Commonhold is often presented as the straightforward alternative to leasehold. It removes the freeholder, gives flat owners greater control and avoids some familiar problems such as diminishing lease lengths and ground rents.
For mortgage lenders and brokers, however, the more important question is not whether commonhold is theoretically fairer. It is whether it produces homes that are readily mortgageable, affordable and saleable.
As a valuer, that takes me quickly to value and risk. Commonhold may remove some risks associated with leasehold but it does not remove risk altogether. In several important respects it relocates it.
THE COLLECTIVE FINANCIAL RISK
The attraction of commonhold is easy to understand. Unit owners collectively control the building rather than depending on a landlord whose interests may differ from their own.
There is no shrinking lease term and no freeholder extracting ground rent. But lenders will still need confidence that the building itself is financially sound.
Under commonhold, owners are members of a collective. The financial strength of that collective may therefore become relevant to the security against which a lender is advancing money.
If some owners fail to pay their share of expenditure, what happens to the commonhold association? How quickly can arrears be recovered? Who meets a temporary shortfall?
Those questions potentially matter not only to existing owners but to lenders assessing individual flats within the building.
RESERVE FUNDS AND AFFORDABILITY
Well-funded reserves are one of the strongest arguments for commonhold. Rather than suddenly asking each owner for £10,000 when a roof needs replacing, a building can accumulate funds over time. In principle, that should make major expenditure more predictable and improve transparency.
But there is an important mortgage affordability question. Money paid regularly into a reserve fund is money that cannot service a mortgage.
If commonhold requires substantially higher contributions to provide adequately for expenditure 15 or 20 years ahead, purchasers may have less disposable income available for borrowing.
That creates an interesting tension: strong reserves may reduce building-level risk while simultaneously reducing an individual purchaser’s borrowing capacity.
Lenders and brokers may therefore need to pay increasing attention to commonhold contributions in much the same way that service charges already affect affordability.
There is also the question of whether the reserve itself is adequate. Long-term forecasts depend on assumptions about construction costs, inflation, regulation and investment returns. A reserve fund does not eliminate the possibility of an unexpected bill.
MANAGEMENT STILL COSTS MONEY
Commonhold also promises greater control over building management. That may prove valuable but it should not automatically be equated with lower costs.
Removing a freeholder does not remove the expense of maintaining lifts, roofs, communal areas, fire-safety systems or insurance. Nor does it eliminate contractor costs, health and safety requirements or regulatory compliance.
For lenders, the quality of management may ultimately matter as much as the tenure itself. A well-managed commonhold with appropriate reserves, transparent accounts and effective procedures for collecting contributions should look very different from one with weak governance, poor maintenance and significant arrears.
DUE DILIGENCE WILL CHANGE
Leasehold is complicated but lenders, valuers, conveyancers and brokers are accustomed to it. They understand lease length, ground rent, service charges and the familiar warning signs.
Commonhold will create a different due diligence exercise. The rules governing a commonhold can evolve. A purchaser therefore needs to understand not only the current arrangements but how decisions can subsequently be changed, what voting thresholds apply and what financial obligations could follow.
Mortgage lenders will need sufficiently standardised information to assess these issues efficiently. If every commonhold requires extensive bespoke investigation, there is a risk of slower transactions, greater uncertainty and potentially a more cautious lending approach.
BETTER TENURE DOES NOT AUTOMATICALLY MEAN LOWER RISK
Commonhold may ultimately prove to be a better structure than leasehold. Greater owner control, no diminishing lease term and properly planned building expenditure all have obvious attractions.
But lenders cannot base mortgage decisions on the assumption that removing the freeholder removes the risks.
The important question will be whether commonhold provides a sufficiently robust, transparent and standardised framework for those risks to be understood.
For brokers, lenders and valuers, that is where the commonhold debate becomes much more than a question of tenure reform. It becomes a question of mortgageability.
