A direct comparison between leasehold and commonhold

Commonhold offers an alternative to the traditional leasehold system for property ownership in England and Wales, yet it remains largely underused despite being introduced in 2002. With only around 20 commonhold buildings currently in existence, the government aims to promote commonhold as the preferred tenure through upcoming reforms, although leasehold remains the dominant model today.

Understanding Leasehold and Commonhold

The leasehold system is hierarchical, where a freeholder owns the entire building and grants leases to individual flat owners. Each leaseholder holds a lease for a fixed term, which typically includes obligations such as paying ground rent to the freeholder. The freeholder is often an investor or developer unconnected to the leaseholders. Leasehold interests are depreciating assets because their value diminishes as the lease term shortens, although lease extensions can sometimes be negotiated.

In contrast, commonhold ownership involves a collective structure where the freehold of the building’s common parts is owned by a Commonhold Association, a company controlled by the occupants. Individual units are owned outright on a freehold basis, without leases. Instead of multiple leases, there is a single legal document called the commonhold community statement governing the entire property. This means commonhold units do not depreciate in value as leasehold units do.

Similarities and Key Differences

Both leasehold and commonhold require maintenance, repair, and insurance of the building, with occupants contributing to these costs. Both tenure types impose restrictions on unit use, such as requiring consent for alterations, and include mandatory procedures for selling units. Despite these similarities, the legal frameworks differ significantly in practice.

For example, in leasehold, major works are managed through a statutory process involving Section 20 notices. Leaseholders may face substantial bills if no reserve fund exists, and they can challenge the works via a tribunal. Commonhold associations, however, must prepare a 10-year building report identifying upcoming works and maintain a reserve fund to cover these costs. This approach emphasises forward planning, transparency, and collective budgeting, aiming to avoid sudden large bills.

Government Plans and Industry Challenges

The government intends to shift away from leasehold by making commonhold the default tenure through the forthcoming Commonhold and Leasehold Reform Bill. However, Housing Minister Matthew Pennycook clarified on 29 April that current leasehold flat owners will not be compelled to convert to commonhold, though they will be encouraged to do so where feasible.

One of the main barriers to commonhold adoption is a lack of understanding, compounded by some mortgage lenders’ reluctance to finance commonhold properties. As awareness grows, this hesitation is expected to diminish, potentially increasing commonhold’s appeal to buyers seeking more control over their homes.

What This Means for Landlords

For landlords, the rise of commonhold could signal a shift in property management and ownership dynamics. Commonhold offers homeowners greater autonomy and a more transparent system for managing communal responsibilities, which may reduce disputes and improve long-term maintenance planning. However, with leasehold still prevalent and familiar, landlords should stay informed about legislative changes and evolving market attitudes towards commonhold.

Understanding the differences between these tenure types is crucial for landlords advising tenants or considering investments in flats. The potential for commonhold to become the standard tenure model means landlords may need to adapt their management practices and legal knowledge accordingly.

Which Tenure Is Better?

Currently, the limited number of commonhold properties makes it difficult to definitively state which tenure is superior. Theoretically, commonhold appeals to those who value autonomy, transparency, and fewer regulations. Conversely, some homeowners may prefer the predictability and established legal framework of leasehold. Ultimately, time will reveal whether the government’s preference for commonhold translates into widespread adoption and improved outcomes for property owners.

Mari Knowles is a solicitor at Commonhold and Leasehold Experts Limited and a member of ALEP (the Association of Leasehold Enfranchisement Practitioners).

Source: Based on reporting from Property118

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