Property to the people: making commonhold mainstream
It's time new rules were introduced to make commonhold a popular ownership model, says Beth Rudolf
To say that the conveyancing industry faces a large number of challenges at present would be something of an understatement.
Even discounting the B word and the potential impact this will have on the housing market, specifically transaction levels, and the issues it is likely to bring for the UK economy as a whole, there are a whole host of ongoing developments which will shape the future of our sector, not least the much-needed reform of the leasehold regime.
The so-called ‘leasehold scandal’ burst into the public sphere in 2018, but practitioners have been concerned for years about unpalatable practices. I remember going to the then Department for Communities and Local Government (DCLG) in 2014 to warn them of escalating bad practice in leasehold.
This tended to focus on the ‘work’ of leasehold administrators who, for one, were very difficult to actually track down, were (and still are) charging very high fees for documentation which should really be provided at reasonable cost, and – the irony – were then taking an incredibly long time to deliver to those who required it.
It was not surprising that back then – and still now – the leasehold purchase/sale process would take, on average, three to four weeks longer than it did – and still does – for freehold properties.
The same sorts of issues were raising their heads in terms of estate agents and developers’ activities when it came to leasehold; less than 2 per cent of 1,200 home-buyers surveyed had received any information prior to making their offer.
This escalated into the ‘leasehold scandal’, which came to light as more and more buyers of leasehold houses found themselves locked into financially onerous clauses.
These then affected the sale of these leasehold houses, the difficulties and costs involved in trying to purchase the freehold, the problems in securing mortgages or selling these properties, plus the issues in trying to change the unfair terms in leases which stop people from doing even the most basic work to a property.
However, go back five years, and we were told by the sole person working in the leasehold department in the DCLG, that this was an issue well in hand and would be more than adequately covered by the Consumer Protection from Unfair Trading Regulations, which say that all material information should be revealed prior to offer.
I’m not sure they had any idea of the scale of the problem. However, that absolutely cannot be said in 2019 with the work of consumer groups such as the Leasehold Knowledge Partnership, National Leasehold Campaign and Home Owners’ Alliance, and with property professionals in organisations such as the Law Society, the Society of Licensed Conveyancers, the Conveyancing Association (of which I am a director), or the Bold Legal Group, who, together, are bringing the issue to the fore.
Further, there are now more than 20 people in the ministry’s leasehold team, and the Law Commission has two leasehold projects in its 13th law reform programme – so it is clear that the government is trying to resolve leasehold problems.
But we are still some way from having a leasehold system which is fair, transparent and fit for purpose. A far better prospect would be to replace dysfunctional leaseholds with commonhold, which would avoid the ticking time-bomb of a wasting asset in the ownership of people’s homes.
It is clear that the industry is beginning to agree with this position. For instance, commonhold is now under the scrutiny of the Law Commission. The commission started a consultation on the issue in December last year, which should be read by all serious conveyancers before it closes on 10 March 2019.
However, there is still a great deal of ignorance around commonhold, what it is, what it isn’t, what it can achieve and what it can’t.
New ownership model
Commonhold was introduced by the Commonhold and Leasehold Reform Act 2002 as a new way to own property. The Law Commission describes commonhold succinctly as follows: “Commonhold enables a person to own the freehold of a ‘unit’ (such as a flat) within a building or development and also become a member of a company which owns and manages the shared areas.”
This means there is no term of years and therefore no wasting asset and no short-lease issue. A further advantage is that the landlord is replaced by a Commonhold Association – a company limited by guarantee with every unit holder being a member and having a vote.
No landlord also means there is no ground rent, and no issue with escalating rent clauses. The lease is replaced with a Commonhold Community Statement (CSS), which sets out the terms under which the commonhold operates.
The law provides that there is only one CSS across the whole development with standard terms set in the regulations. It’s also possible for local rules to be created in the CSS to reflect the specific requirements of the estate and removed or added to by the commonhold association via a vote, so onerous terms do not arise or can be voted out.
When the property is sold, a Commonhold Unit Information Certificate is provided to show what service charge payments are required. In this respect, the Law Commission consultation asks whether the certificate should be supplied within 14 days of request and be guaranteed so that the buyer and seller can rely on it when agreeing apportionments on completion.
However, as the Law Commission noted, “fewer than 20 commonholds have been created since the commonhold legislation came into force [in 2004].” In response to the commission’s call for evidence, conveyancers said they had not been involved in commonhold “because they did not think buyers or their lenders would be willing to use commonhold, as it is a relatively unknown form of ownership.”
However, they also said that “commonhold had the potential to improve the conveyancing process.” In the wake of the leasehold scandal, the government then tasked the commission to recommend reforms “to reinvigorate com- monhold as a workable alternative to leasehold, for both existing and new homes”.
The current proposals would allow sections to be created so that mixed-used developments or developments where some units have exclusive use of leisure facilities or similar can be accommodated.
Other proposals include a new rule for the conversion of a leasehold into a commonhold requiring an 80 per cent majority in favour. Administration fees and the provision of information for the sale of the property would be governed by the Commonhold Association.
This could be the end of unreasonable fees and delays currently experienced in the leasehold home moving process. A far greater take-up of commonhold would be the best way forward and a much better option for consumers.
There will undoubtedly be some push-back because it’s not been widely used up until now and is therefore misunderstood – although commonholders the Conveyancing Association surveyed were overwhelmingly happy with the arrangement.
It also does not provide an opportunity to make significant sums of money from it. But therein lie two very good reasons why it’s in the best interest of the public.
A move away from leasehold will take time, and will require a continued focus on delivering in this area from many stakeholders, and such a move should not be at the detriment of existing leaseholders but if we want to secure a better system, one that is far more transparent and does not work against the consumer, then it should be actively pursued.
Beth Rudolf is director of delivery at the Conveyancing Association www.conveyancingassociation.org.uk