Wednesday, 22 August 2012

Why Commonhold has failed

In the years following the enactment of the Commonhold element of the Commonhold and Leasehold Reform Act 2002, I was lucky enough to be working with many of the UKs major developers advising on the management structures on some very large schemes.

For about 2 years, no more, the Commonhold option was a topic covered at every initial meeting. Often I would be in the room with a development director, architect, solicitor and sales director. It was always a difficult concept to promote because the solicitor had no precedents and would be working from scratch, the development director was simply not empowered to make a radical change to the existing model that worked, and the sales director could not be certain that he/she would be able to sell a new concept.

Those that were brave enough to consider the option in more detail, and there were some, usually niche developers, found difficulties that would only be resolved by trial. Ultimately they could not afford to be the guinea pig for this new concept nor would their financiers let them.

Finally there were insurmountable issues:

  1. There was no evidence that selling a freehold unit would achieve a better price to compensate for the freehold value. Although it would be natural to conclude that this should be the case, the reality was that at the point of sale purchasers looked for values matching the local expectations. Fundamentally they did not expect to pay a premium simply because it was a different structure.

  1. The legal advisor implied that the costs were likely to be higher because they would have to set up from scratch (despite the fact that in theory all documentation is pretty much standard). They would have to find a way to protect the interests of their client during the development period and they would have to explain in detail to all purchasers solicitors how the structure worked.

  1. The Council of Mortgage Lenders stated, eventually, that it would in principal approve mortgages for Commonhold structures. This was no comfort to developers who still could not be certain that potential purchasers would find funding.

  1. Commonhold did not appear to work where there was an ultimate freeholder such as the local authority, MOD or a trust. Many of the major mixed developments rely on the developer having a head lease interest.

  1. Additionally, structures designed to allocate different levels of service charge, for example, estate charge, residential charges and building charges (all of which may be charged on a different basis) do not work for commonhold in its current form. Most complex schemes have more than one service charge level.

  1. Commonhold limits the ability to lease a unit to under 7 years. This was immediately seen as problematic to a number of potential tenures, not least Housing Association rentals. It also gave rise to concerns about how the interests of commercial leaseholders would be met. No one was willing to take a mighty gamble to find out.

  1. Despite wanting us to believe the contrary, the building industry is deeply conservative. As far as they are concerned it isn’t broke and doesn’t need fixing. Until they are incentivised or compelled to do so I cannot see them making the change.

So what of converting to Commonhold? The simple answer is; once you have bought the freehold why would you? You have an existing structure that works with the ability to amend leases to suit and to grant them for 999 years. In practice this has proved cheaper then going through conversion.

Finally there are some other interesting points to note: The ability of the Commonhold Association to collect charges are significantly weaker than those currently enshrined within leasehold statutes. There is no legislatory framework to fall back on, nor could you utilise the services of the LVT. The only remaining issues that separate it from leasehold are a diminishing asset and intransigent landlords. The first could be resolved by insisting on 999 year leases, the second is often already resolved by having leases with Residents’ Management Companies built in.

It is also wrong to assume that Commonhold is somehow a panacea for management difficulties and inability to move things forward and protect asset values. There will still be difficult individuals who hold sway over associations and there will still be those who choose not to pay.

In conclusion it seems right that a form of Commonhold should become the preferred form of residential tenure and replace the antiquated feudal system that is now almost unique to England and Wales. It needs to be revisited in significant detail and in consultation with developers, lenders and lawyers. The original legislation was a rush job. A more considered and collaborative approach might just work in these more thoughtful times.

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