The Leasehold Knowledge Partnership held a roundtable meeting last week to address commonhold, the form of flat ownership that prevails in the rest of the world – and has failed to make any inroads into England and Wales.
These are the only two countries in the world where flats are sold on long tenancies – leasehold – with all the vulnerability, insecurity and opportunities for exploitation that that involves.
The meeting, hosted by LKP MP patrons Jim Fitzpatrick (Labour) and Sir Peter Bottomley (Conservative), mean that commonhold was addressed in Westminster for the first time since the Commonhold and Leasehold Reform Act of 2002.
That law attempted to wean England and Wales off the toxic leasehold model, which proves so lucrative to developers, freehold owning groups (a high proportion owned in obscure trusts offshore), exploitative property managers, and assorted professionals such as solicitors in the leasehold extension business.
Indeed, the law only came about after the Law Commission recommended the adoption of commonhold, having seen it work perfectly well in other countries.
An indication of just how much money is involved in leasehold was provided in May when the Upper Tribunal threw out a challenge to flawed lease extension valuations, which have involved leaseholders paying millions – quite possibly billions – more than they should to freeholders for the privilege of extending their lease.
The roundtable was addressed by Professor James Driscoll, an authority in landlord and tenant law who also sits as a judge in the property tribunal. He contributed in discussions in preparation for the 2002 Act.
“It [the Act] was preceded by a statement that government did not consider the leasehold system suitable for owner-occupation,” Professor Driscoll told the roundtable.
“For future developments, it proposed that Commonhold would be available. This would be on a voluntary basis and there is no provision that in future would forbid the creation of new property developments on a leasehold basis (the so-called ‘sunset clause’).”
However, over the past 14 years developers have “ignored commonhold and have continued developing on a leasehold basis”.
And leasehold professionals don’t like it either.
“Most lawyers and other property professionals I have spoken to over the years have been sceptical about commonhold,” said Professor Driscoll.
“But I have yet to meet anyone who thinks that the idea of commonhold is misconceived, or that it is a bad idea in principle. We know from the experience of other countries, where commonhold or strata title systems have existed for decades, that it does work.”
Sebastian O’Kelly, of LKP, pointed out that developers partiality for leasehold meant they were now building leasehold houses, where previously freehold houses would have been built.
He referred to Persimmon building leasehold houses at London Road in Peterborough, which were selling at the same price as freehold houses on the same road offered by Barratt.
Professor Driscoll replied that he was surprised to hear this as he would certainly pay more to own a freehold house than a leasehold house.
He was also asked whether commonhold would ever come to pass without the government making it compulsory, as had been considered before the 2002 Act.
“Giving the market, say, 20 years to adapt to commonhold after which no more leasehold could be built would be a way of doing it. But I’m very much doubt that it would be well received by the property market right now.”
Professor Susan Bright, of the law faculty at Oxford University, pointed out that mortgage lenders would have to be on board for commonhold to take off. In the 16 sites in England and Wales where commonhold existed, there was evidence of “very serious problems” among those trying to sell on their properties.
Martin Boyd, of LKP, who chaired the meeting, said that the Council of Mortgage Lenders had been most enthusiastic for commonhold when it was discussed by Conservatives in the 1990s.
Somehow this diminished after 1997 and the New Labour government came to power and introduced the 2002 Act.
Dr Hazel Easthope, of the University of New South Wales, gave the second presentation to explain how strata title – a form of commonhold – came into being in Australia in 1961.
It was driven by developers who wanted to move away from a system, called “company title”, where flat owners owned their apartments, and the building and land, through an apportionment of shares. Mortgage lenders did not like this complexity, so strata was introduced.
“Residential strata is the fastest growing form of property tenure in Australia,” said Dr Easthope. “Over half the new dwellings to be built in our metropolitan areas are likely to be in strata developments. Our best guess is that one in eight people in Australia live in strata title homes, or three million people.”
