The Central Problem with Collective Enfranchisement of leasehold flats
Much of the problems with leasehold in the UK relate to the unmutualised character of most blocks of flats: the building as a whole is not owned in some sense by those who own the flats. There are a lot of problems downstream from this, but the key one is that a lot of the mitigation strategies for flat owners with pathological landlords are fairly ineffective.
Mitigating third-party landlords
Here the various "remedies" for leaseholders:
- challenging service charge invoices
- applying for a court-appointed manager
- claiming the Right To Manage
- extending the lease to remove ground rent
- collectively buying out the freehold ("enfranchisement")
Simply put, a group of homeowners is less likely to rip each other off than they are to be ripped off by a third party.
Of those mechanisms, the last two involve substantial payments to the landlord. But buying the freehold means you (collectively) *become* the landlord, which reduces the incentives for fraud and rip-offs, and avoids some of the less effective remedies.
Issues impeding enfranchisement
Let us suppose that it's desirable, as a matter of public policy, for as many flat owners to buy their share of the freehold as possible, not least to reduce the resources wasted on disputes. You could go about doing this as follows:
- reduce the overheads involved in enfranchisement
- reduce the premium payable to landlords
- incentivise enfranchisement, e.g, via taxes or fines
- compel individual homeowners to enfranchise
The conventional case here is a block of flats; but there are also mixed-use buildings where only some of the floor space is flats, and individual houses that are on a leasehold basis. Considering these different patterns helps disentangle two sets of isses:
- how does an individual home owner afford this (whether of a flat or a house)
- what do we do about the situations where only *some* owners in a building can afford to do it?
A typical per-flat enfranchisement premium is £7500.
I want to leave the second set of issues, those "partial enfranchisement" issues, to one side for another day. For the case of an individual leaseholder is a useful model for collective enfranchisement: a lot of it looks like solving the issues of the individual case, but for all the flats in a building at the *same time*. So what are these issues?
- the leaseholder might not want to enfranchise because it's not a good enough deal - the money could be better invested elsewhere
- maybe there is a negative tax consequence; this cannot be completely controlled by UK legislation because the tax consequence may arise in a foreign jurisdiction where the leaseholder actually lives
- the leaseholder might not have the money to hand
- the leaseholder might not be able to *borrow* the money
Ground rents
Given that the enfranchisement will lower the leaseholder's ongoing costs, it would be commensurately easier to borrow the money: if the ground rent is £200 per year for the next £150 years, although that tallies to £30000, most of that money is not due for a very long time, and so it is subject to a hefty discount. If you put about £7500 in gilts today, it would pay the £30000 at the required rate (assuming the right discount rate). And of course it is precisely by borrowing money that a lot of freeholders themselves buy the assets which entitle them to these ground rent income streams.
To a great extent, the ground rent looks like a disguised mortgage. There's no need for a credit check when buying a leasehold flat due to the draconian forfeiture terms for defaulting.
Reversions
There are two other terms in the sum payable for enfranchisement: development value and the reversion, i.e., how much you must invest today to buy the flat at the end of the least; in many cases these are both negligible. Importantly, there are also cases where ground rent is negligible but the reversion is not. For longer leases, ground rent is much more significant, e.g., over 125 years remaining. For shorter leases (e.g., below 60 years), the reversion starts to become more important.
Financing
Looking at this in the abstract: there is some sum to be paid on particular date, that represents various types of future income. The payer (the leaseholder) may or may not be able to afford to pay up, and may or may not be willing able and eligible to take out an appropriate loan. Any loan relating to ground rents could of course be financed by the reduction in ground rents to zero, lower reductions now being illegal. Loans relating to the reversion would be more problematic.
In the simple case of a leaseholder of a house buying the freehold, this would always be at a time of the leaseholder's own choosing. It comes down to a financial operation which is equivalent to re-financing one's debts, a bit like switching credit cards, and counts as a "swap": the exchange of one stream of payments for another.
But of course not everyone is able to refinance any debt at any time, not least as there might be no-one willing to lend to them on the requisite terms or at all. And the ability to pay is affected by whether the premium primarily relates to ground rent or the reversion: there's a big difference in *practice* between an obligation to transfer £200 worth of assets every year for a hundred years on the one hand and to transfer a £300000 flat in a hundred years on the other.
Conclusion
It's going to be difficult to compel people to enfranchise, as they might not be able to afford to. For a single house it may be difficult, but for a block of flats, everyone effectively needs to be able to refinance *at the same time*.
Therefore it would be good to have more options for people to buy in flexibly.
That is anathema to those who want rid of leasehold as soon as possible. This forces the terrible choice of Options 1 and 2 in the government's commonhold whitepaper: give up on enfranchisement for individual flat owners and water down commonhold to accommodate the remaining long leases, or place a charge on the commonhold title of a non-consentingly converted unit, to be redeemed when the flat is sold. To have any kind of ongoing payment to pay down that charge would require an equivalent of ground rents and forfeiture, which supposedly is what we're trying to avoid!