This is the first blog in a two-part series summarising the conversations that took place at a roundtable held on the 2nd May exploring the challenges of leasehold in high-rise residential developments in London, and the potential implications of a commonhold system. The event was organised by LSE London, a research unit at the London School of Economics, in collaboration with architects PTE and HTA. The event built on the 2023 book ‘What is the future of high-rise housing?’ by the Tall Residential Buildings Research Group, an informal network of London-based academics, architects and built environment practitioners. The roundtable was part of a series of events exploring how we can improve financial, governance and wellbeing aspects of high-rise housing in London.
London is seeing a growth in high-rise residential towers containing more than 100 units. The current legislative and regulatory framework for leaseholds, service charges and sinking funds are not adequate to cope with the complexities of this type of housing. This is illustrated by growing concerns about: rising service charges and inadequate sinking funds; dissatisfaction with management and repair services and costs, and the potential costs of long-term maintenance highlighted by the cladding issues arising from the tragedy at Grenfell. This blog aims to set out the current system of leasehold and the challenges involved.
Leasehold is the home ownership arrangement where a property owner has a legal agreement with the landlord or freeholder to own the property for a set number of years – ownership of the property returns to landlord when the lease comes to an end. This arrangement normally includes a service charge to cover the costs of managing and maintaining the building. While this system is “fundamentally feudal” a number of protections have been put in place to protect leaseholders. These include the service charge protections bought in under the Landlord Tenant Act 1985 and amended by the Commonhold and Leasehold Reform Act 2002, a requirement that service charges are “only recoverable by a landlord so far as the costs have been reasonably incurred” and “it is only recoverable if works carried out for the charge are of a reasonable standard”[1]. Furthermore, there is a requirement for leaseholders to be consulted on any single set of major works costing over £250, and give the leaseholders an opportunity to nominate contractors. These costs haven’t changed since 2000, so there is a question concern about the thoroughness of the consultation process.
While forfeiture (the system in which if a property owner breaks the terms of their lease the property is returned to the landlord with no money paid back) still exists, in reality this rarely happens because of the levels of protection in place. One participant said in their 20-year career they have only seen this happen once. But the threat of forfeiture as a result of not paying service charges is one of the arguments against leasehold.
An area where there isn’t adequate regulation is sinking funds, this fund is maintained by the landlord from service charges to cover the cost of future capital works. While sinking funds are a good way to protect against unexpected large costs, leaseholders often complain they are paying too much into the sinking fund. It is difficult to gain agreement over the right rate but – when capital works are required – inadequate sinking funds lead to the need for large one off payments by leaseholders to bridge the gap between actual costs and the fund.
The Building Safety Act 2022 was brought in as a direct reaction to the Grenfell fire tragedy and places new duties on building managers of buildings over seven storeys or 18 metres, those deemed as “higher risk buildings”. All higher risk buildings must now be registered with the regulator and have a principal accountable person in charge of the management of the building. Full details of the act can be found here. While cladding removal remediation works post-Grenfell have to be covered by the developer, the additional costs of meeting these new regulatory requirements for higher-risk buildings can be covered by service charges, and they can be adapted accordingly. It is currently unclear how much these new requirements will increase costs.
The Leasehold and Freehold Reform Act introduced shortly before the General Election is currently in committee stage at the House of Lords. The key takeaways are:
- Greater transparency about service charges and what is included, leaseholders will have the right to request information and the landlord will be obliged to provide it. While this will give leaseholders a clearer picture, from a landlords perspective it is an additional pressure on management and resources.
- Increase of the standard lease extension term for houses and flats to 990-years (up from 90 years in flats, and 50 years in houses).
- Remove the so-called ‘marriage value’, which makes it more expensive to extend leases when they’re close to expiry.
In summary these changes will reduce the value of being a freeholder, but it is not yet clear by how much. One attendee argued that unlike the high-rise towers built after the war these modern buildings are much more complex and expensive to look after, and require careful management by people with professional qualifications. Asking developers or investors to be responsible for the building long term without any or limited financial compensation “just doesn’t make sense”.One attendee pointed out that the recent rise in utility costs and insurance could not have been predicted in these projections. However, it was argued that if you are honest from the outset, people are much more understanding of changes. This does not however avoid the problem of leaseholders who are simply unable to afford the increase. This is particularly acute for marginal homeowners, including shared owners or help-to-buy owners, who have stretched themselves financially to purchase a property.
As mentioned above, one of the big increases in costs over recent years has been in insurance costs, which in turn are passed onto leaseholders in service charges. There is a lack of clarity about why insurance costs have increased, and more conversation is needed in this area. One attendee argued that as buildings become better designed, for example adding sprinklers, this should decrease insurance costs as you are reducing the risk of damage. But in practice, this improvement is making the buildings more expensive to insure because of the increase of water pipes in the building. Participants said they are having to split their insurance across a range of brokers in order to spread the risk and make costs more affordable. Furthermore, the New Building Safety Act which has deemed high-rise buildings as “high risk” has given insurers further reasons to increase premiums.
As part of winning bids to build homes there are expectations on developers (partly arising from planning requirements) to provide more than just the properties. One attendee shared an example of a client who in an attempt to win a bid has included landscaped green spaces, a community gym and a community centre. While these additions make the overall development better, it is important to consider who covers the costs, and often these are met by leaseholders via the service charges. There has recently been a lot of backlash over the service charges in Elephant Park, a new housing development at Elephant and Castle. These service charges are covering not only the maintenance of the flats but the upkeep of public amenities including a public park, public roof terrace, and a community space known as the “Tree House”.
There is currently a lot of political pressure to make things more affordable for leaseholders, however, attendees argued that this is an oversimplification of what is needed because, as outlined above, costs are increasing, and they need to be covered. So, the politics of making things cheaper needs to be coupled with policy to control costs, if leaseholders are going to ensure buildings are maintained as needed. One participant argued that a government-mandated cap on service charges would force developers to think creatively and innovatively about how costs are managed, for example creating other revenue streams to subsidise costs.
Participants felt that the increased costs outlined above, coupled with other problems such as shortages of labour, materials and new requirements for a second staircase on high-rise building, are deterring developers from building in London because of viability.
It was felt there was often a lack of understanding from buyers about the potential costs involved with buying a flat in a tall building, and the legalities of how things work, and a lot of this is linked to how the homes are marketed. Marketing for new developments focuses on selling a certain lifestyle without going into the details of the contractual responsibility a buyer is entering into. One landlord tried to overcome this by producing an easy-to-understand online guide outlining the technicalities of the contract – they would ask the buyers to complete a checklist showing they have read over it. Despite this effort, no one read the online material. One could argue that more onerous obligations should be placed on the sellers to be up-front about potential costs, however, they are generally not experts in these issues and their main focus is on selling the property. Another option would be a requirement for solicitors to have more of a duty to explain to buyers what their responsibilities are. However, it was pointed out that this would increase the time required with the buyer and therefore the legal fees.
In conclusion, there are a number of challenges facing the leasehold system in high-rise residential blocks including increasing management costs, unaffordable service charges and a lack of knowledge from buyers about the responsibilities they are taking on. The second part in this two-part blog series will explore whether Commonhold offers a viable alternative.
