A direct comparison between leasehold and commonhold

Commonhold offers an alternative to the traditional leasehold system, yet despite being introduced in 2002, it remains rare in England and Wales. With only around 20 commonhold buildings currently in existence, the government is now aiming to promote commonhold as the preferred tenure, signalling a significant shift in property ownership frameworks.

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 often includes obligations such as paying ground rent to the freeholder, who is frequently an investor or developer unconnected to the residents. These leases are considered depreciating assets because their value decreases as the lease term shortens, although lease extensions can sometimes be negotiated.

In contrast, commonhold ownership is structured around a collective model. The freehold of the common areas is held by a Commonhold Association, a company owned by the occupants themselves. Individual units are owned outright on a freehold basis, without leases. Instead of multiple leases, there is a single legal document known as the commonhold community statement that governs the entire building. This means commonhold units do not depreciate in value due to lease expiry.

Similarities and Key Differences

Both leasehold and commonhold require maintenance, repair, and insurance of the building, with occupants contributing to these costs. Restrictions on property use, such as needing consent for alterations, are common to both tenures. Additionally, both systems have mandatory procedures for the sale of units, ensuring fundamental rights and obligations are upheld.

However, the legal frameworks diverge significantly in practice. For example, in leasehold, major works are managed through a statutory process involving Section 20 notices, and leaseholders may face substantial bills if no reserve fund exists. Leaseholders can challenge these works via a tribunal.

Commonhold associations, by law, must prepare a 10-year building report outlining anticipated works and maintain a reserve fund to cover these costs. This forward-planning approach emphasises transparency and collective budgeting, aiming to avoid sudden, large expenses. The process is designed to be more predictable and collaborative than the leasehold system.

Government Plans and Market Challenges

The government intends to move away from leasehold by making commonhold the default tenure through the upcoming 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 but will be encouraged to do so where feasible.

One of the main obstacles to commonhold’s wider adoption is a lack of understanding and limited mortgage lender acceptance, which can deter potential buyers. As awareness grows, it is expected that lender reluctance will diminish, potentially increasing commonhold’s popularity.

Which Tenure is Preferable?

With so few commonhold properties currently, it is difficult to definitively state which tenure is superior. Commonhold offers greater autonomy, transparency, and a non-depreciating asset, which may appeal to homeowners seeking control over their building. Conversely, some may prefer the familiarity and certainty of leasehold arrangements.

Ultimately, the success of commonhold as a tenure will depend on how effectively it addresses the concerns of homeowners, lenders, and the wider property market over time.

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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