The Commonhold White Paper is good news for leasehold reform.

(this post will be revised in a few days)

In particular, it signals that the government is going to be hard-headed about driving through reform. You can't make an omelette without cracking some eggs, as the saying goes, and that is what is implied by today's white paper.

There are some areas where they are also watering commonhold down to make it easier to get it adopted. There's also a fudge on the key financial questions of how the conversion to commonhold is to be paid for, and the role of veto-holders is largely unaddressed.

On the other hand, this annoucement is the death knell for the idea that commonhold will lead to leasehold abolition: the Government has accepted the Law Commission's proposal to water down commonhold by allowing long leases within commonhold blocks, initially to bail out Shared Ownership.

Existing sites

See, for background, my earlier article re existing blocks

The announcement does not really do much for existing sites, though it does increase the incentives for private collective action to take control of existing blocks and sites.

There are two key problems with converting existing sites:

  • not everyone can afford to
  • some sites are complex, with a single entity covering a block of flats as well as shared property on a wider estate

These both relate to who can veto conversion to commonhold, which is currently:

  • the freeholder of a block of flats, which is generally irrelevant because the leaseholders have bought the freehold amongst themselves
  • all the leaseholders
  • their mortgage lenders
  • any other party empowered by the Secretary of State

Now since commonhold hasn't been adopted widely, we haven't seen that last clause bite, but it allows the government to grant a veto to an estate's Resident Management Company, e.g. under a tripartite lease. The provision is under the Commonhold (etc) Act 2002 s3(1)(d).

Conversion to commonhold extinguishes the leases in a block, which may extinguish individual flat owners' obligations to pay towards the wider estate. It does not however cancel membership of any management company linked to the dwelling, though it may cancel the requirement for the next owner of the flat to join such a company. You can easily imagine these companies protesting and getting granted their veto under s3(1)(d).

As an example of where this is relevant: a development with a block of flats and some houses may have a shared car park, where a management company controlled by the unit holders of the flats and houses manages all the shared areas, inside the block of flats and on the wider estate. The company's constitution may be set up to reflect the differing interests (houses using shared car park, flats using shared car park, houses with their own car park).

Do we really expect to be able to convert to commonhold in such circumstances? That is, all the shared land, rather than just the block of flats? Does it make sense to give the owners of houses a veto on getting included in a commonhold that only manages a few strips of land, merely because other houses and flats may have car parks the house owners have never seen?

See also the stats on how many RMCs are really resident controlled:

Forced conversion and forced loans

One of the options for conversion is mandatory equity loans on converting very short leases. Obviously there are Many Such Cases of people who've knowingly or unknowingly taken a lease whose extension is unaffordable, e.g. due to Marriage Value.

If this isn't fixed, then under the White Paper's proposals a 50% majority of flats could force an unaffordable equity loan on a non-consenting flat owner. Ironically, it would then be the leaseholder asserting A1P1 rights.

The white paper is not forthcoming on which option to use, but if they go for Option 2, and impose forced loans capped at what the ground rent would have been, it could work.

Sections

A key weakness of the 2002 Act's commonhold system was the absence of "sections" that allowed costs and voting power to be allocated to subsets of the members, as is possible under share-of-freehold and estate RMCs.

Alarmingly, the courts have recently imposed their own "sections" system on Right To Manage(!), but the government has said it will roll out sections in a reformed commonhold, which likely eliminates a key blocker.

Watering down commonhold

There are two principal areas where commonhold is being watered down:

  • initial management control
  • continuation of leasehold within commonhold

The first of these is a sop to developers, who will receive expanded rights to override the decisions of unit owners during the initial phases of development. On my development, the developers' appointees have controlled the management thirteen years after the first flat was sold, and six years after the last flat in my estate was sold.

Widespread roll-out of commonhold threatens exposing the fake market for managing agents to genuine competition; the sector has tried to head this off by pushing for a regulator for themselves, which would likely impede new pro-flat-owner market entrannts. The development rights clawback allows this problem to be postponed for a few years.

The second is a sop to the Housing Associations, who will get to continue shifting discredited Shared Ownership product via leasehold, rather than using statutory shared ownership trusts. It is unlikely that an exemption to the ban on long leases over commonhold units will be expandable beyond shared ownership, but watch out for a sort of "LAFRA Schedule 1" ever-expanding list of categories of exemption from commonhold ownership. How are developers to build flats on land that they have already taken out a 900 year lease on?

Signal on Marriage Value

Although the white paper fudges the key financial issues of conversion to commonhold, it's implied that the government will not be totally walking away from the previous government's attempt to reallocate marriage value to enfranchising leaseholders. This is a positive signal given the ongoing litigation.

Building safety

There doesn't seem to be any proposed change to the general rule in the Building Safety Act that enfranchised blocks lose the so-called "leaseholder protections".

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