Commonhold Meaning vs Leasehold or Freehold
Thinking about buying a property but worried about the limitations of a leasehold? Consider commonhold. This unique form of ownership offers increased control, the potential for lower service charges, and long-term security.
Leaseholds depreciate when the term runs down and you have to extend them, so changing from a leasehold to a commonhold means you save money from the lease extension cost.
By owning your individual unit outright and having a say in how the shared areas are managed, you can enjoy a more fulfilling homeownership experience.
What is commonhold?
Commonhold is a form of ownership for multi-occupancy developments in the UK.
Unlike leasehold, where you own the right to occupy a property for a fixed term, commonhold grants you individual freehold ownership of your unit as a "unit holder".
This means you own the property outright, including a share in the land it sits on.
The commonhold meaning is that while you own your individual unit, you also have a stake in the overall upkeep and management of the shared spaces.
The common parts of the development, such as hallways, gardens, and parking areas, are owned and managed collectively by a commonhold association or residents' association.
This ensures that everyone has a say in how these shared spaces are maintained and managed.
How does a commonhold work?
- Each unit-holder owns the freehold of their unit, offering a more secure tenure than a leasehold agreement.
- Commonhold is governed by standardised rules and regulations, ensuring consistency and fairness among unit-holders.
- Unit holders contribute to service charges to cover the costs of maintaining and managing the common areas.
- The commonhold or residents' association owns and manages the shared areas of the development, such as hallways, gardens, and parking areas.
- The association is responsible for managing the common parts, collecting service charges, and enforcing commonhold rules.
- The association typically holds regular meetings where unit-holders can discuss and vote on important decisions regarding the management of the development.
The Commonhold and Leasehold Reform Act 2002
The Commonhold and Leasehold Reform Act 2002 was introduced to promote commonhold ownership in the UK.
It provides a framework for the creation and management of commonhold associations and sets out the rights and responsibilities of commonhold owners.
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Rights and responsibilities of Commonhold owners
Rights
The right to use and enjoy their individual units, including renovations or improvements as long as they comply with the commonhold rules.
The right to participate in the commonhold association and have a say in the management of the building.
The right to access and use the common areas of the development, subject to any reasonable restrictions imposed by the commonhold association.
The right to contribute to the management of the building through participation in meetings and voting on important decisions.
Responsibilities
Paying service charges to cover the costs of managing the common areas and other shared expenses. In some cases, unit owners may be required to contribute to a reserve fund to help cover the cost of repairs or replacements to common areas.
Complying with commonhold rules, which may include restrictions on noise, pets, and renovation work.
Maintaining their individual units in a good state of repair. This includes ensuring that their unit complies with building regulations and safety standards.
Commonhold and mortgages
Mortgages are generally available for commonhold properties. However, lenders may have specific requirements and considerations when assessing mortgage applications.
Factors that can influence the interest rates offered on commonhold mortgages include the condition of the building, the financial stability of the commonhold association, and the location of the property.
For example, they might require that the commonhold association is in a healthy financial position and has sufficient funds to cover ongoing expenses and future repairs.
They might also look for a dispute resolution mechanism to address any conflicts between unit owners and to avoid potential legal action.
Individually, the borrower must have a good credit history and be able to demonstrate their ability to repay the mortgage loan.
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The Commonhold Association
The Commonhold Association is a company that manages the common parts of a commonhold development. Its responsibilities include:
- Maintaining and repairing communal areas such as hallways, stairways, gardens, and car parks.
- Budgeting for repairs, hiring contractors, and ensuring that the common areas are kept in good condition.
- Collecting contributions from unit owners to cover the costs of managing the building. These charges are typically calculated based on the size of each unit and the services provided.
- Ensuring that all unit owners comply with the rules and regulations governing the development. This includes enforcing rules related to noise, pets, and renovation work.
- Making decisions about the management of the building, such as budgeting, repairs, and improvements. The association may hold regular meetings to discuss these matters and vote on important decisions.
Advantages and disadvantages of commonhold vs leasehold
Increased control
- Commonhold owners have more say in the management of their building compared to leaseholders.
- They can influence decisions about repairs, maintenance, and improvements, giving them a greater sense of ownership and control over their property.
