Is commonhold really in the public interest?

The Law Commission’s proposals to “reinvigorate” commonhold, published over the summer, are of much interest to the property industry. They set out a vision whereby, if the government decides to do so, commonhold might become the only option for new developments – and, at the very least, measures are to be put in place to incentivise its use. The government’s other option, if it does implement the proposals, would be to make adoption of commonhold optional; in other words, to let the market decide. So, what should the government do if it gets that far? The arguments in favour of mandating use of commonhold centre on a belief that the public would be better served by commonhold than leasehold, particularly in light of the concerns around the misuse and abuse of leasehold by a minority. They will run their own developments, own a freehold interest in their flats, and lose their landlord. There’s something attractive in that – ideologically, at least. Steps to improve leasehold would also help address many of those concerns. Support for the ban on use of leasehold houses and the Public Pledge for Leaseholders signed by industry and government last year show some change is welcomed by all. Lack of choice The fundamental problem with making commonhold mandatory is that “consumer choice”, and more generally market choice (including choice for lenders), is removed. While there may be public policy reasons for taking that choice away from less informed individuals, there are many purchasers who are either experienced investors, or have taken the time to properly research their options, who will recognise the downsides to commonhold: In buying a commonhold property, you are also buying into ownership of the commonhold association that provides the common services to your property. If you volunteer to assist in the running of the association, you risk legal (including criminal) liability. If you don’t volunteer, many key decisions affecting your property, such as applications for consent, will be made by your neighbours; what if you have fallen out? The association is unlikely to have any external source of funding; it will be forever on the brink of insolvency, with the complications that scenario would bring (and risks to your investment). n Your ability to hold the association to account if they unreasonably incur service charge costs is very limited, unlike leasehold ownership. Recent research by Savanta Group on behalf of professional freeholders found that 75% of leaseholders “feel negatively” about taking on new obligations for building and fire safety as proposed by the government, predominantly due to fears of neglect and conflict with residents. It is unlikely many buy-to-let investors would see commonhold as an attractive option, given leasehold investments often come with a professional asset manager making objective decisions over the day-to-day and long term management of their block. By contrast, how will you hold your association to account without risking running them into chaos or insolvency? Conversion What of the intention to ease the process of conversion from leasehold to commonhold? Here we run into similar problems. Given the number of existing leaseholds, these proposals controversially pose an even greater risk to the public. The intention is that leaseholders on existing developments will be able to convert to commonhold through a simple majority vote. Those not in favour will be forced to move from leasehold to commonhold, with the costs of doing so (as the landlord’s reversionary interest must be purchased) potentially funded by way of a compulsory equity loan secured against the unit, to be repaid on sale. That almost half of the owners in a block could be forced into an equity loan against their will ought to raise an eyebrow. What of lenders? We can confidently assume that among the eyebrow-raisers will be those in the banking sector responsible for setting lending criteria. And, of course, absent lenders, commonhold will struggle to take off – this being the best (if still poor) argument in favour of making it mandatory. Aware of this, the Law Commission recently wrote a letter to lenders, attempting to persuade them that their concerns have been resolved and that commonhold really is the better option for strong security. However, it seems unlikely they will have been persuaded. The structural aspects of the leasehold model offer far more protection for an apartment block. As part of the leasehold model, a professional freeholder is commonly in place to provide long-term stewardship for a development. Lending on a commonhold property does not have that benefit and is an entirely different prospect. Lenders may have several new powers under the proposals, but it seems unlikely they will want to exercise them except in the most extreme cases. The ability, for instance, to appoint new directors and become heavily involved in any insolvency and termination processes of the association is a burden few will want to take on. Lenders don’t want the onus of ensuring compliance, and given each apartment may well have a different lender, which of them will take the lead? “After you.” “No, please, go ahead.” The relative benefits of commonhold versus leasehold vary by development. One can readily see in small, uncomplicated developments that commonhold may rightly prove popular in the market, but not so elsewhere. It will be fascinating to watch the debates play out if and when the proposals make their way to a Bill. Leasehold campaigners should be careful what they wish for – consumer choice should not be eroded. Simon Allison is a barrister at Landmark Chambers Photo by Anna Shvets from Pexels