In our last “commonhold versus leasehold” article, we explored day-to-day management comparisons. As the COP26 climate change conference approaches, it was only fitting to look “commonhold versus leasehold” in the context of climate change. Previously, many snubbed climate change as a “fad”, but with a delegate list including world leaders past and present and Royalty, and with noticeably bizarre weather over the last two years, it is an issue that can no longer be ignored.
How does the environment impact property design?
Climate change is already having a direct and negative impact on commonhold and leasehold housing stock. We have seen a significant rise in the number of properties being damaged by severe flooding, or significant damage to the fabric of the building caused by storms. This in turn leads to an increase in insurance premiums and escalating repair costs. Climate change has woken up the property industry with buyers being more cautious than ever when it comes to choosing a property, with climate damage making properties potentially unsaleable or unmortgageable. As climate damage gets worse and more frequently, it is likely that those properties at risk will depreciate quickly, leaving those who own them significantly worse off in all respects. Regardless of tenure, climate change is already leaving its mark on property.
How does property design impact the environment?
In the same way that the environment is damaging homes, the homes are damaging the environment. At the very heart of climate change is how we behave at home: what we eat, how we heat our home, what vehicle we use, leaving lights on in the commonways, what materials our building is made from, recycling, how well insulated it is, so on and so forth. Poor maintenance can leave buildings exposed which in turn drives up fuel consumption to keep the place heated or in needing energy-consuming materials to fix them. Many buildings are decades old, and the technology and construction methods are becoming more and more outdated. Communal heating systems, for example, are known for being expensive to run and maintain. They also generate a huge amount of waste with residents regularly reporting the need to keep windows open because their flat is too hot and they cannot adjust their heating individually.
Multi-occupancy buildings: the issues
Whilst the environment cannot be changed to help buildings, buildings can certainly be changed to help the environment. The range of options is vast from smaller measures, such as changing to energy-saving lightbulbs to substantive measures, such as replacing a heating system with a renewable energy system.
In a freehold house, the property owner usually has the autonomy to make net zero changes, whether small or large. The homeowner can elect to take out various government grants to help modernise and improve which in turn helps keep carbon emissions down. The homeowner has complete choice to decide how much impact they have on keeping emissions down.
By comparison, improving carbon emissions in multi-occupancy buildings can be complicated both because of the legal framework and practical difficulties. The primary difficulty with a block of flats is the lack of autonomy to make changes individually. Installing an electric vehicle charge point in a leasehold garage, for example, can be fraught with complications – the landlord’s consent will likely be needed, fees will need to be paid, access to the communal electricity source to hook up the charge point will be required, not to mention the disruption of digging up the car park to lay the cables. Even in a commonhold block which does not have the same rigid legal constraints, the practical issues will still likely arise to a degree.
A secondary concern is that many changes can only be made by the landlord or commonhold association – for example, controlling when the hallway lights come on or insulating the building. Even if the occupants want these upgrades, unless living in a commonhold unit, there is little that the occupants can do to force the building owner to engage. A further complication with the leasehold system is the fact that many net zero measures will likely fall within the definition of “improvement” works, which most leases do not sufficiently provide for. Even if the building owner is keen to implement changes, the legal framework may not allow it.
Should occupants be allowed more flexibility to improve their carbon footprint? What happens when things go wrong? How will it work in practice? Does the legal framework allow for it? Are the costs going to be unaffordable to make substantive changes to the construction of the building? These are all worthy questions that should be thought about.
Notwithstanding the practical issues, commonhold is the clear winner when it comes to tackling climate change. The Commonhold Community Statement gives flexibility to the Commonhold Association to carry out any works necessary, including improvements, which will likely include any net zero measures. It also allows for collection of a sinking fund which could be adapted to incorporate future net zero costs to make modernsiation affordable in the long-term.
As well as having the legal framework in place to permit such works to be carried out, another advantage is that the members of the Commonhold Association are the unit owners. The unit owners will likely have a keen interest in keeping their carbon footprint healthy for the building they own and often live in.