Potential for lower service charges
- The management of the building is handled by a commonhold association, which can potentially negotiate better deals for services, leading to lower service charges compared to leasehold arrangements. Negotiations take place on behalf of all unit owners which gives greater bargaining power.
- This can be particularly beneficial for owners who are concerned about the rising costs of property management. For example, everyone might be able to benefit from lower rates for landscaping services and enjoy a tidy area outside of the building.
- Additionally, the existence of a reserve fund for unexpected major repairs means that if, for example, an elevator breaks down the association can quickly and effectively get it fixed.
Long-term security
- Commonhold ownership offers a more secure tenure than leasehold, as it doesn't have a fixed term. This means that unit owners don't have to worry about the uncertainty of lease renewals or the possibility of the landlord selling the property.
Complexity
- Setting up a commonhold can be more complex than establishing a leasehold arrangement. There are various legal and administrative procedures involved, and it may require the assistance of a qualified professional.
- It would involve drafting a constitution, registering the association as a company, and appointing directors. The commonhold must also be registered at the Land Registry and a transfer of ownership needs to take place from the developer to the individual unit owners.
- The commonhold association will need to have a reserve fund established to cover the costs of major repairs or replacements to the common areas.
Limited market
- Commonhold is less common than leasehold, which can limit the pool of potential buyers if you decide to sell. This can make it more difficult to find a suitable buyer and may impact the sale price.
- For example, you might require consent from the commonhold association for the sale of the unit, and you will need to disclose all available information about the association including its financial health, management practices, and any outstanding disputes.
Potential for disputes
- As with any shared ownership arrangement, there's a risk of disputes arising between owners. Disagreements can occur over a variety of issues, such as the allocation of service charges, the management of common areas, or the enforcement of commonhold rules.
Control
Commonhold owners have greater control over their property and the management of the building compared to leaseholders. They can influence decisions about repairs, maintenance, and improvements.
For example, if you notice that the building's exterior paintwork is starting to peel and fade, you'd have to report this issue to the landlord or managing agent in a leasehold.
However, under a commonhold, you have a direct say in the decision-making process and you can propose a vote in the next meeting amongst commonholders on repainting the building.
Service charges
Commonhold associations can potentially negotiate better deals for services, leading to lower service charges compared to leasehold arrangements.
In a leasehold run by the freeholder or managing agent, they might have different priorities over cost and quality. For example, they might overspend because they can pass the cost onto leaseholders in service fees or from major works.
In a commonhold association, however, there is an interest for everybody involved to choose the best deal. You'd collectively weigh out the costs, quality, and timescales.
Long-term security
Commonhold ownership provides a more stable, secure, and predictable environment for property owners, as it doesn't face the same issues of lease renewals or extensions.
There is no fixed-term agreement like a leasehold, meaning unit owners don't need to worry about their freeholder or landlord selling the building.
Leaseholds also depreciate when the term runs down and you have to extend them, so changing from a leasehold to a commonhold means you save all the lease extension costs.
Converting a leasehold
The process of converting a leasehold to a commonhold requires the following:
- The freeholder of the property must give their consent to the conversion.
- Any registered charge holder over the freehold must also give their consent.
- Unanimous consent from all leaseholders is currently required. However, the Law Commission has proposed reducing this threshold to 50% of all leaseholders, with protections in place for non-consenting leaseholders.
If the consent threshold is met:
- The land would be registered as a commonhold at the Land Registry.
- The commonhold association would become the registered owner of the common parts.
- The leaseholders named in the application would be registered as unit holders and become members of the commonhold association.
- The existing leases would end, and the rights and obligations they contained would be replaced by those in the Commonhold Code of Practice (CCS).
If you cannot get permission to convert to commonhold from your freeholder, you may still have the right to buy the freehold via collective enfranchisement.
Is commonhold the same as share of freehold?
While there are similarities, commonhold and share of freehold are not the same. Share of freehold involves owning a specific portion of the freehold title to a property, often as part of a larger development.
Commonhold, on the other hand, involves owning a share in the freehold of a building along with other owners, while also owning an individual unit within it.
Thinking about buying a commonhold home?
SAM can help. Our experienced commonhold solicitors will help you complete your purchase and advise you throughout.
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