Commonhold conundrum: what England can learn from Scotland to reform apartment ownership

Scotland has developed a different approach to property ownership, particularly in apartments. Most buyers acquire a heritable interest (the equivalent of freehold) in an apartment and a share in the common parts of the building.

A deed of title conditions may be put in place by a developer of a new build or newly converted apartment block prior to any sales, and this will govern the parties’ respective rights and obligations in respect of insurance and maintenance of the building. In default of any such title conditions, the Tenement (Scotland) Act 2004 provides this framework called the Tenement Management Scheme (TMS). 

“In 2002, England and Wales looked to resolve the “fleecehold” issues inherent to apartment leasehold tenure by introducing commonhold, which closely aligns with the Scottish system whereby it allows the apartment to be held freehold”

In 2002, England and Wales looked to resolve the ‘fleecehold’ issues inherent to apartment leasehold tenure by introducing commonhold. This closely aligns with the Scottish system in that it allows the apartment to be held freehold, and the owner becomes a member of the commonhold association (CA) that owns and maintains the common parts of the building, noting that all owners in the building would be a member of the CA.

The CA would be a limited liability company with a prescribed form of articles of association. However, this form of tenure has not yet been fully embraced – there are fewer than 20 commonhold developments.

So, what’s preventing widespread adoption of commonhold in England and Wales?  

First, many homeowners, developers, mortgage lenders and legal professionals are unfamiliar with the commonhold system and therefore prefer to stick with the more familiar leasehold. Developers also have little incentive to adopt a commonhold structure when they are able to secure future revenue through leasehold, such as selling lease extensions or the freehold interest. Mortgage lenders are also concerned about the potential insolvency of the CA and its impact on building repairs.

Enforcement of commonhold is another challenge, as many feel that the legislation does not adequately address dispute resolution. The Building Safety Act adds further complexity, particularly when majority decisions are required for essential repairs.

Commonhold also requires apartment owners to co-operate and participate in property management, which many are reluctant to do. Converting existing apartment blocks to commonhold is difficult because it requires unanimous agreement from all interested parties.

The concerns surrounding commonhold in England and Wales could potentially be addressed by learning from Scotland’s system. One approach would be to make commonhold mandatory for apartment blocks. Employing professional property managers for building maintenance, a practice common in Scotland, could also help to alleviate some challenges.

Additionally, replicating the TMS provisions, which allow any apartment owner to instruct emergency works with all owners contributing to the cost, would remove the need for a majority vote, simplifying decision-making.

“While Scotland’s system does not force the sale of apartments to recover arrears, it does allow the collection of a float from new owners, charging penalty interest for late payments, and collecting reserve funds”

Another solution would involve creating a simpler process for converting existing apartments to commonhold tenure. Protections around expenditure levels, similar to those currently in place for leaseholders, could be introduced, requiring CA directors to consult members on qualifying works or long-term agreements.

Stronger dispute resolution measures should also be included. While Scotland’s system does not force the sale of apartments to recover arrears, it does allow the collection of a float from new owners, charging penalty interest for late payments and collecting reserve funds. Purchasers take on the liability of previous owners, ensuring that any arrears are settled at the time of sale.

Scottish local authorities also have the power to serve statutory notices for repairs and can undertake the work and recover costs if owners fail to comply.

Should England and Wales adopt a similar system, protections akin to those that leaseholders currently enjoy against forfeiture of a lease would need to be implemented if the ability to call for the sale of a defaulting owner’s apartment to recover arrears was introduced.

Lyndsey O’Connor, partner, Shoosmiths