The draft Commonhold and Leasehold Reform Bill contains measures designed to bring the leasehold system of ownership to an end, replacing it with a reformed commonhold regime. It will also introduce a cap on existing ground rents, and replace forfeiture of long residential leases and similarly draconian powers relating to freehold estate rentcharges with more proportionate enforcement schemes.
We look at the proposed measures in more detail below.
The key takeaways
· The draft Commonhold and Leasehold Reform Bill contains measures that:
- Cap existing ground rents in long leases at £250 per year, reducing to a peppercorn (effectively nothing) after 40 years.
- Promote a reformed commonhold model of property ownership, and make it easier for existing leaseholders to convert to commonhold.
- Ban the use of the traditional leasehold model of ownership for new flats.
- Abolish forfeiture of long residential leases, replacing it with a new scheme of enforcement.
- Replace similarly harsh enforcement powers for those on freehold estates.
· The draft Bill has been published for pre-legislative scrutiny and may change even before being formally introduced to Parliament.
What is ground rent and what is the proposed ground rent cap about?
Ground rent is typically an annual payment that leaseholders are required to pay to the landlord under the terms of the lease.Sometimes the ground rent is a relatively small sum, but in other cases the amount can be very high.
A particular problem has arisen over the last few decades with developers including provisions in new leases in which the amount of ground rent increases, sometimes at an exponential rate. This has caused significant problems, with some flats being unmortgageable and unsellable due to the current and future ground rent liability.
The law has already intervened to a large extent, with legislation introduced in 2022 having banned ground rents being included in new leases.
The Competition and Markets Authority (CMA) has also taken action under consumer protection law which resulted in undertakings (legal promises) being given by several well-known residential developer-freeholders to remove clauses from existing leases which caused ground rents to double more frequently than every 20 years.
However, the problem still exists in relation to existing leases where the CMA has not taken action. The draft new Bill seeks to tackle the problem of “unregulated and unaffordable” ground rents for these remaining leaseholders.
If passed into law in its current form, the draft Bill will cap ground rents in existing leases at £250 per year, extinguishing them altogether in 40 years’ time.
There were previous indications that the government would propose immediately capping the figure at what is called a “peppercorn”, which has no monetary value. There is, however, another side to this issue.That is, that there is significant value associated with the income that freeholders will derive from future ground rents.
Indeed, there is a whole market of investors, including pension schemes, who have invested in ground rents in order to create stable long-term sources of income.
The problem, therefore, is that immediately capping ground rents at a peppercorn would instantly transfer the full value of ground rents from freeholders and investors, to leaseholders. There have already been challenges to other recent legislation concerning the fairness of such a transfer of value, which are still going through the courts.
Whilst the government considers that interference in existing leasehold contracts is necessary, with clear attractions to an immediate peppercorn cap, it has concluded that a modest cap of £250 per year, for a transitional 40-year period until the market adjusts, strikes a fairer balance between all those involved.
No doubt the government also has in mind that ensuring that some value is maintained will make it harder for freeholders and investors to challenge the new measures as and when they inevitably seek a judicial review.
The government has considered alternative options – such as a cap based on a percentage of the property’s value, a higher or lower cap, or a shorter or longer transitional period – but has concluded that its proposal has the advantage of being simple, clear and deliverable, is consistent with mortgage lenders’ current lending requirements and will result in a more proportionate transfer of value to leaseholders over a reasonable adjustment period.
What are the proposed reforms for commonhold?
Under the current leasehold system, the ultimate owner of the property (the freeholder) grants a long lease of a flat to a leaseholder, for example for 99 years or longer. The leaseholder essentially rents the property from the freeholder, albeit for many years, and often has to pay a small ground rent each year as well as a service charge.Successive governments have taken the view that there is an inherent problem with leasehold ownership of flats. The current government describes it as an “exploitative model” of home ownership, where landlords have almost full control and say over the upkeep and management of leaseholders’ homes and the charges they pay.
The draft Bill contains proposals that will replace leasehold ownership with commonhold.
Under the commonhold system, the residents own the freehold together. Freehold ownership lasts forever, unlike leaseholder which is time-limited.
The owners are part of a commonhold association, which the government considers gives them more control over their homes and common areas, and greater opportunity to have a say over key decisions affecting how their building is used, managed and financed.
Commonhold already exists, but it has had a very poor take-up. The draft Bill seeks to address this by banning the use of leasehold for new flats, meaning that commonhold will be the default model of ownership (subject to certain exceptions yet to be set out).
