As of 30 June 2023, there are only 184 properties registered as "commonhold" within England and Wales, which is less than 0.01 % of the total number of properties in the same area. This evidences the extent to which the current form of commonhold ownership in the UK is unsuccessful. By contrast, the condominium system and the strata title system in the US and Australia respectively are very well used and internationally well regarded. In this article we explore what commonhold ownership is, what it is designed to do, what solutions it might offer the UK real estate sector and what challenges it needs to overcome to be utilised in the senior living sector.
1. What is commonhold ownership and what is it designed to do?
Commonhold ownership was created under the Commonhold and Leasehold Reform Act 2002 as an alternative way of owning properties that have communal facilities or share a common structure such as walls, roofs and foundations within a communal building. Previously the only method of arranging this was via a lease, with the landlord retaining ownership of the structural or common parts on a freehold basis, managing them on account of its tenants, and recouping the cost as part of a service charge.
In an attempt to redress the apparent imbalance of power in the leasehold ownership of land, in which substantial steps have already been taken (as explored in our recent publication on ground rent and the abolition of section 21 rights to evict tenants on no-fault grounds), the Government has been promoting the use of commonhold ownership for newly created developments that have shared facilities and structures, with a view to doing away with the landlord / tenant relationship entirely in a residential context. This applies to apartments within a shared building or buildings on a residential estate with shared areas such as access roads, communal gardens / landscaping or estate offices. In the commonhold model, individual apartments or buildings are owned on a freehold basis with shared areas jointly owned and managed by a commonhold association made up of residents who contribute towards the costs of their upkeep. By putting the management of communal areas in the hands of those that jointly own and use them, the Government hopes to remove the potential conflict of interest that exists between a landlord for whom income production is the main motivation for ownership, and the tenant for whom security and value are the priorities. What solutions might commonhold offer in the senior living context?
2. What parts of the senior living sector have the potential to benefit?
The commonhold ownership model is not a good fit for all senior living schemes. It is more appropriate for use in a retirement village or assisted living scheme, where residents own individual homes or apartments within an estate with shared facilities, rather than occupy a room within a common building such as a care home. That is because the running of the care home is a healthcare business with the provision of a care package as its priority rather than property ownership or control. Individual residents take up space within a care home on shorter term licence or other contractual arrangements, and for this they pay a holistic fee for their room, meals, facilities and care provision combined. This means that, within a typical care home structure, residents are never provided with an interest in land. Many have complex needs, are in need of care, or are unable to be involved in the management and maintenance of large-scale buildings. The care home operator is a registered healthcare provider which delivers these health and care services as well as acting as custodian of the building from which care is provided, either on behalf of the owner or in its own right.
By contrast, tenants in retirement villages and / or assisted living schemes enjoy greater independence. This is reflected in the fact that retirement living schemes offer home ownership – typically on a long-lease or shared ownership basis – with an interest that can be traded on the open market should the tenant desire to relocate. Asides from being a development where minimum age restrictions on entry apply, the shared facilities that feature in retirement villages (e.g. reception areas, communal gardens, dining and often leisure facilities) also do not vary significantly to those enjoyed in PRS schemes. In the case of both, the commonhold model offers the residents the ability to own their homes on a freehold basis and have a stake in the ownership and control of the shared structures and facilities, which they are either capable or desirous of running.
3. What solutions might commonhold ownership offer in the retirement village or assisted living context?
A commonhold model of ownership offers a number of benefits. It could allow retirement or assisted living schemes to run on a basis which offers residents a freehold interest in land which can be freely sold on the open market (subject to age restrictions) but does not depreciate in value over time as with a lease. These arrangements can entered into be free of 'event fees' or 'exit fees' which are often a feature on assignment of retirement leases (a topic we explored in our original briefing here and as part of an update on the Government's Leasehold Reform (Ground Rent) Bill 2021 here). They also offer residents the opportunity to manage the common facilities enjoyed by all residents, gaining control over the cost of running them and allowing them to be responsive to residents' use and needs. Even where management duties are outsourced to a third party (as they are typically expected to be), the residents maintain control over the identity and terms on which that manager is appointed and can bring the engagement to an end where it no longer works in their favour, ensuring the arrangement is always competitive.
