Emerging Risks: Labour reinforce their intent to shift from Leasehold to Commonhold

In a recent radio interview, the UK Housing Minister reiterated the government’s intent to abolish the “feudal system of leasehold” over the duration of this parliamentary term. This announcement signals a significant shift in the housing landscape, particularly for residential properties in the form of flats. At this stage, we understand that the government aims to replace the leasehold system for residential flats with “commonhold” and will completely abolish leasehold for houses.

This is an important development for the insurance industry, and while the topic may not seem immediately relevant to some, it could have significant implications for the property insurance market. In particular, the transition from leasehold to commonhold, which is similar to the condominium system in the US, will fundamentally alter how insurance is arranged and managed for residential blocks of flats.

What We Know So Far

Under the current leasehold system, the landlord generally holds the responsibility for insuring the entire building, including both individual flats and the common areas. The landlord also controls decisions regarding maintenance, repairs, and the overall expenditure for the building. This structure has provided a unified approach to insurance and a clear framework for resolving disputes over damage or repairs.

However, under a commonhold system, each flat owner would own their individual flat in a manner similar to freehold ownership. The flat owners, collectively, would own and be responsible for the upkeep of the common areas of the building. Importantly, each flat owner would be responsible for insuring their own flat, while the group of flat owners would be collectively responsible for insuring the common parts of the property.

The UK government’s push for these reforms is still in the early stages, and the full details are yet to emerge. However, the proposed shift in the legal framework presents several potential risks and challenges for insurers.

Potential Risks to Insurers

1. Deferred Maintenance Drawing from the experience in the US with condominiums, one concern is the potential for ‘deferred maintenance’. In the US, a key issue faced by condominium communities is that individual flat owners, left to manage the upkeep themselves, often fail to invest adequately in the maintenance of the property. This could result in neglected repairs or the deterioration of shared facilities, which in turn could increase the likelihood of property damage claims.
2. Ambiguities Around Ownership and Responsibility A common challenge in transitioning to a commonhold system could involve determining the boundaries between individual flat owners’ responsibilities and the communal areas’ maintenance. Without clear delineations, disputes may arise over who should bear the cost for repairs or insurance coverage in cases of damage to the common parts or individual flats.
3. Complicated Insurance Arrangements Under the commonhold system, where individual owners are responsible for insuring their own flats while the collective is responsible for the common areas, the risk of confusion and disputes between insurers is heightened. If individual owners opt for different insurers for their flats and the communal areas are insured separately, disagreements could arise regarding who should cover specific damages, leading to potential delays and complications in claims handling.
4. Subrogation Issues The shift to commonhold could invite reconsideration of subrogation waiver protections. Presently, joint insurance arrangements in leasehold buildings limit the possibility of claims between owners in cases where damage, such as fire, is caused by the negligence of one individual owner. However, under a commonhold arrangement, these protections may no longer apply, potentially resulting in a rise in liability claims between flat owners.
5. Increased Liability Exposure The introduction of more individual responsibility for insurance and maintenance may lead to greater liability exposure between owners. If one flat owner’s actions lead to damage in the building (for example, fire caused by negligence), the lack of a joint insurance pool may result in more legal disputes and claims for negligence among flat owners themselves, as well as with insurers.

What’s Next?

While much of the detail surrounding the transition from leasehold to commonhold is still to be finalised, insurers must be prepared for a potentially complex shift in the property insurance landscape. It is crucial to stay ahead of the debate and understand the evolving risks associated with this reform.

We will continue to monitor developments closely and provide further updates as the government’s proposals take shape. As we gain more clarity on the implementation of the commonhold system and its potential impact on property insurance, we will be able to advise on how insurers might adapt their coverage and claims management processes to mitigate new risks effectively.

We will provide further updates as more details emerge.

Richard Houseago - Partner and Coverage Special Interest Group Lead

rhouseago@keoghs.co.uk

Natalie Larnder - Head of Market Affairs

nlarnder@keoghs.co.uk