Martin Keegan: What is to be done about commonhold?

Commonhold in the UK is a system of land ownership that can be used as an alternative to leasehold. However, it is currently very seldom used.

Leasehold has a number of problems, and I know my own situation as a leaseholder without these problems makes it much harder to empathise with people in situations that seem fairly extreme and unjust.

But leasehold is a tool that is used to solve some genuine problems, too. The main ones are:

• managing negative externalities and collective action problems within blocks of flats or on private estates
• enabling a tax-efficient system of shared equity home loans, known as Shared Ownership

Commonhold is a solution to the first of these, and irrelevant to the second.

To phase out residential leasehold tenure, there must be an alternative, and commonhold is the only available alternative.

There are two points to this longish article. They are to consider:

• how feasible it would be to mandate the use of commonhold on newly constructed blocks of flats, and
• the viability of commonhold on existing sites, given the problems of "fleecehold"

Wider availability of commonhold risks the creation of an additional tier in the UK property tenure system, to the detriment of any leaseholders who cannot convert to commonhold. So the feasibility of conversion to commonhold matters. There is also the problem that the assumed benefits of commonhold are not necessarily available on sites that have converted to commonhold from leasehold, about which I shall write much more below.

Under commonhold, there is no time-limit on how long the owners of flats own the flats. It follows that there's no additional party whose interests must be protected, other than those of the neighbouring flat owners. Commonhold requires that the block of flats be owned by a body corporate whose members are the flat owners. In the UK, this body corporate is just a normal non-profit membership organisation registered as a company with the usual company registry, Companies House.

Since the UK has very democratic company law, and a very technologically progressive registry for companies, this is a good thing; in strata title jurisdictions, the main registry is the one for land ownership, not company ownership. Where a collective enterprise is dealing with the UK bureaucracy, experience has shown that companies, whether big multinationals and tiny non-profits and NGOs, are treated as first-class citizens, and other types of body (trusts, non-company charities, mutuals, trades unions) have to use outdated technology and rules. Commonhold associations get the perks of just having to deal with Companies House.

How ready is Commonhold?

There are one or two problems that mean that commonhold isn't ready for the average block of flats yet:

• in principle, it's hard to recover service charge arrears in a timely fashion
• it's virtually impossible to have delegated management of less than a whole block of flats (a "section")

Now some blocks of flats are fairly uniform, but in my own case, there are 12 flats, 10 of which have access to the internal corridors and two which don't. It's not fair for the two non-connected flats to have to pay for the cleaning, heating and maintenance of those corridors, nor is it fair for them to have a say in the management of services. This can be achieved under share-of-freehold but not under the current commonhold legislation. There is some difference of opinion about the management of subsections of a block under the current law. I am not going to say the Law Commission is wrong when they say that it's "virtually impossible" to exclude some flat owners from voting on such matters, but I've certainly heard a credible counter-argument.

The more complicated a site is, the more awkward the inflexible governance model becomes. But this is a key trade-off: inflexibility is the key advantage of commonhold over share-of-freehold, as commonhold lacks the flexibility that would permit deliberate or accidental unravelling of the shared freehold arrangements. "sections", along the Law Commission's proposed lines, can currently be implemented under share-of-freehold but not under commonhold. Only larger, more complex sites would require them.

The issue about service charge arrears could be solved with a one-clause private members' bill. The sections issue could probably be solved with a one-clause bill plus a schedule.

The Law Commission's report on reforming commonhold runs to about 20 chapters, a third of which are taken up with making it easier to convert to commonhold, and therefore irrelevant to the question of commonhold on newly constructed blocks. The commission's reports deal with the two issues I raise above, and some unrelated matters. It is not a huge amount of work to partition the commission's 121 recommendations into matters which must be addressed before mandating commonhold on newly constructed blocks, versus matters which are "nice to haves".

There's also the question of Shared Ownership schemes under commonhold; it's my understanding that currently commonhold does not permit a flat to be owned under a Shared Ownership scheme, with the implication that commonhold will might exclude social/affordable housing units. It may be that I've slightly misunderstood this, and there's an equally tax-efficient shared equity scheme that is compatible with commonhold as it currently stands.

In summary:

• commonhold already works.
• it needs some reform to improve the handling of service charge arrears, and this affects all sites
• many sites would also benefit from a statutory scheme for "sections" of the property to be treated separately (in the sense that not all the commonhold members would have a say in the governance)
• there are some other, less important, reforms that would be beneficial

Mandating commonhold on new sites

We are not at the point where commonhold can be made mandatory for new blocks of flats. But it requires only two or three small reforms to make it viable for new blocks.

Therefore, I support a ban on third party freeholders for new blocks of flats. What that means today is that if such a ban were implemented, any new blocks would have to be share-of-freehold (with no third party investors) or commonhold. Once commonhold has been reformed, that ban could be tightened to mandate commonhold across the board for new blocks.