From an investor / developer perspective, the commonhold model of ownership would allow owner-developers to exit the schemes on completion of development or, at the very least, on the sale of the final unit. The exit can be achieved at a potentially higher price-point bearing in mind that: (i) the extent of land being sold, when including common parts, is overall far greater; and (ii) the ownership, obligations and responsibilities in running and maintaining the shared areas would no longer be the owner-developer's responsibility. As a result, the model absolves the investor / developer from retaining obligations as landlord and having to carry out the administration involved in the management of leasehold interests (e.g., rent collection, operation of service charges, approval of applications for assignment or alterations etc). This shifts the focus and value of the land from one in which there is value in holding on to or trading in the reversion to one in which immediate disposal is the aim. This has the potential to free up investor / developer's interests and time into re-investing into further development. This in turn supports the Government's agenda to promote house building.
The commonhold model also allows the rights and responsibilities of both the investor / developer and residents to be simplified. Complicated rights connected with leasehold ownership, such as collective enfranchisement, the exercise of the right to manage, rights of first refusal on sale of the freehold reversion (to name a few), all of which are designed to enable tenants to claim control and/or ownership of property from their landlords, fall away under commonhold regimes. Similarly, rights to challenge the reasonableness or management of the service charge, rights to form a tenant's association, or rights of forfeiture in the event of breach, are no longer relevant. This removes uncertainty and the main causes of potential disputes. In the alternative, individual residents sign up to a collective document regulating the relationship between each of them on joining the commonhold called the "commonhold community statement". That statement, rather than being negotiated with the landlord as in the case of the lease, is prepared at the outset of the scheme, follows a statutory form, and can be adapted over time to account for "local" or other necessary changes. It offers obvious advantages over using a lease to regulate relationships between the parties, given the lease typically favours the more powerful party and, given it is individually negotiated with each tenant, has the potential to diverge or conflict with other leases in the scheme over time. The commonhold statement is a democratic document which prepares the basis for a unified working relationship between co-owners going forwards.
4. What problems are there with the commonhold model in the retirement village or assisted living context?
The main disadvantage of the commonhold model of ownership in the senior living sector is that, short of an independent operator being brought in to provide care services under a contract with the commonhold owners (the terms of which would need to be specifically negotiated), there is no landlord in place to provide care services or delegate the provision of care services to the commonhold occupants under a single contract negotiated with a care provider. This is a problem which is unique to the sector. It is not experienced, for example, in PRS schemes, where health and care services are not required by the vast majority of occupants. The landlord's role in negotiating, entering into and policing care contracts at the freehold level is removed and the burden must be placed on the commonhold association, who may not have the commercial experience or negotiating power to secure beneficial terms for the commonhold occupants. By contrast, the leasehold model offers a convenient division of responsibilities between landlord and tenant for these and other professional or commercial purposes.
In this and other respects, commonhold will have to compete with the leasehold model for some time. This is not in the least because of the prevalence and length of leases which are already in circulation (particularly long leases with terms of 99 years, 125 years, 150 years, 999 years etc), which would need to be extinguished to be replaced, but also due to lack of familiarity. This lack of familiarity brings with it problems with obtaining finance or accurate valuations on commonhold property and it can be more complicated to insure. Fewer mortgage products are currently available on purchase and the pool of potential purchasers for commonhold properties may be limited due to a lack of understanding of what commonhold ownership actually entails. Some purchasers may in fact be put off by shared management responsibilities which they would otherwise prefer to have been administered by the landlord, particularly in the context where the commonhold association has not appointed a professional manager for this purpose. This is particularly the case in a retirement living context where occupiers are typically looking to take on less responsibility rather than more when they move into the scheme.
It is also unclear how commonhold ownership will operate in a mixed-use context. This is a challenge for senior living schemes which offer shared facilities with a commercial element, such as restaurants, leisure facilities, or guest accommodation available at an additional charge. Many of these elements involve outsourcing to third party operators; are run at a profit which needs to be paid back into the scheme and re-administered; or require independent licensing (such as for the sale of alcohol or provision of entertainment) that must be carefully regulated. This will nearly always require the involvement of a professional manager whose expertise will come at a charge. Management arrangements such as this, even though negotiated on commercial terms, would not benefit from the many protections which have been set down in statute and at common law in respect of leasehold service charges regimes and have evolved over several decades. It is questionable, therefore, if residents are left more exposed when entering into independent management arrangements where they are free to enter into a "bad bargain" (the avoidance of which would require sophisticated commercial negotiation and advice) and would in any event have to pay a fee for. It diminishes the argument that commonhold ownership provides better opportunity to reduce costs and also the argument that it offers better protection for its participants, given it has not been challenged in the courts and has no body of case law supporting it. This would change over time, but it would be a lengthy process.
