In zoology, the apex animal is the one at the top of its eco-system or food chain. I use the term “apex interest” instead of referring to the freehold interest for any block of leasehold flats (or the interest of the commonhold association for any block under commonhold law) because it more aptly describes its subject matter, is free from negative associations and is usefully generic.
The reform agenda
Any block of flats naturally starts by having an outside investor as apex owner: the original developer. What happens after that stage has become the issue. All rights must start out as claims and there is currently a populist claim for apex ownership of any privately owned block to become an inalienable right for the units’ owners, accompanied by the assertion that this will help units’ owners.
The direction of change is to cause apexes for existing leasehold blocks to become of such little value that they hold no attraction for outside investors, as a way of herding owners to convert blocks to commonhold, where apex ownership by outside investors is prohibited.
Proposed measures to achieve this goal, including provisions in the Leasehold and Freehold Reform Bill and recommendations from the Law Commission, include the normalising of leases’ terms at 990 years, outlawing ground rent entirely, awarding marriage value in full to the lessee and the reinvigoration of commonhold.
Those future measures involve takings of valuable possessions from current investors. They raise an obvious question under human rights law, which – under Article 1 of the First Protocol of the European Convention on Human Rights – boils down to any government promoting them needing to show that they serve the public interest.
The most interesting question, and a neglected one, it seems, is whether this proposed driving out of external investors and destroying of the second-hand market for apexes is a good idea. But, conveniently, that hurdle under human rights law rather forces this question to the top of the agenda for anyone interested in this area of proposed reform.
For and against
There are a number of arguments in favour from those who advocate these confiscatory reforms, in respect of which I would make the following counter-points:
- Leasehold is a relic from feudal times: This is just a trope. It has no obvious force. Many institutions with us today existed 600 years ago, such as the monarchy, universities, and churches, and their survival shows merit and usefulness. They may need to be modernised and improved by their constituents, naturally – but that is a very different matter to abolition.
- Ground rent is not reflected by any service being provided: A better way to see matters is that the lessee has not bought a last small percentage in the values of their unit and block, for which they must pay a ground rent, so that there can be an apex owner who is accountable and has value at risk for the good running of the scheme. If this relationship is destroyed there will be negative synergy. Unfortunately, the legal profession and mortgage lenders, in setting the criteria for acceptable leases, and subsequently parliament, in the form of the right to manage, have already severed the need for the apex to own management in leasehold blocks, when a wiser reform would have been to institute compulsory lessee representation on management boards; it would be better to reverse these mistakes than to pile new ones on top of them.
- Freehold ownership has enabled abusive and predatory practices, such as setting ground rents that double every 10 years, having fixed service charges that increase excessively in relation to a prices index, insurance gouging and forfeiture: This comes from the common law avoiding questions of the fairness of consideration and so is not a unique problem. Statute can control ground rents and other excesses, as occurs in other contexts such as the Pubs Code and consumer credit and the Law Commission prepared reforms on forfeiture over 30 years ago.
- Having no separate ownership of the apex removes a conflict with the interests of units’ owners, it reduces the incidence and size of disputes, and is especially liberating when a scheme is in jeopardy: This is also answered by enacting specific rules and creating new powers for the First-tier Tribunal, as in the Building Safety Act 2022.
Independent reasons against collapsing apexes in favour of unit owners include:
1. The resulting nominal apex body is then uncreditworthy for the lack of any asset that can be realised in a liquidation. On insolvency, the law can either leave creditors with no recourse or give them rights against individuals in the scheme and so deny limited liability. Commonhold law presently has both options under a judicial discretion. And, under commonhold there will be no remedy of forfeiture, which puts stress on liquidity, making insolvency more likely.
2. Accordingly, amounts that the nominal apex contracts to spend may need a bank guarantee or escrow arrangement before traders will commit resources. This will cause large communal reserve funds to be necessary and so will be unpopular.
3. Units’ owners with uninsured claims against the apex (say for damages from breaches of duties) will have no recourse.
4. On sales of units, sellers will want buyers to pay an extra amount for the reserve sum held and notionally attributable to their unit, although it will not be under a trust if the scheme is commonhold, but this poses unfathomable problems in identifying that sum with regard to confidential issues facing the nominal apex’s management, such as arrears owed by other units’ owners and current spending.
Thus, the concern for any government must be that it is not going to be possible to justify such takings from current outside investors when other – targeted, less drastic, and so more proportionate – changes can be made instead. As with natural ecosystems, if the apex species
is killed off there will be harm to the species below.
James Brenan is a partner at Spencer West LLP