Until quite recently, it had been assumed by many that there would be a grand bill submitted to Parliament which would include an implementation of the Law Commission's recommendations on commonhold. I never thought that was likely. The Law Commission's proposals go much further than the minimal changes that would be required to make commonhold mandatory for newly built blocks. The Powers That Be seemed to be going for a "big bang" reform, but I no longer think this is the case.

If the measures can be broken down into smaller pieces, then it would be theoretically possible to reform commonhold to the point where it could be mandated. No political party is currently proposing either such a breakdown or such a mandate. Yet.

Aside: cooperative model for commonhold?

Some people want to introduce the one-member-one-vote system of cooperatives into commonhold or into Right To Manage companies. Under the current law, the cooperative model is allowed for share-of-freehold, but completely impossible for commonhold and RTM companies, both of which are strictly required to be companies limited by guarantee, and must additionally be run on a one-flat-one-vote basis.

It is, however, perfectly legal to run a share-of-freehold on a one-member-one-vote basis, due to the protean flexibility of share-of-freehold.

I'm a big supporter of cooperatives. For those unfamiliar with how they work in the UK, they are similar to companies, but have to be for-profit, and come with a statutory lobster trap that protects the little guy from being outvoted by larger investors.

I think the for-profit character is a red herring; the problem is that it will just strike too many people as unfair that someone who owns two flats in a building should get the same voting strength as someone who owns only one. I don't think there's any political will whatsoever to allow such arrangements within commonhold or RTM. As companies limited by guarantee, with prescribed constitutions, commonhold associations and RTM companies already have adequate protection for the little guy.

One possible exception to the above: any one voting member ought to be able to force a commonhold or RTM company to hold an AGM; the current threshold is that five percent of the members must act jointly, which means more than one member if there are more than twenty flats.

Commonhold on existing sites

This is a real can of worms, due to what's known as "fleecehold", the growing phenomenon of private estates.

We must step back and take a broader and historical view. What is happening is that the relationships between dwelling owners are coming more and more to be regulated by a different type of law: before the 1980s, it was mainly property law, the law of landlord and tenant. Increasingly, however, company law is playing a larger role, for better and for worse: commonhold relies heavily on company law, as do tripartite leases and so-called "di Marco clauses". This shift is driven both by industry and by government-initiated reforms opposed by the sector. The roots of the current reform situation go back to the 1980s, when the Thatcher government reformed leasehold law and began the move to implement commonhold, which was the baby of the Lord Chancellor, Lord Mackay of Clashfern; the commonhold project was delayed by Thatcher's deposition and two elections, but taken up by the second Blair government and enacted in 2002.

The 1980s government crackdown undermined the ability of freeholders to profit from the provision of services. A very brief account of this is presented in a deleted article on Flat Living, which claims that tripartite leases arose as an attempt to offload management powers that were no longer going to be so profitable after the accountability measures imposed by this legislation. Thus began the plague of tripartite leases and monocratic Residents Management Companies.

A tripartite lease is one where there are three or more parties. In addition to the freeholder and the leaseholder, there will be one or more management companies, called RMCs ("residents' management companies"). The term "RMC" has no agreed definition, though there has recently been an attempt to specify one under building safety legislation. Tripartite leases will set out the respective roles of the parties, with the management functions under the lease exercisable by the RMC rather than the freeholder. In practice, this made it easier for developers to sell on the freehold and the management rights separately: freeholds are a fixed income investment, management rights not so much.

The management company party to a lease might have any governance arrangement: it might be wholly independent for-profit company over which the leaseholders have control, or a firmly leaseholder-controlled entity, or something in between. There's also no reason that a management company might be restricted to managing leasehold property, and instead might manage a wider estate. Some management companies permit or indeed require leaseholders to be members.

The constitutions of management companies ("articles of association") are available at Companies House, and I've read literally hundreds of them, as they're all different. RTM companies, by contrast, are required to have the articles of association in identical form, and this is effectively true for commonhold associations as well. Resident Management Companies, on the other hand, exhibit a wide variety of constitutional arrangements with respect to how unitholders (the leasehold or freehold owners of dwellings managed) relate to the company and each other:

• unitholders might be required to be members of the company
• unitholders might be required to follow the rules of the company, or pay money to it
• unitholders might be allowed the decisive vote on all matters, or some matters, or none
• there might be private contractual arrangements overriding the publicly acknowledged arrangements

Now some of this clearly overlaps with the terms of a typical lease, which require leaseholders to pay money and follow the block regulations and so. But it also overlaps with local government, particularly all that stuff about voting and collective management of land. If a body can tax you and enact bye-laws, how different is it from a government? This is basically the thesis of Professor Hazel Easthope who studies strata title in Australia.

