Government unveils plans to reinvigorate commonhold for residential ownership in England and Wales

The UK government has outlined its vision for a new commonhold model for homeownership in England and Wales in a white paper detailing its objectives and proposals to reform the little known (and little used) system of commonhold – with a view to making it the default for ownership of flats in England and Wales.

Commonhold and its limited uptake

Commonhold is a form of property ownership introduced in England and Wales by the Commonhold and Leasehold Reform Act 2002. Individuals fully own their flat (or unit) within a building, and all owners collectively own and manage the common areas through a commonhold association company. Unlike leasehold, commonhold provides freehold ownership, meaning there is no lease term to expire and residents are automatically in control of management.

Despite its potential benefits, commonhold has not gained significant traction in England and Wales. Several factors have contributed to its limited adoption:

• Financial and lending concerns. Central to any model of residential ownership is mortgageability. Lenders have been cautious about providing mortgages for commonhold properties due to uncertainties about the system's stability and what happens if residents fail to pay for maintaining the building. Without the building block of willing lenders, there was little prospect of widespread uptake. Advocates of commonhold argue that this is a risk shared with buildings that have been enfranchised by leaseholders.
• Lack of awareness and understanding. The leasehold model is deeply entrenched in the property market and many potential buyers, investors, developers, lenders and property professionals are not familiar with the commonhold system. There was no compulsory element to the previous legislation and, bar a very few exceptions, most have chosen to stick with what they know rather than risking an untested model.
• Developer reluctance. Developers have historically favoured leasehold because it allowed the generation of an additional income stream from ground rents and other charges, although since the abolition of ground rents for new leases, this has become less of a factor. However, commonhold would require developers to completely overhaul their site set-up processes, a complex and costly task. Under commonhold, the long lease and management company would need to be replaced with a commonhold community statement setting out the rights and obligations of each owner and a commonhold association to govern building operations.
• Complex legal framework. The initial legislation was complex and has been hampered by limitations, including requiring unanimous consent for a conversion to commonhold. In addition, the management of mixed-use developments and the handling of shared ownership were not adequately addressed.
• Responsibility and conflict aversion: Homeowners in a shared block do not necessarily want to take over responsibility for managing their building. This is likely to be time-consuming and potentially stressful if agreement cannot be reached between the residents over whether repairs should be carried out or if the rules governing the commonhold should be changed. Management duties have become significantly more onerous, particularly for high-rise residential buildings with the introduction of wide-ranging duties for the Principal Accountable Person under the Building Safety Act 2022. Realistically, residents are likely to need to appoint a professional managing agent.

Reinvigorating commonhold

The government's initial objective is to replace the current leasehold system with commonhold as the standard for new flats, similar to the regimes governing multi-occupancy buildings in Australia and New Zealand. There are also plans to facilitate the conversion of existing leaseholds to commonhold: this will be logistically complex and a phased introduction is likely. This will be similar to the changes affecting ground rents that were abolished from 2022 for new developments, while existing blocks are still awaiting reform.

The aim of commonhold is to provide homeowners with greater control over their properties, simplify property management and address the potential for abuse identified in the existing long-leasehold system, under which residents have been subject to soaring service charges and opaque reporting. It is however, worth noting that many of the concerns with the existing leasehold system are already being addressed.

The Leasehold and Freehold Reform Act 2024 provides the framework for reduced premiums for lease extensions (not yet in force) and makes it easier for leaseholders to exercise the right to manage. Significant consumer protection measures have also been trailed with the government pledging to consult on unaffordable ground rents in pre-2022 leases, forfeiture (or the threat of) as a remedy for breach of lease, costly private estate management arrangements, transparency and fairness of service charge fees and the imposition of standards for managing agents of residential blocks. 

Appropriate controls for service charges and managing agents are key to reducing resident dissatisfaction and will be important even if commonhold became the default as many residents will not want (or have the expertise) to take direct responsibility so will need to appoint agents.

In addition to the legislative changes, many developers have already sought to better empower residents by moving to a model whereby the residents each have a share in a residents' management company and upon all units in the scheme being sold, the freehold is transferred to that management company.

Despite these changes in practice and anticipated improvements for residential leaseholders, the government is keen to press ahead with commonhold.

Key proposals

The government plans to introduce a comprehensive new legal framework for commonhold, based on recommendations from the Law Commission's 2020 report.

• Flexibility: Greater flexibility will allow more tailored decision-making and cost allocation. This would include allowing "sections" to be introduced within commonholds to manage different areas or groups of units separately.
• Development: Improved rights for developers will facilitate the process of a phased construction and sale of commonhold units.
• Conversion: The current consensus requirements make conversion to a commonhold very difficult; it is proposed that the threshold should be reduced to 50% (mirroring that for enfranchisement).
• Commonhold association insolvency and disrepair: Historically, a big concern for lenders, it is acknowledged that greater certainty and protection needs to be provided for the situation where the commonhold association runs out of money. Unit holders also do not want to risk ownerless (or poorly managed) common parts falling into disrepair and significantly devaluing their property.
• Reserve funds and emergency measures: Commonholds will be required to establish a reserve fund to cover future maintenance and repair costs. It is also suggested that commonhold associations should be permitted to take out loans to fund repairs with security for the lender offered in the form of the building's common parts (assuming the nature of the common parts is valuable for a lender) or future commonhold contributions (a somewhat uncertain income stream for a lender to depend on).
• Repossession: It is proposed that commonhold associations should benefit from a process, similar to forfeiture but less draconian, to allow recovery of unpaid contributions by selling the defaulting owner's property. Lenders will receive the balance of their loan, with any surplus (after payment of arrears of service charge) being returned to the defaulting former home owner.
• Dispute resolution: Quicker and cheaper resolution of disputes will be promoted via mediation and other out-of-court methods. Owners who do not agree with the decisions of the majority will have greater protection with an ability to challenge certain changes at the tribunal.

Osborne Clarke comment

We can expect a draft bill and consultation in the second half of 2025, and the government's stated aim is for "commonhold to become the standard tenure by the end of this Parliament". 

It is essential to ensure that mortgage lenders are fully on-board and prepared before it will be practically possible to introduce commonhold. This is likely to take some time as the complexities are ironed out and appropriate mortgage products developed to cater for different building types (large high-rise and mixed-use buildings being especially problematic). Particular difficulties are likely to be encountered in connection with any move to convert existing leaseholds to commonholds – affordability concerns over the cost of buying out what may be a valuable freehold interest (possibly against the wishes of some of the leaseholders) will need to be addressed.

The government calls on the industry to "prepare to support the widespread use of commonhold at scale", although the detail of the reform in the form of a draft bill will be necessary before the implications can be fully evaluated. Nevertheless, if the government proceeds at its projected pace, developers may find that some current developments with a long lead-in time will need to be disposed of on a commonhold basis. Being as prepared as possible for this significant overhaul of flat ownership is essential.