Background
The advent of commonhold has been much trumpeted. The government has just published a new white paper, The proposed new commonhold model for homeownership in England and Wales. After so many years, could commonhold be the new reality for future residential and mixed-use developments?
Historically, take up of this alternative structure to leasehold has been unenthusiastic – there are twenty-nine registered commonholds in total, despite the Commonhold and Leasehold Reform Act 2002 promising a new era in land ownership.
Lender caution may have been one factor for commonhold tenure being unpopular, but so also was the "one size fits all" approach to commonhold of the first report by the Law Commission in 1987. A more recent Law Commission Report in 2020, Reinvigorating Commonhold: The Alternative to Leasehold Ownership signalled a more practical and nuanced approach to commonhold, and it is the recommendations contained in this report that the Government is now committing to implement. It promises a draft Bill in the second half of 2025, bringing in commonhold 2.0. It has also said it will launch a consultation on the abolition of all new residential leaseholds later in the year, including transitional provisions so that delivery of new homes is not held up.
How and when will this affect new mixed-used developments?
Trying to guess the future is always risky, as the speed of the Renters’ Rights Bill progress has shown. However, abolition of leaseholds and mandatory commonhold is a more detailed process. If the Government is to introduce a draft commonhold Bill in the second half of 2025 it is unlikely to become law before at least quarter 3 of 2026. Similarly, for the abolition of new leaseholds, if the consultation is issued towards the end of 2025, it is unlikely to become a Bill until later in 2026. However, we would expect an Bill abolishing new residential leasehold to become law within the lifetime of this Parliament. It is not therefore an immediate concern for developers, but it is undoubtedly a cloud on the horizon.
Same but different?
The existing legal framework of commonhold lacks the flexibility needed to accommodate the diverse needs and interests of different types of owners. Imagine a building with flats above shops, and a public amenity such as a library or doctor’s surgery with associated parking. Under the current commonhold rules, residential owners might have a say – and potentially contribute to the costs – of a car park used exclusively by non-residents, and vice versa. This lack of clear separation can make commonhold an unattractive prospect for both homeowners and businesses.
But the upcoming reforms are set to change all that. The White Paper details several key changes that (it hopes) will make commonhold a workable and preferable alternative to leasehold for mixed-use developments.
Introducing 'Sections': A Game Changer for Diverse Developments
One of the most significant proposed changes is the introduction of 'sections' within the commonhold framework. This innovative approach will allow a building or estate to be divided into distinct sections, enabling the separate management of different areas or groups of units. In our example of flats, community amenities and shops, the non-residential units could form a separate section from the residential units. This means that only the shop owners and community asset representatives would vote on matters solely affecting their section(s), such as the upkeep of the commercial car park, and only they would be responsible for the associated costs. This ensures fairness and removes the potential for disputes arising from differing interests.
The creation, combination, and dissolution of sections will be governed by clear rules, with safeguards in place to prevent their misuse. While developers are expected to establish sections during the initial planning phase, commonhold associations will also have the scope to create them later, albeit with a higher voting threshold. Importantly, unit owners will have recourse to the Tribunal if they believe a section has been created improperly. To ensure clarity, the Commonhold Community Statement ("CCS") will include annexes detailing the specific rules for each section.
Separate Heads of Costs: Tailoring Charges to Usage
Complementing the introduction of sections is the provision for separate heads of costs. This will allow for much greater flexibility in budgeting, ensuring that costs are allocated according to whom benefits from specific services or facilities. So, if a mixed-use building has a gym that is only accessible to the ‘private’ residential units, but not to shared ownership leaseholders, only those private owners would contribute to its upkeep. This brings commonhold in line with the leasehold system where schedules are used to achieve a similar outcome. However, the government hopes that its new structure will provide a more democratic and transparent framework.
To further enhance transparency, the government intends to support the provision of a new Code of Practice on cost apportionment in commonhold. This will guide developers in setting up fair allocations from the outset and help commonhold associations resolve any future disputes quickly. Mechanisms will also be introduced to correct any errors in cost apportionment.
Shopkeepers welcome?
The reformed commonhold model recognises that mixed-use developments often include commercial units. Therefore, the new framework will allow for business leases to be granted for commercial units within a commonhold. This means that developers can sell or retain these units as investments once they have been let, just as they would in a leasehold development. This crucial change, it is hoped, will make commonhold a far more attractive option for developers and investors involved in mixed-use schemes.
Reconciliation of interests
The White Paper has an evangelical tone, with many references to democracy, transparency and equity. However, it should be noted that this is principally with reference to the interests of ‘homeowners’. The reality of mixed-use developments had not been recognised in an earlier Law Commission report, but, by 2020, a way had been found to ensure that commercial or community contribution to the desirability and profitability of new developments would not stand in the way of a more perfect form of homeownership.
The White Paper also includes enhanced rights for developers, including phased sales of parts of the whole development and allowing them to reserve any rights they deem necessary in the CCS for the completion and marketing of the site.
And what about the Lenders?
Domestic lenders are typically risk averse and this is something that the White Paper acknowledges, however it bullishly declares that as far as lenders are concerned, a commonhold unit offers them a more secure asset than a leasehold. This will no doubt raise a few eyebrows in credit committees up and down the land, but the rationale is that a commonhold cannot be forfeited and lasts for ever, unlike the depreciating value of a shortening lease. There are also protections for the lender in the event of commonhold insolvency and provisions for step in rights. The Law Commission took the unusual step of issuing an open letter to lenders on taking commonhold as security.
Conclusion
Our view is that the writing is on the wall for new residential long leaseholds including in mixed-use developments. As a political idea, it is pleasing to all parties; human rights law has percolated into property law and with it the view that a ‘home’ is worthy of special treatment.
Whether commonhold as an ownership structure will spread to developments like industrial estates or even shopping centres is an interesting prospect, but not an immediate one.
