Mark Wilson, ALEP member and founder of MyLeasehold, sets out the debate between leasehold and commonhold in an attempt to identify the better structure – but there’s no clear winner.
A popular joke in the world of leasehold enfranchisement is: “Why did the commonholder cross the road? To avoid being invited to the AGM and asked to become a director”. A likely or unlikely scenario? What is certain is that commonhold is often presented as the simple answer to leasehold. Some argue it’s a better structure, but simple it is not.
The jury is still out on the day to day detail, but as a valuer my focus is on value: does commonhold create, preserve or destroy it, and does debating the issues even help us decide? Like anything property related it will be case by case, except that flats in higher-value buildings will likely have the resources to smooth the bumps, which is unlikely to be the case for lower value blocks, where incomes and budgets may not have the flexibility to absorb the demands of this tenure shift.
So let’s look under the hood at a few of the issues that stand out for comparison, debate and better understanding.
The freehold ownership
Reformist: Commonhold removes a genuine structural conflict. There is no landlord with an economic interest that can move in the opposite direction to the flat owners. The unit holders are ultimately paying for the building and controlling it. There is no ground rent, no forfeiture, and no shrinking term.
Realist: At face value that is a real improvement. But removing the freeholder does not remove risk, it relocates it. What now needs to be managed in addition to the building itself is collective financial risk: commonhold can remove one source of conflict, but it cannot remove the fact that unit holders are now part of a collective and no one knows anything about each unit holders’ ability to pay. If the association’s finances fail, there is no freeholder left to absorb the shock.
The reserve fund
Reformist: A properly funded reserve should mean fewer nasty surprises. Rather than asking owners to pay up £10,000 each when the roof fails, the building accumulates money gradually and plans ahead. A commonhold association also has clear accounting obligations and reserves are held for the owners rather than for a landlord. That should mean more transparency than many leaseholders currently get from their service charge accounts.
Realist: The principle sounds sensible. The problem is that a 15 or 20-year reserve forecast is only that. What will the roof actually cost in 2046? Are the projections in real terms or nominal terms? What inflation assumptions are being used? What happens if regulation changes the specification? And what return is the money expected to earn while it waits? If it can’t keep up with the real costs there will still be a shortfall.
And of course, most flat owners have finite incomes and money paid into a reserve is money that cannot service a mortgage. If substantially higher regular contributions are needed to pre-fund future expenditure, that may improve the finances of the building while reducing what purchasers can afford to pay for the flats within it.
A system intended to preserve value could, if badly calibrated, put pressure on value through affordability and smoothing expenditure is not necessarily the same thing as allocating capital efficiently.
Management
Reformist: Commonhold gives owners direct control over who manages their building and how.
Realist: Greater control appears to be genuinely valuable, but it should not be confused with lower cost. There are bad managing agents, and not every building will have access to the best players. There are also plenty of costs that have little to do with landlord or agent profit. A £100 charge to change a communal light bulb can sound ridiculous until contractor minimum charges, access, insurance, health and safety and compliance are added to the job.
Commonhold may change who appoints the manager and who pays, but it does not change what the job actually costs. Don’t expect the earth simply because the ownership structure changes and the freeholder has gone.
The community
Reformist: Commonhold creates a community of owners making decisions collectively about their building.
Realist: Sometimes that will work extremely well. At other times, it may become a breeding ground for conflict and different outlooks. Communal management can require considerable diplomacy and compromise.
A 65 year old planning to stay for life and a 28 year old hoping to sell in two years will not necessarily want to spend the same money at the same time, and of course, some will pay promptly, but others will not. And whilst legal enforcement is one thing, using it against somebody you pass in the lift every morning is another.
Then there is participation. Enthusiasm may be high at the start, but give it a few years and much of the work may fall to the same one or two people because everyone else has, or finds, other things to do. That is significant because their judgement, competence and ambitions for the building can end up carrying a disproportionate amount of weight, much the same as the ousted freeholder.
The rules
Reformist: Unlike an ageing lease, commonhold can adapt. Owners can change the rules as circumstances change.
Realist: That flexibility cuts both ways. A lease may be inflexible, but a buyer can read it before purchase and understand the contractual framework. Under commonhold, the rules can evolve. That creates an additional due diligence issue: a commonhold buyer needs to understand not merely today’s rules, but who can change them tomorrow, by what majority and with what consequences.
So who is right?
Both. The reformist is right that commonhold removes a genuine structural conflict and gives owners greater control’ the realist is right that control does not eliminate risk.
Commonhold may well be the better structure. But the honest case for it is not that the problems disappear when the freeholder does.: they don’t. The real question is whether commonhold gives owners a better framework for managing the risks that were always there, and whether the market agrees.
About the author
Mark Wilson is a member of the Association of Leasehold Enfranchisement Practitioners (ALEP) and the founder of MyLeasehold, a leading provider of leasehold property advice and services. With over 40 years of experience in the industry, Mark has established himself as a trusted adviser to landlords and tenants alike.
The views expressed in this article are those of the author and not necessarily those of Today’s Conveyancer.
