Comeback for Commonhold?
March 14, 2018
Written by Property Partner, Tom Seabrook
Last year the government announced plans to reform residential leasehold ownership in England and Wales. This was in no doubt driven, at least in part, by lurid headlines over what in reality is a very limited number of leasehold properties affected by onerous escalator clauses, which could over time lead to ridiculous ground rents becoming payable.
Putting aside the rights and wrongs involved for the time being and awaiting the ‘meat on the bones’ of the reforms, we do know that there will be a ban on almost all new leasehold houses and considerable restrictions on ground rents for new flats.
The reforms will not be retrospective and will not affect existing leaseholds, so could lead to a two-tier market in leasehold properties. But what of the alternative?
Commonhold was introduced in 2002 as an alternative to leasehold ownership in multi-occupied buildings. Similar to strata ownership in many other jurisdictions, each unit holder becomes a member of a commonhold association which manages the building and common parts. Sounds good. Although to date,it hasn’t really made any impact at all.
Why? Well, there are two routes to commonhold and each has had its problems.
First, the intention was that existing leasehold owners would voluntarily convert to commonhold.
The snag was / is that every party with an interest in the freehold or any lease, including lenders, and crucially the landlord, has to agree. Lenders are reluctant to get involved as there is next to no existing market and values may be difficult to fix.
And landlords of course, in receipt of ground rents, have no real incentive. If tenants were to have to compensate the landlord, then it is difficult to see many situations in which the required unanimity amongst them would be achieved.
The second route to commonhold was intended to be new build only, but developers haven’t cooperated for the obvious reason that leasehold developments are more valuable to them.
Not only because demand for commonhold is largely untested, a bit like ‘chicken and egg’, they can also charge ground rents and retain an income stream or they can sell that income stream on.
There is a thriving market in ground rent portfolios, which are generally considered to be a low risk investment (and if / when the restrictions bite and no new portfolios can be created, we can expect that market to get lively).
Leases are by their very nature a wasting asset, they become less valuable as their term shortens. Conversely, the cost of a statutory extension rockets as the term depletes.
Commonhold certainly solves that problem, but is no panacea in other respects.
There will always be issues with common ownership of whatever kind and those who have used existing legislation to do away with third party landlords and manage the freehold themselves, haven’t always found it plain sailing.
Commonhold will not assist there.
Nevertheless, if incentives to build leasehold flats are lessened by effectively banning ground rents, it could be time to revisit commonhold as a means of ownership. In my book at least, if statutory intervention is deemed necessary, it would be preferable to incentivise new building of commonhold rather than try to force it by placing restrictions on the alternative. But the outcome may yet be the same.
If you would like more information / advice with regards to this subject or any other property queries, please contact Tom directly and he will be more than happy to help.