We need to talk about commonhold

James Brenan argues commonhold’s problems show why leasehold is not “feudal” or “toxic”. The leasehold reform project straddles with some confusion and diminishing clarity the three time dimensions: the past (parts of the Landlord and Tenant Act 1987, the Leasehold Reform, Housing and Urban Development Act 1993, the Commonhold and Leasehold Reform Act 2002, the Leasehold Reform (Ground Rent) Act 2022); the present (the Leasehold and Freehold Reform Act 2024 emerging through the dawn light as Human Rights Act challenges are litigated and the government decides which provisions to bring into force and which to recast); and the future (bills promised for 2025 and 2029, which we are told will tackle ground rents, reinvigorate commonhold and bring an end to the leasehold system). A fair summary of the project’s agenda is as follows: To rescue unit owners of flats within a scheme, whose lease terms – originally of 21 years or more – are short by market standards, by forcing apex owners (often outside investor landlords, owning as an investment) to sell enlargements at controlled premiums. To abolish ground rents for lease terms so extended – so far, on compensation being paid – and to ban them for all new leases since mid-2022. To free unit owners from having an outside investor landlord by enacting rights to acquire the apex at a controlled premium. For situations where unit owners do not buy up the apex, to give them the no‑fault right to manage. To create a commonhold system in which unit owners will have titles that last for as long as their scheme and will own the apex via a company limited by guarantee that is typically, but not necessarily, a company of straw (with no capital asset and no income stream of its own), so that the apex cannot be sold and so cannot pass to an outside investor landlord while the scheme endures. That agenda started with rescuing flat owners from the distress of owning a wasting asset. It created the RTM as a temporary institution pending the uniting of units’ titles with the apex. It now seeks the abolition of fixed terms of ownership (leases) and uniting of unit titles with the apex, through the policy goal of instituting commonhold as the only permitted means of ownership in flat schemes. Claims of the leasehold reform agenda These claims hover somewhere between being an empirical argument – based on facts and experience – and a normative one: claiming a “right” for unit owners that, wickedly, they have been denied by “feudal” and “toxic” laws. They amount to these propositions: It is not enough for unit owners just to have the RTM, and so to self-manage while their block’s apex is still held by an outside investor landlord; rather, the unifying of units and the apex is necessary for achieving fair and efficient management, and so more affordable management charges. It is good enough for an apex to be of no value or ability to be sold for as long as a commonhold scheme endures and for the apex to be held by a company of straw. There is an inherent conflict of interests between an outside investor landlord and unit owners, so that those owners will be better off financially under commonhold, when their entity will own the apex. To see how those claims are mistaken, it is necessary first to consider who fills the informal role of “scheme banker” under each system, then to take stock of how capital costs and running costs will be higher for unit owners under commonhold, of how there will be an absence of accountability under commonhold, and then to observe how commonhold will be a divisive and anxious experience. Scheme banker The scheme banker is the party who, ultimately, must provide the cash needed as cover for shortfalls of annual management charges caused by unit owners who default, if the scheme is not to fail. Leasehold and commonhold each silently create a role of scheme banker – silently because, so far, this appointment is never expressly provided for. Under leasehold, the outside investor landlord is the scheme banker. A combination of rules make this so: first, the rule whereby the outside investor landlord’s repairing and insuring obligations bind it to spend the necessary amounts regardless of what has been paid by unit owners into the trust fund (a stick); second, the outside investor landlord is not allowed to draw on funds paid by the good-payers to cover shortfalls from defaulters (another stick) and anyway it would be unsustainable; third, the presence of the forfeiture remedy, combined – fourth – with rules for the outside investor landlord to recover costs and interest when “relief” is granted (the carrot). Under leasehold where the RTM is operated, the situation is as above but made less effective because the RTM company – being a straw – cannot be held liable for its management failures and needs always to work with the outside investor landlord in any case of serious arrears so the landlord pursues forfeiture. But the important thing is that there is still a scheme banker and it is not the unit owners. Under commonhold, the position is nuanced. Insofar as there is any spare cash with the apex, the apex owner – being to that extent not a straw – is the scheme banker. But as soon as there is no spare cash or the apex owner is already a straw – the more common situation, surely – the unit owners must become scheme banker or stand and watch as their scheme fails. Higher capital and annual costs with lack of accountability For any commonhold scheme that has some capital value stored in the apex – say some airspace that can be developed, or roof space or surplus land that can be let – each owner, when buying their unit, will be required to pay a fraction