Why investment in leasehold is crucial to building safety

18 November 2020 | Investment

It is no secret that the leasehold market has had its challenges in recent years. Abuses by a number of developers have undermined trust in the leasehold model of ownership and overshadowed those responsible freeholders who have been supporting leaseholders burdened with unfair terms.

But we must be careful to distinguish between the challenges which are inherent to the leasehold tenure and those that simply go with the territory of life in an apartment building.

By conflating these issues, we risk throwing the baby out with the bathwater and undermining the very system that is best placed to deliver the changes that are sorely needed.

As one of the largest institutional freeholders in the UK, we have been closely involved in issues relating to the leasehold market and the wider reform agenda over the last few years. In that period, the UK’s cladding crisis has worsened, and the issue of building safety has (rightly) risen to the top of the agenda.

The Ministry of Housing, Communities and Local Government’s (MHCLG) proposed building safety reforms go a long way to addressing these challenges. But they are currently moving in the opposite direction when it comes to leasehold reform.

The government’s Building Safety Bill will significantly increase a freeholder’s building management and safety obligations, while their leasehold reforms (specifically the ground rent ban) will drive them away from the market entirely.

This will inevitably leave inexperienced and unwilling residents to take on a financial, legal and even criminal obligations of managing a property. It is hard to see how this will improve building standards and safety oversight.

Meanwhile, the Law Commission has put forward proposals to invigorate commonhold and make it the preferred alternative to leasehold. Its proposals have raised a more structural question about how mortgage lenders will react to this shift toward communal management.

A lender’s security is linked to the fabric of the building – if unqualified and time poor residents are responsible for this, as is the case with commonhold, then this security is significantly diminished.

The Law Commission is aware of this challenge but its proposed remedies – including encouraging lenders to use communal gardens and shared facilities as security – shows a deep misunderstanding of this system.

The fallacy at the heart of both of these agendas is the idea that getting rid of leasehold will somehow solve the complex challenges associated with building management. Disputes over communal assets, such as electrical faults, no hot water and leaking pipes all relate to how a building is managed. They are nothing to do with whether or not it is a leasehold property.

All of these issues would still exist, if not get worse, under a communal ownership structure. You only have to look to places like Scotland, Canada or Australia, where similar models have been implemented, to see this happening in practice.

So, if leasehold is not the problem, can it be part of the solution? There is no doubt that the system has been open to abuse in the past but, by regulating the industry and ensuring the right kind of investment is going in, it could be the most effective way of delivering the improvement in standards which we all want to see.

Long Harbour is funded by institutional investors and pension funds who are attracted to the sector because of the long-term income streams.

This means we have a significant interest in maintaining building and safety standards over a very long period of time – much longer than the average leaseholder.

It also means we are able to employ dedicated professional teams who can act swiftly and deal efficiently with complex issues that arise from block management. Without a ground rent, there is simply no reason to invest in the sector and this function will disappear.

That means that building management will fall to residents. This may be what some campaign groups want, but there is compelling evidence which shows that leaseholders themselves do not want to take on a building management role.

Recent research commissioned by Savanta Group on behalf of professional freeholders found that 70% of leaseholders are happy with their current rights and responsibilities as outlined in their lease.

A further 67% of leaseholders do not want to take on the management of their block or responsibilities for their building, due to fears of neglect and conflict with other residents. Clearly, communal management is not going to be the panacea that some seem to think.

There is broad consensus across the sector that reform is needed. Not only do we need to address malpractice in the leasehold sector, but we also need to drive up standards around building management and safety. But these objectives cannot be achieved if we have misdiagnosed the cause of the problem.

Instead of blaming the leasehold system for poor management, we should be using it as a tool for reform. That starts with regulation and evidence-based policymaking, not driving investors out of the market.

*Richard Silva is Executive Director of Long Harbour 

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–> This post has originally been featured in Property Investor Today.