COMMENT The government agenda on leasehold in recent years has focused on removing some of the perceived abuses and excesses of the old regime. In the first tranche of reform, introduced by the Leasehold Reform (Ground Rent) Act 2022, ground rents for new residential leasehold properties were abolished and measures were introduced to make it easier for leaseholders to extend their leases.
A perhaps inevitable consequence of this has been a shift in traditional leasehold models. As income from ground rent has dried up, the incentive for freeholders to take on responsibility for buildings has diminished. As a result, we’re seeing more and more developers establishing resident management companies as part of their freehold disposal and long-term management strategies for new schemes.
More control for residents?
Resident-managed buildings are seen by many as the solution to the “leasehold problem”. They allow residents to feel more in control of their homes and the buildings they live in. For developers, it means being able to hand over responsibility for buildings, which is particularly appealing at a time when many professional freeholders are exiting the market.
This model requires resident directors to run the resident management company. These are typically lay people without professional training, who volunteer or are elected to the role. They have responsibility for the management and maintenance of the shared areas of a building, and need to ensure that the building as a whole is compliant with building regulations.
The growth in RMCs is coinciding with the dawn of a new building safety regime, and this synchrony is making the resident director role an increasingly onerous one. In the majority of cases, it is likely that RMC directors will assume the role of a building’s “accountable person” under the new Building Safety Act 2022 – this means owning the building safety system and taking on liability when things go wrong.
Although some of the detail is still being worked through, the duties involved in this will be significant: they will be responsible for assessing risks, ensuring the right information is kept about the development, and making sure residents are kept up to date with all relevant safety information. They will also be responsible for engaging with residents, including by creating and updating an effective residents’ engagement strategy.
For larger or more complex developments in particular, the challenge is finding residents who are willing and equipped to step up to the responsibility.
Bringing in the professionals
This is a problem which is likely to grow. For many buildings, it will become increasingly difficult to fill the roles of resident directors, and indeed many who are already doing the job may well rethink it as the new building safety regime comes into force.
For larger and more complex buildings, those with energy centres or mixed-use sites with commercial space as well as residential, the industry needs to look carefully at a third way. There should be space for specialist roles (distinct from existing property managers) where private companies with the skills and remit can act as RMCs where residents can’t be found. The ability to do this is established through clauses in the structure of RMCs, with the cost charged back to leaseholders. It allows qualified, professional people to be paid to manage buildings with complex requirements, rather than relying on volunteers in their own homes.
Cost is, of course, the major challenge for this model. Employing professional directors to manage developments starts to compromise some of the reasons that RMCs are considered appealing in the first place – namely, giving leaseholders more control over their homes and the finances associated with them. There will need to be an acknowledgement from residents that, as is always the case, there are costs associated with outsourcing responsibilities to external professionals. The risk of professionally run RMCs is that a system conceived to give more decision-making power to residents in fact comes full circle, leading to residents effectively having less control and paying more.
Management in practice
Building ownership and management structures, particularly for larger or more complex developments, is inherently complicated. Attempts to untangle the traditional leasehold structure have caused the industry to respond, with many professional freeholders moving out of the market and developers increasingly taking up an RMC freehold model. Attention in recent years has also fallen on commonhold, although it is hard to imagine that this will be a priority for the new prime minister and government.
Many see huge merit in alternative models, and there are certainly many positives to these different systems, but none of them are a silver bullet. They all come with their own sets of challenges, and need to be judged depending on the asset in question. However, the situation regarding RMCs and resident directors highlights the need for greater consideration of how asset management works in practice as the traditional leasehold regime is partially unpicked.
James Duncan is a partner and head of real estate investment at Winckworth Sherwood
