‘Can you manage?’ Discussing leaseholders’ right to manage their properties

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This post discusses what Leasehold and Commonhold ownership is and explains who has the right to manage properties. This is a must-read for anyone who currently owns or is considering purchasing a leasehold flat and wants to know more about how it can be managed.

When purchasing a flat, it is rarely ever owned outright by the resident (i.e. the freehold). Instead, flats tend to be in a building divided into ‘leasehold properties’. Leasehold is a form of property ownership which is largely exclusive to England and Wales. Through this ownership, a leaseholder buys the right to live in the property for a given period of time (up to 999 years). It involves two parties:

1. The freeholder (landlord): retains ownership of the land on which the property is built.
2. The leaseholder (tenant):  lives in the property (having exclusive possession) and pays ground rent and charges to the freeholder for this right.

There are 3 main costs associated with a leasehold:

• Purchase price – this can be purchased with a deposit and a mortgage, just like when purchasing a freehold
• Ground rent – the payment made to the freeholder for ‘the ground your building is on’. This payment is made annually and can be a very small fee e.g. £1 (AKA peppercorn rent)
• Service charges – these are costs associated with the repairs and maintenance of the building

There is also, sometimes, the option for a tenant to buy a leasehold property with a ‘share of the freehold’. This means that you own a stake in the entire building, and if, typically, all other leaseholders own the same equal stake, together you effectively are the ‘freeholder’ of the property. For example, if a building is made into 4 flats and each leaseholder has a 25% stake of the freehold, together they make a ‘full’ freeholder. This arrangement is somewhat similar to ‘Commonhold Ownership’ discussed below. However, this arrangement is still on a leasehold contract and thus leaseholders must pay the ground rent and any service charges stipulated in their lease.

Who manages these properties?

Historically, it is the landlord who has obligations for managing the property. This management includes:

• Services;
• Repairs;
• Maintenance;
• Improvements;
• Insurance;
• Management

Alternatively, these obligations can be transferred so that tenants have the ‘right to manage’ their own properties by setting up a special company, known as an RTM company. The tenants do not need to demonstrate previous mismanagement of the properties to be entitled to exercise their RTM. They also do not have to manage the building themselves. They have the right to directthe management of the building; therefore are free to appoint their own managing agents.

This can also be the case if a management company already exists in the leasehold. In this way, the management functions of the management company become functions of the RTM company.

Criteria for RTM

In order to set up an RTM the following criteria must be observed:

• Each tenant must be a long leaseholder (i.e. a leaseholder with a lease of at least 21 years)
• The premises consists of a self-contained building or part of a building
• The premises contains two or more flats held by qualifying tenants (tenant of the flat under a long lease)
• The total number of flats held by qualifying tenants is not less than two-thirds of the total number of flats contained in the premises.

(Section 72, CLRA 2002.)

Why consider RTM?

RTM’s involve control of the building; either physically carrying out repairs or directing someone else to do it. As a tenant, there are clear advantages to having control over the place where you live as you’re more likely to spot and deal with issues more quickly. Landlords, however, do not necessarily share these interests, as their primary concern is to make a profit from their asset. Landlords can sometimes be indifferent to repairs, postponing or avoiding works in order to retain their cashflow and are ultimately in the driving seat when it comes to deciding who should carry out the works and at what cost. This imbalance of power for can lead to tenants feeling that they have little or no control over, frequently, their most significant asset – their home.

However, RTM is not a perfect solution, as there are restrictive rules governing how many flats can be managed, and obscure rules  concerning other parts of the premises, such as shared gardens and car parks. The Law Commission has proposed some reforms of RTM, in their paper: ‘The Future of Home Ownership, Summary’. One of their significant findings is that the structure of leasehold is no longer fit for purposes when dividing ownership of flats in England and Wales and that there is an alternative ownership structure – commonhold – which may be preferable.

Commonhold

Commonhold is a form of ownership which allows the residents of a building to own the freehold of their individual flat (called a “unit”) and to manage (or appoint someone to manage) the shared areas through a company. In this way, there is no overriding landlord as every resident owns their own unit.

This form of ownership is very common in most other parts of the world, known as ‘strata’ in Australia and ‘condominium’ in the US. In fact, basically every advanced country has abandoned the concept of a leasehold structure except for England and Wales.

For homeowners, commonhold offers a number of advantages over leasehold ownership, as it:

• allows the homeowner to own their property outright,
• gives the homeowner greater control of the management of the property; and
• is specifically designed to regulate an equal relationship between a group of people whose interests are broadly aligned.

A group of such commonhold owners forms a Commonhold Association, which is responsible for dealing with the upkeep of the common parts of the building such as the roof, stairs and landing. This association is democratic, as each owner has a vote as to what needs to be done. Decisions in terms of repairs, service charges etc.. are decided by a majority vote.

Why is commonhold, indeed, not common?

Despite legislation introduced in 2002, it is estimated that fewer than 20 commonholds have been created. This can be explained by a variety of factors:

• developers being reluctant to build blocks of flats on a commonhold structure in case they didn’t sell;
• mortgage lenders being hesitant to lend on commonhold properties, in case the structure failed;
• a resistance to the ‘culture change’ of there not being a traditional ‘landlord’ to oversee the property.

However, these concerns miss the fundamental benefit that commonhold ownership brings, which is the ability to empower owners of flats to take control of their own properties and accept personal accountability for any defects or repairs, equally. This approach also ensures that the market puts consumers’ needs ahead of those of developers or investors. Essentially this approach prioritises the value of treating a house (or flat, in this case) as a home, creating a ‘collective’ approach to managing property for those who live there. This is at odds with the current priority of most landlords to maximise profit from their property, an asset that they own rather than enjoy.

In response to the poor uptake there have been calls for government to set up commonhold councils to ensure the public has better knowledge of the commonhold system and answer any queries. The Law Commission has also recommended that the Government ‘ensures that commonhold becomes the primary model of ownership of flats in England and Wales, as it is in many other countries’, and recommends that commonhold is made compulsory for all new flat builds. There are also campaign groups, such as getcommonholddone.co.uk ,arguing for more progression of commonhold ownership.

Conclusion

In conclusion, tenants do have the right to manage their own properties as long as they meet the criteria set out in Leasehold and Commonhold Act 2002. However, commonhold ownership is a tried and tested method elsewhere, which may provide a fairer method of managing property, whilst allowing homeowners more control of the asset they reside in. Without government implementing the Law Commission’s recommendations and increased public pressure, however, there is a risk that the notion of commonhold ownership could disappear entirely with hardly anybody noticing.

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