What UK Leasehold Alternative Means for Homeowners

The UK’s leasehold system has long been a source of frustration for homeowners. From spiralling ground rents to unyielding freeholders, many feel trapped in a system stacked against them. But now the government is stepping in with a promising fix: commonhold.

With fewer than 200 properties presently using commonhold, it is fair to say the system has not really taken off. But Labour’s new reforms seek to change that, promising a fairer, more transparent alternative to the leasehold model.

What exactly is commonhold, and could it finally give homeowners the control they have been craving?

What Is Commonhold?

Imagine owning your flat outright with no lease counting down, no freeholder calling the shots and no shock hikes in ground rent. That is the idea behind commonhold.

Under this system, your flat is 100% yours but shared spaces like hallways, roofs, or gardens are managed by a commonhold association, a group made up of all the owners in the building. Everyone has a say in decision-making, and together, you would decide how the building is run.

It is a model that is already popular in places like continental Europe and North America, where condominiums operate under similar principles. But in the UK commonhold has struggled to gain traction. Because lenders and developers are sceptical and the system has been bogged down by red tape.

The government is stepping in to simplify the rules and make commonhold a viable choice for more homeowners.

What’s Wrong with Leasehold?

The leasehold system has been around for centuries. But it is not perfect. For starters, it puts a lot of power in the hands of freeholders, who own the building and the land it sits on. That means leaseholders -- the people who actually live in the flats -- are often at the mercy of freeholders, who can charge exorbitant ground rents, overcharge for maintenance and even pocket kickbacks from contractors.

Worse still, leaseholders who want to push back on their freeholder or take control of their building face a cumbersome and expensive process. And in some cases, uncooperative freeholders have even held up critical fire safety measures.

Owing to that, some leaseholders have turned to “share of freehold” arrangements as a workaround. Yet the setups lack stable rules and can be just as messy to run.

What’s Changing Under Labour’s Reforms?

The government admits the original commonhold legislation, introduced in 2002, was “not fit for purpose”. And they are taking a fresh look at the system, drawing on a 2020 Law Commission review to make it more user-friendly. Some important changes proposed are:

• Stronger Governance - Commonhold associations will need at least two directors, elected by the owners. Annual meetings will be mandatory, giving owners a say in budgets and building management.
• Reserve Funds - Owners will have to pay into a reserve fund to cover big-ticket expenses, like roof repairs or new lifts.
• Tougher Enforcement - Associations will have more power to force the sale of a property if owners don’t pay their fees.
• Flexibility for Developers - Large mixed-use buildings (think shops on the ground floor and flats above) will have more flexibility in how they are operated.

The government is also promising tighter regulation of overseeing agents like minimum qualifications to make certain buildings are run professionally.

How Will Commonhold Buildings Be Run?

Under the new system, commonhold associations will take the reins. Owners can choose to hire a managing agent to handle day-to-day operations, but unlike the current system -- where agents report to the freeholder -- owners will have the power to fire underperforming managers.

“We expect that managing agents will continue to be used to run all but the smallest commonhold blocks,” the government’s proposals state. But the major difference is that owners will be in charge, not a distant freeholder.

Will Current Leaseholds Convert to Commonhold?

This is where things get tricky. The government wants to make it easier for leaseholders to convert to commonhold but the process can be complicated. Right now, every leaseholder, the freeholder and even lenders would need to agree to the switch.

The government is proposing to trim the approval threshold from 100% to 50% of leaseholders. Yet that might not be enough. Some leaseholders may not have the funds to buy out their freehold even though recent legislation has made it cheaper.

To fix this, the government is considering allowing conversions to go ahead with the commonhold association leasing back properties to owners who want to remain leaseholders. But that threatens to create a “two-tier system,” leaving some leaseholders stuck in the old model.

What Happens Next?

The government has promised to publish a draft bill later in the year, setting out the details of the new commonhold system like how to handle thorny issues like converting existing leaseholds and overseeing tall buildings with higher fire risks.

There will also be a consultation on how to introduce the ban on new leasehold flats, and if any exceptions should be made. The government wants to get commonhold up and running before the ban on new leasehold properties comes into force.

Conclusion

Commonhold could be a radical shift for UK homeowners as it offers a fairer, more transparent alternative to the leasehold system. But for it to succeed, the government will need to win over sceptical lenders and developers and make the transition smooth for existing leaseholders.

Even though commonhold might not be a magic bullet, it is a step in the right direction. And for homeowners tired of being at the mercy of freeholders, it could finally give a way out.