In 2002 the government was presented with a once-in-a-century challenge. Most of the residential leases granted at the beginning of the previous century were expiring. To provide a potential solution to extending one’s lease, the Commonhold and Leasehold Reform Act 2002 was introduced along with a new form of ownership – commonhold.
Commonhold allows unit owners in multi-occupancy buildings, such as a block of flats, to be the owners of their units for an indefinite amount of time. This stands in sharp contrast to leasehold, where a tenant has only a temporary right to hold property and has to pay for extending one’s right to live in it. Essentially, leasehold is a two-party relationship between landlord and tenant, whereas commonhold ownership involves only one party that has a perpetual right to the property.
Although similar types of ownership successfully exist across Europe and the rest of the world, commonhold ownership failed to take off in the UK. As of now, only 20 properties in the country are owned as commonholds.
Apart from the failed Commonhold reform, the overall housing situation in the UK is grim. The housing crisis is arguably one of the principal medium-term problems Britain faces along with wealth inequality, the North-South divide and a warming climate.
The nature of the problem has severe implications for the whole economy and the geographical distribution of inequalities. As a result, addressing housing inequalities is inseparable from the Conservative goal of levelling-up the economy.
The unequal regional dynamics can be illustrated by comparing house prices in greater south east England with the rest of the UK. For instance, in Chatham, between 2013 and 2018, total housing wealth increased by a total of £6.4 billion whereas in Sunderland, a city of similar size, it increased only by £600 million during the same period.
The reasons behind housing inequalities and shortages can be attributed to numerous factors. One of them is the restrictive planning system. Liz Truss has quite controversially highlighted it by stating that one million new homes have to be built on the Green Belt.
Addressing the housing crisis by allowing new developments to appear on the Green Belt seems more like treating the symptom but not the disease. It has limited capacity to solve systemic regional inequalities in the housing market and would only temporarily make the situation less pressing.
Throughout this century house prices have gone up exponentially, especially in the past few years. Although slight correction is likely, as the cost-of-living bites and interest rates rise, the nominal drop in house prices does not mean that buying a home suddenly becomes a feasible option for everyone who needs it.
Thus, the important thing that the Government has to keep in mind is how to solve the problem of commonhold reform without exacerbating the other problem of unaffordable housing.
Reforming the current commonhold system cannot be ignored, as the existing framework does not allow flat-owners to be the owners of their flats. The fact that 93% of owner-occupied flats are owned through leasehold is a peculiarity of the UK property market, barely comparable to any other country in this regard.
The Law Commission published three reports in 2020 on commonhold and leasehold reform and proposed quite drastic modifications to the current legislation. For instance, it proposes to change the requirement of unanimity when seeking to convert from leasehold to commonhold, and that the threshold for conversion would be lowered to 50% of leaseholders. Although there are questions around how to finance the conversion to commonhold when only half of the residents consent, and how democratic such processes would be, the other pertinent issue that is somewhat neglected in the Law Commission’s report is how large-scale conversion to commonhold will affect prices in the housing market.
What is clear from the international evidence is that introducing commonhold-strata-condominium legislation can lead to the rapid redevelopment of certain city areas, a change of urban landscape and higher housing prices. This was the case in Vancouver, where the introduction of the Strata Titles Act (1966) led to the redevelopment of entire neighbourhoods, such as Fairview Slopes, where condominium towers now dominate the landscape. In Singapore, Land Titles Strata Act amendments in 1999 enabled the country to address its land scarcity problem, stimulate investment and create new housing units.
Nevertheless, in both jurisdictions commonhold legislation also had adverse consequences, such as the eviction of residents in Vancouver and skyrocketing housing prices in Singapore. When applied to the UK context, the regions that could be the most transformed by commonhold reform are the ones which have the largest concentration of leasehold properties.
As a rule of thumb, leasehold ownership is most popular in densely populated and highly sought-after areas, such as London, where 51% of transactions are leasehold sales. If the 50% rule where only 50% of leaseholders have to consent to commonhold conversion is implemented, and large-scale conversion from leasehold to commonhold gathers pace, housing inequalities between London and more rural areas will widen. The government should reconsider the 50% threshold and recognize that moving away from leasehold to commonhold is not a solution in itself since issues around the taking care of common areas and administering the building will remain.
Since 2017, the government has been taking the right steps to make sure that leasehold functions effectively and that leaseholders are protected from unfair ground rents. It has to continue to address unfair practices within the leasehold system, like distorted dispute resolution process, to keep both commonhold and leasehold on the table. Making both ownership systems fully functional will enable leaseholders to have the freedom of choice to convert but should also minimise the negative repercussions that large-scale conversion could have on levelling-up and the affordability of housing.
Andrius is currently undertaking work experience at Bright Blue. Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Tetyana Kovyrina]
