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Removing consumer choice is not a victory for leaseholders

18 January 2021 | Investment

Whether residents want to be or not, they will now be jointly responsible for the safety, maintenance, and upkeep of the apartment buildings in which they live or own flats. Regardless of size or complexity.

The timing of this is especially baffling. We are currently in the midst of a building safety crisis brought about by the failure of successive governments to address the inadequacies of building safety regulations. Professional freeholders are working across their apartment blocks to secure urgent repairs and remediation, providing cash flow, negotiating with contractors, and dealing with insurers; in short fulfilling their lease obligations in a time of crisis.

It is therefore astonishing that at this precise juncture the government announces a proposal that will take freeholders out of the equation, force all management and safety responsibilities onto individual flat-owners and then attach a series of additional financial and criminal liabilities to them through their building safety reforms.

And it’s not as though the long-term consequences of abolishing leasehold cannot be foreseen. We have practical real-world evidence of what the future looks like for apartment owners if the government’s proposals come into force. The commonhold system, which lest we forget has existed alongside leasehold for 20 years in England and been roundly rejected by consumers, has been put to the test in Scotland, and found wanting.

Following the removal of freeholders in 2012, over 80% of buildings have fallen into critical disrepair, with all the attendant safety issues that sit alongside that, and with thousands of leaseholders unable to fund the £2 billion that is needed for remedial works.

A study by RICS and BEFS found that the most critical issues in Scotland were leaseholders reaching a majority agreement and getting all owners to fund the works in advance, which significantly slowed down the remedial processes and vastly increased costs for residents. This is evidence that government is aware of yet chooses to ignore when setting out its own policies.

It is a strange feature of this debate that commonhold advocates can simultaneously argue that leaseholders should not be responsible for historic building safety issues (a sentiment with which I agree), while also proposing that they are lumbered with yet more obligations in this space.

Ministry of Housing, Communities and Local Goverment (MHCLG) officials have benefitted enormously from having single, professional points of contact for the delivery of remediation work on buildings across the country. Ministers know this, and yet they publicly advocate for the removal of freeholders.

Can they, in all honesty, argue that they would rather be dealing with millions of untrained and under-resourced residents in order to fix one of the biggest crises the sectors has ever faced?

It is also important to remember that residents and leaseholders are often different people. There are now 2.7 million buy-to-let investors in the UK, meaning over half of the country’s flats are owned by those who have invested in their property as a nest egg.

These people may live hundreds, if not thousands, of miles away and so they rely on the presence of a freeholder to ensure the longevity of their building. How exactly are these investors going to become active participants in a commonhold association and how would they feel about responsibility being passed onto a group of unknown and largely unaccountable residents?

The fact that these questions haven’t been asked is a sign of how short-sighted and poorly thought through these proposals are. In fact, there appears to have been no real consideration for what apartment owners actually want at all.

A recent snap poll by Savanta Group found that only 31% of people would willingly take on the management of their apartment block, with previous research finding that 67% of people were worried about extra admin and building neglect if they were forced to take on such responsibilities.

The government’s proposals have been driven by the “ownership” arguments put forward by a vocal minority, but this has blinded them to the very real concerns of the vast majority of apartment owners up and down the country: building longevity, building safety and professional oversight of their investments. These concerns have at best not been examined and at worst ignored.

But the government is not just ignoring external evidence. They have ignored the evidence from their own consultation process.

When MHCLG first consulted on this in the summer of 2017, they asked what level ground rents should be set at. 66% of respondents agreed that there should be some financial value with a minority of 33% calling for ground rents to be abolished. Clearly not the answer they wanted, so the data was ignored.

The same thing happened with the HCLG Select Committee’s Inquiry on Leasehold Reform. The Committee’s view was that the government may “need to implement an exemption for mixed-use buildings” when it came to the ground rent ban.

Having examined the evidence, the Committee clearly understood the difference between apartments and houses and recommended different treatment. Again, this appears to have been ignored. 

There is no doubt that this policy has been driven more by ideology than evidence. But the tragedy is that by acquiescing to the demands of a vocal minority, and by arguing that houses and flats are the same, the government risks imposing further hardship on the silent majority.

And that is before considering the impact the introduction of commonhold will have on the value and saleability of apartments; an impact publicly recognised by the Law Commission in the open letter it sent to lenders, desperately trying to persuade them that this new commonhold model will provide enough security for lending. As if the point needed making that the removal of professional oversight and building maintenance affects the value of the flats within.  

It’s impossible to argue that reform isn’t needed. Leasehold houses are an anomaly and should rightly be banned going forward. The wider failures and instances of abuse in the leasehold system are well-documented.

But we need to be absolutely clear about what the government is proposing here. Instead of remedying these problems, or exploring regulation that would outlaw these abuses, they have opted to abolish the system entirely.

For apartment owners, who under current legislation can choose whether they self-manage or obtain professional oversight via a freeholder, the option of professional oversight is removed.

Instead of following the evidence and putting the effort into improving the options that are available, the government has made an executive decision about how people in apartment buildings should live. This enforcement of communal living will have a far-reaching impact, both on the value of people’s homes, their cost of living and the quality of life within apartments.

*Mick Platt is CEO of Wallace Partnership Group

This post has originally been featured in Property Investor Today.