Why commonhold can't be mandated on existing blocks


Who would be upset by abolishing leasehold? Actually, some leaseholders who can't afford their share of their freeholds would. And people shouldn't be compelled to pay what they can't afford, so it follows that commonhold should not be made mandatory on existing blocks without some mitigation of this issue.

This blog post is partly an answer to James Creedy's tweet.

Some leaseholders cannot afford to buy their share of the freehold of their block of flats, even if that resulted in permanent ownership and zero ground rent.

Online discourse about long residential leasehold in England and Wales often alights upon abolishing leasehold entirely.

There are unresolved issues with outright, all-at-once abolition, or at least I've never seen any plan which resolves even the issues I'm aware of. So I avoid saying "abolish leasehold". I would go for the much less snappy wording: "phase out the vast majority of residential leasehold". So what do people mean by "abolish leasehold"?

Roughly, what is meant by it, is that all residential long leases should be replaced by freehold ownership of the same space, and that any common parts of buildings or land shared between multiple flats should be owned on a mutual basis by the owners of the flats. The complications of having multiple financially interdependent freeholds vertically stacked on top of each other would be addressed by schemes such as "commonhold" and "strata title".

Now under the existing law, freeholders must be compensated for their legitimate property interests when their leaseholders compulsorily purchase the building's freehold. To the extent that freeholders or managing agents can extract additional income illicitly, above and beyond their legitimate property interests, then indeed those freeholders and agents would be upset by the abolition of leasehold.

But the other group that might be upset comprises some of the existing leaseholders.

Let us suppose that every residential building were eligible for enfranchisement. Under the existing law, not all such buildings qualify, but suppose those restrictions were removed. All leaseholders could then choose to buy the buildings in line with the procedures in the current law: at a time convenient to them, and a price they would agree with the freeholder, appealable to a tribunal.

There are three main components to this price:

  • the future value of each flat
  • the future ground rent
  • any value in the remaining land that's not part of any lease

If the leases are very long, e.g., hundreds of years, then the future value of the flats will be tiny today. If a newly-leased flat is worth £300000 today, but the lease is 250 years long, then the freeholder doesn't get to sell another £300000 lease until the year 2273. So if you bought about £1.50 of government bonds today and cashed them in in 2273, you'd be able to buy that flat. But the longer the lease is, the more ground rent may be due, so to compensate the freeholder for 250 years of £100 ground rent, you might need to pay £4999 on top of the £1.50. The outgoing freeholder could then stick that money in bonds and get an income stream equivalent to what would have arisen from owning the building.

What you'd get for your £5000.50 is a freehold flat (likely a "commonhold unit"), which would have zero ground rent forever. In practical terms it would be £100 cheaper per year, and you could use that £100 saved to gradually pay off the loan you may have needed in order to finance the transaction.

If you were forced by law to accept a swap, of your lease with its £100 a year ground rent, for a debt that cost up to £100 a year to service plus permanent ownership of your flat, you wouldn't have much cause for complaint.

But consider the case where the lease doesn't have very long left to run, e.g. only 50 years. There are fewer years of ground rent to pay, but since the reversion of the flat to the freeholder is closer in the future, much more money must be invested in order to pay for it. To buy a £300000 flat in 2273 might cost only £1.50 today, but you'd have to invest about £26000 today to buy such a flat in 2073. (There is also currently marriage value to be paid on short leases, though this is irrelevant to the wider point).

There's no way that a reduction in ground rent will always offset realistic repayments on a debt of tens of thousands of pounts; after all, the ground rent might well be zero! So some leaseholders in this position would be bankrupt if forced by law to accept a swap of their lease for a ground-rent free commonhold unit plus a loan for the cost of enfranchising it.

Is anyone serious proposing something like this?

The Law Commission discusses it in some detail, from paragraph 5.136 of their report on Commonhold, and it forms part of their Recommendation 12. The report sets out two main models for reform, one of which is the antithesis of abolishing leasehold. It is "Option 1", and entails watering down commonhold to allow long leases and ground rents, avoiding the problem I've outlined above. Option 2 entails compelling flat owners to accept the swap if enough of the other owners in the building want to convert to commonhold.

The assumption in all this is that most but not all of the flat owners are banding together to convert to commonhold at a time of their own choosing, rather than the government making them convert against their will.

In practice, the options are:

  • retain the requirement for unanimity in converting leasehold units to commonhold units (the status quo)
  • abolish the unanimity requirement (Law Commission's "Option 2")
  • abolish the unanimity requirement except in genuine cases of unaffordability (my own preferred option)
  • abolish the requirement for consent entirely ("leasehold abolition" tout court )
  • don't abolish leasehold after all, but instead allow it to persist within a watered-down commonhold regime (the Law Commission's "Option 1")

The first of these options is effectively the position of the Labour Party. To be fair to the Labour Party, they are publicly committed to abolishing leasehold outside the social and affordable housing sectors. I'm not sure what the Conservatives' position is, but philosophically the party has generally been for gradual change, tempered by occasional drastic shock therapy, which may provide some hope.

I think it's important for commonhold not to get associated with compulsion. Nevertheless, realistically, in the generality of cases, it will be in the financial interests of all leaseholders in a block to convert to commonhold, so so long as it's not genuinely financially detrimental, removing veto players from that scenario would probably be justifiable.

All feedback gratefully welcomed.