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How the Commonhold White Paper aims to change the face of homeownership
The Commonhold White Paper proposes a new model for homeownership in England and Wales to replace the problematic leasehold system. Scott Cabot, head of residential research at property services firm CBRE, explains what this will mean for homeowners, lenders and developers
Scott Cabot is director of research at CBRE
The Commonhold White Paper proposes a new model for homeownership in England and Wales to replace the problematic leasehold system. CBRE’s Scott Cabot explains what this will mean #UKhousingThe Commonhold White Paper sets out the government’s proposal for how the reformed commonhold model will operate in England and Wales, aiming to replace the problematic leasehold system. Commonhold, or its equivalent, is the norm in several countries, including Australia, South Africa, Scotland, the United States and Canada.
In the UK, commonhold was provided for as part of the Commonhold and Leasehold Reform Act 2002, which took effect in 2004. However, the concept never took off because of a range of concerns.
Similar proposals were then made by the previous Conservative housing secretary, as part of the Leasehold and Freehold Reform Act which became law last year. This originally included a ban on leaseholds, but was subsequently abandoned. It has introduced other benefits for leaseholders, albeit not all of these have yet been implemented.
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The current white paper now aims to enforce the full abolition of new leaseholds, and it will form the basis of a draft Leasehold and Commonhold Reform Bill due later this year.
Broadly speaking, the paper outlines a plan to reinvigorate commonhold through a comprehensive new legal framework, based largely on Law Commission recommendations. This includes a ban on the sale of new leasehold flats, making commonhold the default tenure.
The paper also addresses the need to improve the conversion process for existing leaseholds to commonhold. Any reforms will be implemented in phases, with an initial consultation on the banning of new leasehold flats.
In the grand scheme of things, there are 24.8 million households in England and Wales and four million leaseholders. With an average of 150,000 new homes built each year, the bulk of which will be freehold, the initial impact of this reform will be relatively small. It will take several decades for the number of commonholds to reach the current level of leasehold homes.
Figure 1: Ownership composition of homes in England and Wales
Nevertheless, the English Housing Survey illustrates the need for this reform, with almost 30% of owner-occupied leaseholders being dissatisfied with the services provided by the freeholder. This equates to approximately 700,000 households.
“It will take several decades for the number of commonholds to reach the current level of leasehold homes”
The survey also illustrates the significant amount of money being levied for service charges. The average household pays £1,650 per year, meaning leaseholders are paying a total of £6.6bn per year to freeholders, or almost £130m each week.
While just over half of leaseholders say they think the charges are fair, 45% reported that they considered the charge to be too high for the level of service provided.
Figure 2: Level of dissatisfaction with services provided by landlord/freeholder across tenures
The reform will have implications across the industry for developers, homeowners, landlords and tenants. But for the most part, these are being addressed through the recommendations made by the Law Commission, albeit converting existing leaseholds to commonhold remains a difficult process at this stage.
A main concern among developers is the reputational risk if the buildings are not property maintained. And from a resident’s perspective, having full control of the management is beneficial. However, this may be challenging to do, particularly in the case of large-scale developments where the scheme is segregated. This would potentially create several different management groups for the same development.
There will also be implications for mortgage lenders, with just over a million households (or just under half of all owner-occupied leaseholders) buying with a mortgage. The new legal framework will need to give comfort to lenders that the building will be adequately maintained by the commonholders, particularly in large mixed-use developments. Initially it may also result in delays in the sales process, as the parties involved with transactions navigate a new and unfamiliar tenure.
“The reform will have implications across the industry for developers, homeowners, landlords and tenants. But for the most part, these are being addressed through the recommendations made by the Law Commission”
Overall, these reforms will create a significant change in landownership, but they need to mitigate the main risk, namely creating a two-tier market between leasehold and commonhold which potentially devalues properties under the old leasehold system. However, what is encouraging is that, in contrast to the previous administration, this government appears willing to listen to stakeholders to get it right.
That said, commonhold may not be the silver bullet that is expected, particularly in terms of service charge costs and management. Admittedly the leasehold model is outdated, but it nevertheless makes the management of a building more efficient and streamlined.
The new commonhold model, while empowering owners, may result in a more complex and diluted management system, particularly on large-scale mixed-used developments.
Scott Cabot, head of residential research, CBRE
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