Removing the leasehold model also creates new complications. Aspects of real estate management that are regulated under leases and are in the common interest of all occupiers (e.g. restrictions on alterations, changes in use etc) have to be regulated by the commonhold community statement rather than under the individual leases granted for the estate. All residents are required to sign up to this statement on purchase, and have their buyers sign up to the statement on sale. However, rather than one party (the landlord) being responsible for enforcement, as in the case of leasehold ownership, all residents would be jointly responsible for enforcing it between themselves through the commonhold association. How exactly this would work in the case of one or multiple defaulting parties (who are themselves party to the document), and in circumstances where not all parties are inclined or willing to enforce, is unclear and could create huge complications. Failure to take prompt action or granting individual concessions could result in accidental waiver of certain of the provisions in the document, which would then become more complex to enforce over time. There is also the question of how enforcement will work if forfeiture is not available as an ultimate sanction – the forced sale of individual units would be an inequitable option, but means uncooperative residents remain embedded within the scheme. Delegation of enforcement or management responsibilities by the commonhold association to a managing third party could circumvent some of these issues, but this does not do away with the complication that that managing agent has been appointed by and acts for the residents jointly, some of whom it would then be responsible for enforcing against.
Ultimately, collective ownership brings with it the complication of enforcement against individuals within the collective, and that is never neat. Common ownership also comes with the assumption that all parties have the same interests in common, which is very unlikely to be the case for the entire duration of the time that the various owners and their successors remain in residence. Though commonhold decisions are made by vote – a process which is innately more democratic than that allowed under any lease – it is impossible to satisfy all parties who, as joint and common owners, would naturally all expect an equal say. Quite aside from issues with enforcement (which is the final stage of problem-solving), if there is any disagreement in the collective or delay (over, for example, any items of expenditure or effecting structural repairs upon which individual units are interdependent), this could lead to larger problems which are ultimately more costly and time-intensive to resolve. The withholding of payments by certain residents may also put the solvency of the commonhold association at risk, with as yet no mechanism to prevent this from happening.
5. How do we move forward?
As things stand, the commonhold model of ownership does not offer a workable alternative to leasehold for the senior living sector without further input from the industry, tightening of legislation, or accident in which it can be put to the test. The main problem is finding investor / developers prepared to test it. The next problem is ensuring legislation is updated fully and quickly enough to support the test.
Commonhold offers certain benefits in terms of freeing up investor / developer time, allowing residents' control over services, and simplifying the complex body of leasehold law. However, from an owner's perspective, it remains to be seen how problems with enforcing against other commonhold owners can be resolved (particularly with no existing dispute resolution service), or how more sophisticated mixed-use schemes can adequately be catered for. Other than by reference to similar, more sophisticated systems in place in other jurisdictions (e.g., the USA and Australia), the route to achieving commonhold ownership and the circumstances in which it works therefore remains unclear.
To move things forward, the Government has established the Commonhold Council in May 2021 to advise on the changes to, promotion of and eventual implementation of the commonhold model of ownership. Amongst other things, it is tasked with finding ways to ensure commonhold provides a workable alternative to leasehold structures, including in more complex settings (which presumably includes the senior living sector), and to identify and then prepare the market (investors, developers and homeowners alike) for its implementation through education and awareness. It has identified new supplies of residential flats as a platform for the widespread introduction of commonhold in particular, with specific reassurance being offered from Housing Minster Rachel Maclean to investors within the senior living sector that commonhold "is not a one-size-fits-all solution", that it "will not be imposed" upon the sector or any others, and that it will not "impinge on leasehold products such as integrated retirement communities" specifically (see here).
The fruits of the labour of the Commonhold Council are yet to be seen, and, despite a Government consultation on the use of commonhold having concluded in February 2022 (which itself follows the Law Commission's report on reinvigorating commonhold as an alternative to leasehold ownership, published in July 2020) there is as yet no statement as to what changes the Government proposes to implement or the timetable for projected reform. However, the senior living sector is demonstrably at the top of the Government's agenda, with The Older People's Housing Taskforce being established in May 2023 to investigate the many ways in which housing and care can be improved for old people in the UK. Whether this occurs through a change in ownership structures, other measures, or a combination of the two working in tandem, remains to be seen.
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