not work then unit owners will be able to pursue the matter in the First Tier Tribunal (in England).

• How might this change affect developers who rely on leaseholds as a revenue stream (e.g., ground rent income)?

For new developments since the implementation of the Leasehold Reform (Ground Rent) Act 2022, developers have been prohibited from charging a ground rent in the lease of a residential flat – so for new commonhold blocks there may not be too much of a difference to the issues they currently face over the deprivation of an income stream.

Lyndsey O’Connor is a real estate partner at Shoosmiths

The UK government’s white paper on commonhold reform follows the majority of recommendations made by the Law Commission in their 2020 report banning the sale of new leasehold flats, making commonhold the default tenure.

The paper proposes more flexibility in implementing commonhold structures, including who manages and pays for sections within wider developments, allowing leases over seven years for shared ownership, equity release, or Sharia-compliant financing models, and ensuring developers have necessary rights for phased developments. The proposed mandatory reserve fund aims to address concerns about arrears and maintenance funds and commonhold associations will have stronger powers of recovery, including applying to court for the sale of a unit for arrears over a certain level. Lenders will be notified when arrears reach this level and can repossess the unit or pay the arrears and add this to the mortgage. If a unit is sold, any mortgage will be repaid before the arrears are settled.

Via @PropertyWire