The Law Commission’s latest proposals represent a significant push towards the adoption of a commonhold model.

The reception to its report entitled: Making commonhold a preferred alternative to leasehold ownership has been mixed, and it remains to be seen what the average leaseholder will think about the prospect of only 50% of residents being needed to force a commonhold structure onto everyone else.

But the most intriguing development was not the contents of its report, but the letter that was sent to lenders after the main report was published.

The explanation that was given to lenders is extraordinarily revealing and raises serious questions about the practicality of these proposals. It also raises a more fundamental question about how well the Law Commission understands this market at all.

Purpose of the proposals

Before we look at the impact on mortgage lending, it is worth remembering what the Law Commission was setting out to achieve with this commonhold workstream.

This was never intended to be an analysis of which tenure offers the most benefits to the consumer; their mandate was to invigorate commonhold and make the case for it as the preferred alternative to leasehold.

However, they have carried out their mission with limited evidence. You cannot simply force commonhold into pole position like this without causing several significant shocks in the market.

Security of leasehold structure

The impact on consumers is the most obvious but the impact on mortgage lending is perhaps the most serious.

The structural aspects of the leasehold tenure offer far more protection for an apartment block, making it more secure and therefore minimising concerns for lenders.

As part of the leasehold model a professional freeholder is in place to provide long-term stewardship for the building. Lending on a commonhold property does not have that benefit and is an entirely different prospect.

Campaigners will argue that forfeiture under leasehold effectively removes the lender’s security when a leaseholder defaults under its lease. Freeholders rarely utilise forfeiture, and where they do it is often at the request of the lender.

Most responsible freeholders do not “benefit” from a windfall under forfeiture – they typically discharge the secured liabilities attached to the apartment and return any surplus proceeds to the defaulting leaseholder.

The Law Commission asserts that commonhold provides improved security to lenders but fails to give a solid argument as to how this would work.

The suggestion that security could be granted over gardens, lifts or hallways is impractical and will not appeal to lenders. The Law Commission recognises that the value of a lender’s security is linked to the management and maintenance of the entire building in which the apartment is located.

However, its proposals pass these responsibilities onto residents who will unlikely want to take on the role – leading to increasing chances of building disrepair and an impact on property values.

In addition, lenders themselves would not want to devote the management time to monitor individual building maintenance and standards.

New responsibilities for lenders

The Law Commission also proposes new responsibilities for lenders, including the ability to appoint new directors and become heavily involved in any insolvency and termination processes of the Commonhold Association.

This puts the onus on lenders to ensure compliance which is an impossible and likely unwanted task. Not forgetting to mention each apartment will have a different lender, which causes further issues around who will take the lead in such situations.

The Law Commission’s proposals also make it compulsory for the Commonhold Association to take out public liability insurance, maintain a reserve fund and allow owners to approve budgets.

This is a complicated role, already being fulfilled under the leasehold tenure, which raises a number of serious questions – what happens if the Commonhold Association simply doesn’t do this and who would step in to ensure it does?

The Law Commission’s answer seems to be to clog up the tribunal process even more. A somewhat incongruous proposal from an organisation tasked with simplifying the law. In contrast, the evidence suggests that the current leasehold system manages to resolve almost all its issues quickly, efficiently and generally without cost.

‘Alarm bells’

The very fact that the Law Commission wrote to lenders straight after publishing its proposals shows that it is acutely aware of these issues and recognises the shortcomings of a commonhold system.

The problem is that their proposed solutions are unworkable and should be ringing major alarm bells for the lending community.

The ultimate irony is that the Law Commission seems fully aware that the fixes required to make commonhold workable are all available within leasehold.

Mick Platt is CEO of Wallace Partnership Group, which owns and manages some 106,000 freehold titles in England and Wales