ARMA on commonhold: Falling leasehold values. Zombie apartment blocks. Plenty of scrapping. Lack of interest. But good business for professional managers …

It does not matter who makes the rules in blocks of flats residents will still find reasons for discontent, Nigel Glen, CEO of the Association of Residential Managing Agents, told the Westminster Legal Policy Forum conference last week.

“No system is perfect and we have to be realistic,” he said. “Let’s recognise that now, because if we don’t we won’t have the procedures in place to cope with it.”

Mr Glen told the audience of leasehold sector insiders that he went to Australia last September

“One of the things in Nick Hopkins’ [commonhold] paper [for the Law Commission] is that if we have the commonhold statement [setting out the rules for apartment schemes], people would understand it better, wouldn’t that be lovely?

“When I said that in Australia, everybody burst out laughing. They just said it just isn’t the case. People moving in for the first time, second time, third time, sometimes the fourth time, they can’t be bothered to read it and understand it.

“What it boils down to is that people don’t like living under somebody else’s rules – it doesn’t matter whose rules they are – be it a landlord or a commonhold association.”

On the other hand from a managing agent point of view, Mr Glen could see the upside of commonhold:

“I think it will be good for managing agents. Because if you wipe out of the eco-system the professional landlord and replace it with owner-boards they are going to want more help.

“Also, you’re talking to people who are spending their own money, that’s good as well.”

That aside, Dr Glen sounded warning notes: that removing landlords would make disputes more personal.

“We have to protect commonholders from their own boards. I don’t accept that once everybody is in control of their own destiny, there is no dispute. That just doesn’t happen. We’ve seen that with RMCs [residents’ management companies], we see that with RTMs [right to manage companies]. If you look at the rates of disputes in Queensland, it is ten times as high as over here …

“Number one is pets and number two dispute is suing your own commonhold body for failure to maintain.”

“Fat cat freeholders” would be stopped by Commonhold – claim

The government is being urged to make commonhold ownership compulsory on all new apartments – and the move could even begin a long-term phasing out of the increasingly controversial leasehold tenure. The call comes from the Leasehold Solutions Group, ahead of the upcoming publication of the Law Commission’s report looking at alternatives to leasehold ownership.

It is curious that Mr Glen singled out rural Queensland, as opposed to Victoria or New South Wales, which have Australia’s urban centres where there are far more apartment blocks.

Drawing on ARMA’s experience of stewarding leasehold blocks that already have self-governance with residents’ management companies or right to manage companies, Mr Glen said a commonhold world would see considerable numbers of flat owners refusing to take an interest in the way their site is being run:

“Some people just don’t want to manage their own [site], whether it’s time or they just don’t feel like it.

“Talking to one of my members, 20% of their RTMs [right to manage sites] have no directors at all. The only director is the managing agent, trying to keep it alive.”

The ARMA boss also urged government to make training “and continuous development” of commonhold directors compulsory:

“ … because you need to be able to understand UK law. It changes all the time. You need to understand company law. It should be online, a couple of hours.

New-build homes best place to start with commonhold – UK Finance – Mortgage Solutions

Creating new-build flats as commonhold would be the best way to introduce the tenure as a mainstream alternative to leasehold, according to UK Finance. Commonhold allows people to own the freehold of a unit within a building or development – such as a flat.

“I mean, I’ve had MHCLG [the ministry of housing] say ‘well, that might put people off being directors.’ If you can’t be bothered to do an hour or two online to find out what you’re going to be doing – and you’re responsible for people’s safety – then you shouldn’t be a director.”

On the issue of whether the adoption of commonhold should be compelled, Mr Glen was less enthusiastic:

“Conversion to commonhold. Well, this is the bit that worries me about commonhold. I’m personally a leaseholder and it will devalue leasehold.”

Mr Glen added that a dwindling number of leasehold properties in Australia are heavily discounted because buyers see leasehold as an inferior tenure compared with strata title, a system that has heavily influenced Law Commission officials in their work to reinvigorate commonhold for England and Wales.

Like Matthew Juppe, principal of mortgages policy at UK Finance, who spoke at the event to give insight into lenders’ thinking, Mr Glen said he was deeply uncomfortable with forcing leaseholders to become commonholders in cases where 100% support cannot be obtained for commonhold conversion:

“ … it’s a bit unpleasant, to put it mildly.”

But a transition away from leasehold could be made to work, conceded the ARMA boss:

“Or do you run both [systems] side by side? It’s doable. It will be more expensive, and there will of course be more of a likelihood of problems if you’ve got 75% [of residents] on commonhold, 25% on leasehold. Section 20 [major works consultation process] over here [for the leaseholders] and not over here [for the commonholders], and so forth.

“But there are ways around that one.”

Having earlier warned about residents balking at the idea of serving on commonhold associations because “you could potentially go to jail” under the anticipated post-Grenfell building safety regime, Mr Glen was suggesting “a way through” towards the end of his remarks.

There could even be a post-retirement job in it for him, he joked:

“Are we going to create a whole new job? So when I retire from ARMA, I become a professional company director with the requisite insurance, maybe become the ‘accountable person’ [as proposed in Dame Judith Hackitt’s government-backed plans for overhaul of building safety regulations].

“OK, a way through it. So there’s that.”

Pushing back on an argument put forward by freeholders, Mr Glen made clear he thought it was not inevitable that overseas buy-to-let investors would doom commonhold:

“… securing funding [for ongoing maintenance]. The zombie apartments that we see in Vancouver and in Australia, again.

“How can we get around that? So again, here’s the opportunity.

“We see that it can happen in strata title and commonhold, so let’s try and figure out how we can avoid having 20-50% of a block refusing to pay, domiciled in China, and good luck trying to get money out of those. You can’t forfeit [threaten to take the property off them], you can’t do anything.”

In an article for Tortoise, the long-form journalism website, the former banker-turned-residential-freehold investor Peter Sugarman, of the JRJ Group, suggested that the high penetration of the UK property market by foreign buyers would make commonhold developments ungovernable:

“So why are the proposals to abolish ground rents and to replace leasehold with commonhold ownership flawed, particularly when commonhold is widespread on the Continent, US and Australia? The answer is that the UK market is fundamentally different from that elsewhere: our private rented sector has low levels of institutional participation, and many larger blocks of flats have significant numbers of non-resident, and in many cases non-domiciled, leasehold owners. Ensuring the long-term ‘health’ of a block of flats requires its fabric to be maintained appropriately.

“This is challenging if the interests of parties are not fully aligned, or if there are no parties suitably qualified to take on the responsibilities. Flat owners want to maximise returns over their period of ownership, which vary between owners in the same building. Achieving consensus about high-cost maintenance is always difficult, but the problem is exacerbated if half of the owners are living in Hong Kong and the other half have no free cash and no ability to hold a management company to account.”

At last! A public defence of the leasehold system from an articulate freeholder …