Mark Wilson, director of Myleasehold and a member of ALEP (Association of Leasehold Enfranchisement Practitioners)
The government wants to make leasehold ‘easier and cheaper’. That’s the headline. It is a virtuous message, politically useful and broadly appealing. But the reality beneath it is more complicated. The Commonhold reforms, as proposed in the recent Commonhold White Paper do not eliminate cost – they shift it. And the shift is squarely onto the shoulders of individual flat owners.
The story here is not about cheaper ownership, it is about cost visibility. After all, 80% of the reformers’ rhetoric is focused on rip-off landlords and their agents. So when the true cost of ownership becomes visible, the value of a flat may just need to be repriced.
The real costs never went away – they were just out of sight
Under the current leasehold system, freeholders carry at least some of the burden – capital expenditure forecasting, and the general risk of the building is on their shoulders. Under Commonhold, that burden is passed to flat homeowners.
That may sound like a fair trade – homeowners having more control and more responsibility. However, the financial implications are real. Remove any landlord monkey business, and under Commonhold the capital costs of running a building do not get smaller just because they are now split among Commonhold flat owners. They likely just become harder to manage, as each owner in the cooperative has a different agenda and vision of how they see their building being run. And as a wake-up, the costs are more immediate.
Under Commonhold, there is nowhere to hide. Lift failures, insurance hikes – it all lands on the owners. And here is the part most reformers do not want to say out loud: those that will show up in service charges, reserve fund contributions, and ultimately, in property prices.
Commonhold is not a free upgrade — it’s a structural reset
Commonhold is sold as a fix, being more transparent and accountable. Maybe it is, but it is also the democratization of ownership liability, as there will no longer be anyone to carry the risk. If your neighbour does not pay, someone has to cover it. If there is, let’s say, a £40,000 per flat, reserve fund contribution required in twenty years’ time, then you have no choice but to make your contribution. And that’s regardless of the fact you will have moved on by then. That liability (excluding indexing for inflation) is £2,000 a year, which with a mortgage rate at 5%, is the equivalent to borrowing £40,000 of the purchase price. And that’s before you have even paid for the building insurance or common part cleaning.
Any managing agent will tell you reserve funds rarely accrue to pay for planned works, as the costs escalate over time and payments are not indexed to match price hikes. The Commonhold White Paper examples sound like manageable reserve funds, but due to their contribution modesty, in the real world, these levels of budgets will not get the serious jobs done. So when flat buyers see that cost structure that comes with ownership upfront, annualised and indexed, priced into their service charge from day one, they may be forced to value their dream home differently. Not because flats are worse homes, but because they are now priced with their full liabilities in view, baked in.
Price correction is not market failure – it is a function of the market
Baby Boomers and Gen Xers buying flats decades ago did very well from leasehold ownership, especially if they got in, and then out, of the market to buy a house. That success has given a false sense of comfort as we are used to the idea that homeownership appreciates by default. If the economics change, so do the valuations.
Flats may simply have been overvalued – not by mistake, but because the costs of ownership were underpriced or hidden. Once those costs are surfaced – the upheaval following the Grenfell Tower tragedy, the Black Swan for countless flat owners – has shown what risk can really be and the punishing inability to financially recover, reserve funding, regulatory compliance (a big one today with nothing to show for it), the pricing structure might have to adjust. That will not be a failure of reform, it is just how markets work when they are given better data.
And maybe, that is the quiet aim here. Let the market reprice, let values reset, and let a new kind of ownership model find its footing.
The trade-off is real
Two successive governments have pledged to reform leasehold. In their eyes it is needed. However, we should stop pretending it comes without trade-offs. It is not the silver bullet to right all home ownership wrongs. Quite the opposite, it is a leap of faith that the reforms will work and that the market can sustain the change without too much price correction – and that is in either direction. After all, there is nothing our society needs less than house price inflation. It makes savings pointless, as home ownership becomes less attainable to even more of the population.
Commonhold makes the cost burden more obvious, it doesn’t remove it. The risk does not simply go away – it becomes shared, and that may be a better model – but it won’t necessarily be a cheaper one. What we will see is the real cost of running a building finally coming to the surface, and when that happens, the pricing conversation may change. Of course, there will need to be a significant timeline given to know if the reforms have worked or not. Until then, each new entrants to Commonhold will be something of a guinea pig, venturing into a new flat ownership regime. Government seems committed so we wish them safe passage … boldly going where no leaseholder has gone before.