Clubbing together to buy

The idea of residents getting together to buy a freehold sounds attractive. So why is it so rare?

After all the hoopla over commonhold, takeup has been slow to say the least and no mainstream developer has taken up the idea. Indeed, a survey of developers by the Department for Constitutional Affairs indicated only about five per cent are at all interested in using the new tenure. So what has gone wrong?

Everyone agrees that leasehold is a feudal concept with little to offer today. Leases decline rapidly in value towards the end of their term, and building societies get sniffy about lending money on leaseholds with as long as forty years to run. The slump in value in the last few years can have a catastrophic effect on maintenance.

Commonhold was modelled on condominiums in the US and Australia, where leasehold is very rare. The idea is to bring residents together as a society of freeholders, cooperating to run the block in the most efficient and cost effective way possible. The first registered UK commonhold is a former hotel in Bournemouth, now converted into flats by Bill Perkins, an independent financial advisor.

Perkins was attracted to commonhold because it puts the owners in charge. "Leaseholders just buy the air in the flat - the walls, floor and ceiling belong to the freeholder," he says. "The commonholder owns the bricks and mortar as well." As a result, he believes commonhold flats will be more attractive to buyers.

The legal side of setting up Perkins' commonhold was handled by Shirley Clough, a property specialist at Bournemouth solicitors Jacobs & Reeves.

"Commonhold has been held back by lack of acceptance by mortgage lenders, but more and more are opening up and once they do, it will be easier to promote commonhold to clients," she says.

The legal advantages include flexibility and simplicity, compared with leasehold, Clough says, but she believes the tenure will appeal most to small communities rather than huge tower blocks.

Larger developers have so far shunned commonhold, says Liam Bailey, head of research at Knight Frank.

"Residential developers are familiar with leasehold and commonhold does not seem to have obvious advantages over a 125 year lease," he says. Most of the advantages of commonhold go to the buyers.

"Buyers do not find themselves with a wasting asset, but for developers that is only a marketing point," Bailey points out.

"I don't feel there is any angle for developers."

It is also possible for leaseholders to join together and convert into a commonhold, simply by forming a commonhold association, but so far none have done so.

This is probably due to the fact that conversion needs the unanimous consent of all the tenants, the freeholder and the mortgage lenders, and it often requires enormous energy and persistance to sign everyone up for a change that may appear to many to be a legal nicety if the current arrangements are working satisfactorily.

There is some concern over the rights of owner-occupiers with one unit, and therefore one vote in the commonhold association, against big investors with many units and so a lock on the association.

Investors should find commonhold attractive, however, because every commonhold agreement will be standard (and if it is not, the non-standard clauses will stand out in comparison with the government-approved norm).

Smaller investors should like commonhold too, Bailey believes. "Commonhold will create saleable freehold property in smaller lot sizes, which will attract small to medium investors in property," he says.

The general opinion is that commonhold will start to take off in smaller developments where the risk is lower, and in mixed developments where business investors like the idea of owning their premises freehold rather than renting.