Michael Gove’s sudden U-turn on leasehold system reforms and Labour’s subsequent outcry to abolish leaseholds altogether has brought longstanding issues with the leasehold system into the limelight.
Leaseholds have been mired in controversies with stories of spiralling ground rents and extortionate service charges alongside tenants often finding that extending their leases is prohibitively expensive. There are also issues with lease assets depreciating and leaseholders lacking true ownership of their property. These have long been a source of contention for leaseholders and property managers, alike.
Previous reforms have made some headway into mitigating ground rent issues, such as the Leasehold Reform Act, which came into force in June 2022 and ended ground rents for new long residential leasehold properties. However, the reform failed to extend its ground rent ban to older properties, meaning that for many leaseholders, the issue very much remains.
Labour’s plans to revive the alternative commonhold system ownership structure as a solution to current leasehold issues have been presented as a panacea for the property market: no ground rent, no service charge abuses, no long leases (and therefore no additional lease extension expenses), and equal rights for all units in a commonhold building.
So, is replacing the leasehold system with the commonhold system the way forward? A closer examination suggests it may not be the fix-all that some claim it to be.
Commonhold: a damp squib?
While the commonhold system has had some success in places such as Australia, since its inception in the UK in 2004, approximately only twenty commonholds were created by 2019. The dismal adoption rate is largely attributed to the reluctance of lenders to embrace commonholds due to a perceived higher risk of insolvency. This means there are few mortgages available for commonhold properties, and a general lack of awareness within the property market.
A switch to commonhold would have a number of repercussions that need to be considered. Unit holders in a commonhold building would become jointly liable for health and safety compliance and managing the property. Although, this could still be outsourced to a contracted block manager as often occurs in the leasehold sector. This is a serious responsibility and many flat owners are unlikely to want to assume that level of legal risk.
This also creates a frustration for existing block managers who will find that where they were previously managing a one-to-few relationship structure, they would now have to manage a one-to-many one, requiring substantially more time and work in administration. Block managers could also face the difficulty of working with individual flat owners within a building, rather than the officer of a management company as they currently do.
Further, ensuring compliance and reaching mutually agreed decisions in commonholds is far from plain sailing. While leaseholders under the leasehold system can escalate any property disputes to a distanced leasehold valuation tribunal, for those in a commonhold, responsibility for resolving disputes falls on individual members of the commonhold association. A lack of consensus between self-governing members, for example on property maintenance projects, would pause any action and could spell chaos for all involved.
In addition, the removal of long leases and of lease extension purchasing effectively removes future income opportunities for developers, disincentivising building when exactly the opposite is needed to solve the housing crisis. Converting from a leasehold to a commonhold will be another administrative burden, requiring hefty expenses (such as legal advisory services) and time to effectively manage this transition.
There is also the scenario where a unit holder withholds payment either by choice or by lack of means. The commonhold association still has the normal methods for debt recovery however, this can become difficult or awkward as invariably you are having to navigate this with your neighbours.
A middle ground
Replacing the leasehold system with the commonhold system will only substitute existing issues in the property market with new ones. The limited previous success of the commonhold system in the UK can attest to that, with its lack of uptake suggesting it is not the solution that some claim it to be.
The Government may have greater success in solving these longstanding problems with the leasehold system if they are able to find a middle ground. The most practical solution is to focus on fixing existing issues within the leasehold system, or perhaps incorporating some of the positive aspects of commonhold.
Reforming the existing system is a more effective approach, with the ban on ground rents for new builds in The Leasehold Reform Act representing a welcome change. The government’s plans for future legislation should be accelerated, which would enable existing long-lease holders to buy out their ground rents and ease the process of extending leases or buying the freehold. These plans also intend to reinvigorate commonhold as an option, providing market choice, but without imposing it, which is a preferable approach.
It is widely accepted that change is needed and the topic can be fraught with emotion for those who feel let down by the existing system. Nevertheless, a measured, reformatory approach with some energy to accelerate its implementation would be a far better way to fix the issues with leasehold. A wholesale switch to commonhold could well end up creating more problems than it solves.
Matt Smith, Sales Manager, Grosvenor Systems