Tripartite leases have the effect of compelling leaseholders, freeholders and management companies to enter into a mesh of additional relationships under company law, alongside those they have under property law. Despite its numerous flaws, landlord-tenant law does at least require that service charges be reasonable and reasonably incurred, but an equivalent fee exacted under company law need not be. A lease might provide that the leaseholder agree to join the management company, and the company articles might provide that accepting the transfer of a housing unit constitutes agreeing to join the company, indeed it will often deny the company directors any right to refuse membership to a leaseholder.

Where the leases do not permit the management company to extract money from the leaseholder in the way it desires, there may be a route under company law; this sort of arrangement was upheld by the courts in the Morshead Mansions Ltd v Di Marco case. The management company in the Di Marco case had given up using its rights to exact service charges under the leases, and instead relied on a clause it introduced into the company constitution allowing it to charge its members (which included Mr Di Marco and the other leaseholders) for the purposes of furthering the company objects, which were of course to manage the building.

Where this leaves us is that we have quasi local governments in the form of Residents Management Companies, with very diverse constitutional arrangements, all the way from democratic to monocratic. Membership of such companies can be unavoidable for leaseholders in a block of flats, and the membership may be shared with neighbours in other blocks of flats or of freehold houses. The company might manage both blocks of flats and wider shared areas, which might or might not be accessible to the general public. Some of this property might be municipalisable, and adopted to be maintained at public expense by the local authority. But it's often that local authority which signed off the arrangement in the first place in return for concessions in a section 106 agreement, and the local authority would rather not be maintaining gardens and soft landscaped areas and so on when others are obliged to pay already. Getting local authorities to maintain, at public expense, the parts of the property that are not even accessible to the general public is a political and moral non-starter.

These sorts of estates have proliferated since the Commonhold and Leasehold Reform Act 2002, which introduced commonhold and the Right To Manage. The property sector has successfully sidestepped the act by fighting to overturn parts of it in the courts(!) and by laying out estates such that neither Right To Manage or commonhold is effective in ensuring that flat owners have control over their collective property or service charges.

The mechanism is as follows: an estate is laid out and developed, with shared areas (car parks, bike sheds, bin sheds, gardens, soft landscaped areas, the corridors and roofs of blocks of flats, etc). As part of this, the developer concludes an agreement with the local authority not not adopt the shared areas. In any case, local authorities would not adopt a lot of this land, e.g., car parks or the common parts inside blocks of flats. Anyone buying a house or flat in the estate is compelled to join the management company under the terms of a tripartite lease or an equivalent provision in the freehold transfer deed. The management company will usually have provision for different members to pay different amounts depending on what access they may or may not have to various "sections" of the common areas, and may or may not have provisions for different members to vote on matters affecting only those sections. This can lead to a situation, for example, where owners of houses have the majority of the votes determining the size of the sinking fund for a block of flats that none of them occupies.

How do commonhold and RTM address this?

Well, RTM now covers only the block of flats and any property that is exclusively used by the owners of the flats but not by the wider estate, which may be a problem. Commonhold completely extinguishes the tripartite leases, but on such estates that's only one of the two relationships that the flat owners will have with the management company: they likely would remain involuntary members, and thus subject to the management company's rules and charges along Di Marco lines, or they'd lose their membership, and with it their vote on wider estate matters. Similarly, the management company might well lose the revenue from the former leaseholders, which may bankrupt it if has a structural deficit without the income from the flat owners. The situation could put leaseholders in flats at serious odds with their neighbours.

Commonhold for an entire estate is a non-starter, because when a commonhold is dissolved, the commonhold association becomes the owner of all the housing units, including the detached houses, which is not a situation that house buyers will likely enter into knowingly.

There is a provision in the 2002 Act, s3(1)(d), allowing the government to give management companies a veto on whether a block of flats can convert to commonhold. Expect this veto to be enacted once leaseholders start converting to commonhold on private estates. I raised this issue at a 2022 meeting of the All Party Parliamentary Group on Leasehold and Commonhold Reform, and publicly the minister wouldn't address it, but at least the issue is understood in government. I raised the matter publicly with Michael Gove when he was reappointed, and similarly he dodged it.

The widespread rollout of private estates and the transition to company law has created "facts on the ground" which impede the adoption of commonhold. Estates are laid out in a manner which entangles blocks of flats with nearby dwellings, and commonhold, which does address the fundamental "wasting asset" issue of leasehold, does not interoperate well with private estate management. This likely affects millions of home owners.

What commonhold gives you is ownership of a flat without a time limit or a third-party freeholder. It is too widely assumed that this brings management, charges and regulations under the control of the flat owners, but sadly that presently will only apply in relation to the block of flats, but not the car park, gardens, bin stores and so on. Effectively the property sector has had a twenty year head start to vitiate the benefits of commmonhold for many sites.

What is to be done?

In addition to reforming commonhold and mandating it for new blocks, there has to be mandatory democratisation of residents management companies and estate management. Effectively, fleecehold needs to be banned.