of that “surplus” value. Thus, units will be more expensive to buy in those situations (under leasehold, that surplus capital value is held with the apex). For any commonhold scheme, the value that would have been the value of the reversion and the capitalised value of ground rent were it a lease scheme is held in the apex before sale of a unit. Once lease reversions and ground rents are abolished, units become more valuable and so more expensive to buy from new. Management and reserve funds under commonhold will need to cover the following categories of unpleasant spending for unit owners that do not arise where the apex is held by an outside investor landlord: Insofar as the unit owners are scheme banker, as above, shortfalls caused by defaulters; Legal costs incurred outside of direct management matters by their apex owner and any adverse costs in such litigation; Any damages liabilities or fines incurred by the apex or its directors; Any remuneration for the apex’s directors;  Losses from unwise management decisions, such as poorly carried out or overpriced or abortive works. Rules in leasehold, imposing switches and dials for the recovery of spending, dictate how undesirable spending cannot be passed down to the unit owners; and “Orphan spending” as a category will also not exist with commonhold, ie spending that is not allocated to anyone in the lease scheme documents, which, depending on drafting, may arise from inherent defects and/or some costs of statutory compliance. Those spending categories are, by definition, separate from and above normal annual management charges, which incidentally, within a leasehold scheme, have a trustee over them (the outside investor landlord or RTM company) who owes fiduciary duties to minimise spending while adhering to RICS guidance, published in 2022, on planned preventative maintenance – and this trust’s existence rather disposes of the “conflict of interest” point, subject only to enforcement. Thus, management charges under commonhold are potentially higher and more volatile, while the duty for PPM will have no effective means of enforcement. Commonhold as an anxious and divisive experience In the case of insolvency of the straw apex owner, a court-ordered levy of management charges is a real possibility. This means unlimited liability for the unit owners, which is a possibility that already exists under commonhold law, under a judicial discretion. Unit owners in default are liable to have their embarrassment revealed to their fellow owners without it being a breach of data protection laws – it being a legitimate disclosure because of the risk and concern for those others. Thus, there is no privacy for any unit owners in difficulty under commonhold. On the other side of the same coin, no unit owners under a commonhold scheme will be able to rest in peace: they will be always anxious to monitor their apex’s communal funds position and be concerned over the fortunes and conduct of their neighbours/fellow unit owners. Sales of commonhold units will involve more complicated and problematic disclosures: unit owners selling will want buyers to pay for management and reserve funds held and attributable to their unit (as if a trust applied and we can expect a trust to be imposed, equivalent to that under leasehold), while buyers will want confidential information over management matters, levels of funds in different accounts, levels of arrears, surveys regarding PPM and spending plans. Positive advantages of leasehold as an ownership system Leasehold law intuits that successful block ownership relies on the apex being an interest of value and ability to be sold and it being held by a party of substance. Value in the apex is essential for the resilience of any block ownership scheme and is a perfectly legitimate way for capital to operate in society. Leasehold harnesses external capital and facilitates cooperation over home ownership schemes between investors of disparate means, while insulating unit owners against “block risk”. Leasehold law embodies the statutory trust for stewardship of communal funds, while putting that duty with someone who can be meaningfully held responsible, by having “switch and dial” rules as to what types and levels of costs can be channelled to the unit owners. But if unit owners under a leasehold scheme still do not believe their outside investor landlord can be trusted with management, they can exercise the RTM, accepting the loss of legal accountability that follows. The RTM is a safer position for them than commonhold. As with any body of law, leasehold is a work in progress. The fact of bad actors within it does not mean it is a bad system. To the contrary, once its subtleties are appreciated, with some sensible adjustments, and bearing in mind the poor build quality of the national estate, the leasehold system wins in any comparison by a very long distance. Closing thought To alleviate some of those problems, it’s possible for laws and regulation to require commonhold apex owners to maintain minimum levels of capital and liquidity, and so not be a straw, but this would render them as an easy target for claims and make the project just the reinvention of an inferior wheel. Once unit owners realise that they are to be required to pay extra amounts to maintain the capital base and liquidity of their apex and to cover additional layers of “compliance”, they will see the leasehold reform project for what it truly has become: a waste of time and public money. Property professionals in 2025 must tell politicians and the media to stop attacking what they do not understand and stand up for leasehold. James Brenan is a partner at Spencer West LLP Photo © Daniel Sikpi/Pexels