The last main advantage is that not only can the Commonhold Association carry out works to the main building, but the individual unit holders can also modernise their commonhold units without the complex, and often expensive, consent process found in the leasehold system.
The generous legal framework gives the unit owners flexibility to come up with practical and workable solutions to implement net zero measures in a cost-effective way.
Whilst commonhold has clear advantages over the leasehold system, there are some disadvantages. Implementing net zero measures can currently be expensive where grants are not available. The voting system does not require unanimous consent for undertaking such works so any member of the Commonhold Association who is not keen on incurring the expense may be forced to do so against their will. The current redress system where a dispute arises also leaves a lot to be desired. Those in the minority are therefore likely to be less well protected than a minority in the leasehold system. Also, if the minority are the ones seeking net zero changes to the building, again, the system leaves them vulnerable.
The leasehold system is vastly different from commonhold when it comes to implementation of net zero measures. The rigidity of the lease usually means that any improvement works cannot be carried out and/or the cost recoverable from the service charge fund. Landlords are then placed in a difficult situation – do the works and potentially struggle to recover the cost, or avoid the work and potentially be in breach of any mandatory net zero measures (although there are no mandatory net zero measures at the time of writing so the risk is relatively low). If and when measures become mandatory however, the situation will change rapidly. Such measures might include mandatory installation of electric vehicle charge points or improving the energy efficiency to a minimum EPC standard. The leasehold framework is not equipped to deal with mandatory works at this time so kills any meaningful net zero measures on a legal basis alone.
There are then practical issues. The government has this week announced a new grant for replacing gas boilers with renewable systems. How will this work if living on the thirtieth floor of a high rise? What if there is a communal system or the individual system links up with other individual systems? Who pays for the balance? What about ongoing maintenance? How does this link up with any building safety measures? Separately, and crossing-over with legal: what happens if a landlord today replaces the boiler with a gas system, knowing that gas boilers are going to be banned in the near future – can a leaseholder challenge that installation of a gas boiler is no longer “reasonable”?
For new housing stock, the legal framework and practical issues can be addressed to future-proof the buildings. Leases can be drafted so as to pre-empt potential mandatory net zero measures alongside constructing buildings with net zero options to begin with. Futureproofing new stock is not necessarily going to be an issue, but there are real concerns about how net zero measures can be successfully implemented in existing leasehold buildings.
We are currently in the middle of a wholesale commonhold and leasehold reform program. Whilst the announcements we have seen so far seem to be specific to key areas such as collective enfranchisement, we have yet to see any clear announcements on net zero for commonhold and leasehold housing stock. Indirectly, permitting leaseholders to buy their freehold and/or converting to commonhold should help with the autonomy issue but the legal framework needs to be specifically updated alongside it for it to work.
What can be done now?
Given the outdated leasehold framework, the ability to implement net zero measures for leasehold properties is difficult, even where the majority of the parties are keen to proceed. One more or less needs unanimous consent to make it work. There are small changes that landlords and managing agents can think about which are permitted under the current system, such as communal lighting arrangements or choosing materials that are more eco-friendly for major works projects. Beyond that however, for now, the leasehold system is very much stuck.
Commonhold, on the other hand, has far more freedom to be thinking of improving the carbon footprint of their buildings. Planning can commence immediately via an asset management plan which incorporates net zero changes, coupled with adapting any sinking fund to allow for future net zero costs. As a community, the unit owners can also look at measures which can be implemented immediately.
Overall, the commonhold system is better designed to deal with tackling climate change issues than the leasehold system. It is clear that COP26 is going to trigger healthy discussions on what more can be done in the property industry. Going forward, if the government decides to mandate energy-efficiency works, it will need to be mindful that the legal framework for leasehold properties in particular must be modernised to make sure that the schemes work for multi-occupancy buildings. The current reforms present a perfect opportunity to future-proof the legal framework before it is too late.
The Team at Commonhold and Leasehold Experts Limited
18 October 2021
Next time in our “Commonhold versus leasehold” series, we will be looking at dispute resolution.