A peculiarity of strata in Australia is that owners’ corporations have unlimited liability, although Dr Easthope was not aware of any apartment building that had actually gone bust (through, say, failed litigation or some other cost).
Dr Easthope was struck by the similarity of disputes in Australia under strata and in England and Wales under leasehold.
“But the biggest difference is that under strata you remove the head property owner who can decide what needs to be spent and what works need doing. This has to be decided collectively under strata.”
Rob Plumb, of HML Holdings plc – a property management company accredited to the Leasehold Knowledge Partnership – noted that in Australia there had never been a leasehold / freehold tenure before the introduction of strata.
“I find quite strange the theories that mortgage providers [in the UK] did not see commonhold as a less risky proposition than leasehold, because it most certainly is,” said Dr Easthope
“Fear of the unknown,” replied Mr Plumb.
Lord Best, an independent member of the upper house, said that he had made his maiden speech in the Lords on the Commonhold and Leasehold Reform Bill, which became law in 2002.
“We thought the world was going to change, but it made no difference to anything,” he said.
Lord Best said that ground rents were set low enough on new flats so as to make no difference to the purchase price.
But they gave the freehold owner a secure income of thousands of pounds. Ground rents of £300 a year on a £300,000 flat would be worth £6,000 over the course of the lease, he said.
Roger Southam, chairman the Leasehold Advisory Service, said that the income might be more like £12,000.
“It is income secured against property and provides no service at all,” said Lord Best. “Who is going to forfeit that unless you are forced to by law?”
John Brown, of the National Housing Federation, said enfranchisement in England and Wales results in a situation no very different to commonhold and Australian strata.
But he has seen occasions where leaseholders lose interest in managing the site, or being directors, or there were disputes among themselves. “Did this happen in Australia with strata?” he asked.
Dr Easthope said: “It is possible under UK law to create something that is in effect, if not in law, very similar to the Australian title system. The difference is that there is not a formal legislative system in place as there is with strata system
“Australia people can get advice on how to resolve them, whereas here you have a kind of system that is always ad hoc in terms of how it operates and how you get to that point [of owning the freehold].
“Of course, disputes happen under strata. Anytime you ask people to spend money on the place where they live, there are going to be disputes.”
Damian Greenish, founder of solicitors Pemberton Greenish, recalled the “heady days” of the early 1990s disputes over leasehold.
“When collective enfranchisement came in, it was was the first step in order to get to commonhold.
“I do not usually agree with Sebastian [O’Kelly], but I do agree that commonhold would be very unlikely to catch on unless it was obligatory.”
As an example of the failures of the leasehold system, Mr O’Kelly, of LKP, called the round table’s attention to the case of Kadian Kennelly, who was in the audience.
She bought a flat in Birmingham after having been told by her solicitors that the ground rent would be £250 a year only for the freeholder to demand £8,000 a year as soon as she crossed the threshold.
It was a “scam” and there were now six examples involving the same landlord.
As well as Kadian Kennelly, the meeting was attended by Dennis Jackson, whose £800,000 Battersea flat was forfeited and then restored to him – thanks to the intervention of LKP – by a closed session of Wandsworth County Court
Alex Ellison, whose mother lives at Mere Court in Knutsford, Cheshire, was also present.
She has repeatedly raised the issue of why Peverel / FirstPort owns a portfolio of house managers’ flats, all with leases issued in 2009.
She complained to ARHM and to ARMA about Peverel’s attempt to sell the house manager’s flat at Mere Court, which it claimed belonged to the freeholder (Tchenguiz). In fact, it belonged to Peverel and the local staff would have received a commission in the event of a successful sale.
Also in attendance was James Wyatt, a chartered surveyor, who has challenged the entire mathematical system of valuing short term leases (those under 80 years), which has hugely benefited freehold owners.
Professor Driscoll’s paper to the round table is here:
Dr Easthope’s paper is here:
The meeting was also addressed by Nigel Glen, the chief executive of ARMA, whose presentation will be considered in a separate article.