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By Richard Silva

Executive Director, Long Harbour

TODAY'S OTHER NEWS

Why investment in leasehold is crucial to building safety

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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    Using Building Safety to justify why Leasehold needs to continue is desperate and low.
    Clearly Leasehold tenure has not done anything to help the current thousands trapped in unsafe buildings through no fault of their own.

    Firstly it's time you give up on the ground rent issue. You have already lost that one. Government are going to legislate at the first opportunity to ban future ground rents. A point you need to accept.

    We don't need your invested interest in our homes, nor are we thankful for it. We are responsible adults who can appoint our own choice of professional managing agent to effectively manage and run our blocks. We don't need Long Harbour for this. This will enable us adults to have control over who we appoint and control over spending. I do agree with your patronising point you make about "Disputes over no hot water" will remain. Correct they will, difference being is WE as the people that pay all the bills will be responsible/ IN CONTROL for choosing who fixes it, and how much is spent fixing it. You repeatedly bang the drum about how "complex" building management is. Correct. The point is we don't need you to sort that. I repeat myself again when I said we need professional management companies to do this we don't need a 3rd party interest.

    You comment "We employ dedicated professional teams who can act swiftly and deal efficiently with complex issues that arise from block management" is pointless as we too under Commonhold can appoint dedicated professionals teams also.

    You state that some campaign groups want building management to fall to residents. As the founder of the National Leasehold Campaign (NLC) which has over 19,200 members I can assure you we fully appreciate the important role managing agents play and will continue to play under the new future Commonhold system. Strange how your recent Savanta survey never reached any of the members of the NLC ??

    We haven't mis-diagnosed the problem. It is clear the fundamental root cause problem is Leasehold which definitely has no place to play in the solution.

    Enough is enough of the leasehold system being used as a cash cow. The work the Law Commission have carried out is outstanding and thorough. You are trying to discredit it because you don't like the outcomes. The problem you have accepting it is because your income stream will be cut.

    LKP along with NLC invite you to be a speaker at the next APPG on Leasehold & Commonhold Reform. Can we put you down ?? I think you have Martin Boyd's Email address from LKP

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    This is just a rehashed article with the usual weak arguments from players that make money from the tenure. Any independent, like the Select Committee on Leasehold, Law Commission, Competition and Markets Authority etc can clearly see the leasehold system is broken beyond repair, infested with scams and needs to be consigned to history.

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    in 2013 I bought a new property from Fairview new homes ltd, and though it was explained to me that I had to pay 250£ in annual ground rent, it wasn’t mentioned that this figure is payable for the first 25 years and that is likely do double up exponentially.
    It goes without saying that if I knew that I wouldn't have bought the property - moreover the lease schedule it’s not clear at all and the solicitor(recommended by the developer) didn’t put any effort in explaining what ‘buying a leasehold property’ means.
    I am more aware now like so many other leaseholders so the fun will be over soon for you guys making money out of 'our' flats

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    Is Richard Silva aware that less than 100 miles away there the other part of the world where blocks of flats (as well as the mortgage market for them) function just fine or even better than in England & Wales without the need for third-party "investors"?

    Investing in freehold (not investing in leasehold as the author has put in the title) is nothing more than a financial instrument or asset class and has absolutely nothing to do with the safety or upkeep of the building. Housebuilders build blocks of flats, make money on selling freehold to a third party and for this the third party can claim money from the leasholders for things that have nothing to do with improving the building and that goes straight to them as profit. The existence of leaseholds on houses (such as detached) is a good illustration to this.

    But of course I understand that someone whose company specialises in this type of investment would be interested in keeping the system as it is. However, it is pretty clear that it serves no one but a handful of rich people and leaves millions of those that bought or live in a flat worse off.

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