In commonhold ownership, there is no lease. Instead, there is a Commonhold Community Statement (CCS) that defines the rights, responsibilities and rules for all unit-owners, and establishes a system for decision-making. The commonhold association will be a company with a standardised set of rules governing its operation, such as how directors are appointed.
Under the revised commonhold system, commonhold associations will be able to set their own local rules for a particular block or development, representing the preferences of that particular set of owners.
The local rules might, for example, cover whether residents can keep pets, restrict short-term holiday lets or determine how shared spaces can be used. Such local rules can be changed over time, subject to a vote, but cannot over-ride the core CCS.
In addition to strengthening the governance of commonhold associations, the draft Bill seeks to address some of the other perceived problems with the current commonhold regime, for example:
- flexibility will be provided for mixed-use developments by enabling shops, offices, residential units and estates with multiple blocks to be subdivided into “sections” for management purposes;
- developers will be able to reserve to themselves in the CCS any rights they need to complete the site;
- a framework for how annual commonhold budgets should be set will be introduced, along with a requirement to maintain a reserve fund for future expenditure;
- the process for registering new commonhold sites at the Land Registry will be simplified; and
- clearer financial and dispute resolution mechanisms will be introduced.
What will happen to the traditional leasehold model of ownership?
The proposed ban on the use of leasehold will only apply to new flats, not to existing leasehold flats.However, those subject to the existing leasehold system will have various rights and options that the government hopes will put them in a similar position to commonhold owners. The draft Bill will add to these by making it easier for existing leasehold buildings to convert to commonhold.
The draft Bill will introduce a new process for conversion, making it possible to convert when 50% of qualifying leaseholders agree.
Leaseholders will be given a new right to buy their commonhold unit that will replace their existing right to the grant of a new lease under current enfranchisement law. In addition, where a leaseholder in a building that has converted comes to sell their property, the commonhold unit must be sold at the same time.
The clear aim is that existing leasehold ownership will be phased out and gradually replaced with commonhold ownership.
What is the proposed new scheme of enforcement that will replace forfeiture?
Under the current law, a landlord can terminate (forfeit) a lease if the tenant breaches their obligations.Over the years, various statutory safeguards have been introduced that actually make forfeiting long residential leases very difficult. Nevertheless, the risk remains that, if the landlord jumps through various procedural hoops, a leaseholder risks losing their home and any equity that they have built up, with a corresponding windfall for the landlord.
For these reasons, forfeiture of long residential leases is widely viewed as a draconian and disproportionate remedy.
The draft Bill, if passed into law, will remove the right to forfeit long residential leases (both existing and new) and replace it with what the government considers to be a more proportionate enforcement regime.
Under the new regime, landlords will still be able to take action if a leaseholder breaches their obligations, but the courts will have the power to grant remedies that are proportionate to the breach.
The new system will require landlords to meet certain statutory conditions before being able to make a lease enforcement claim, including: a requirement to provide the tenant with an “explanatory statement” about the lease enforcement scheme; for any unpaid service charges to exceed a certain threshold, to be fixed somewhere between £500 and £5,000; and for the tenant to have admitted, or for a court or tribunal to have made a final determination confirming, the breach.
Once those conditions have been met, the landlord will then have to give the leaseholder a “lease enforcement notice” providing the tenant with one final opportunity to remedy the breach within a given timescale.
If all of the statutory conditions are satisfied, and a lease enforcement notice has gone unremedied, only then will the landlord be able to make a lease enforcement claim at court.
The court will be able to make such order it considers to be appropriate and proportionate in the circumstances. Such orders might include requiring the tenant to remedy the breach or, in rarer cases, an order for sale.
Even in a rare case where an order for sale might be made, protections will ensure that the leaseholder is compensated for any remaining equity, addressing perhaps the chief inequity of forfeiture.
What about enforcement powers for those on freehold estates?
Where homeowners own freehold houses on privately managed estates, they may have to pay an estate rentcharge for the upkeep of the common areas (estate roads, paths, drains and sewers and such like).The current law enables the person entitled to the rentcharge to take possession of a homeowner’s property, grant a lease over it or appoint a receiver, if the estate rentcharge payment is 40 days or more overdue. Worse still, these remedies can potentially be exercised without any notice being given and without any minimum financial threshold.
Again, the government considers this to be a disproportionate remedy, and the draft Bill will remove these statutory powers. Instead, rentcharge owners will be required to provide notice to the freehold owners before taking enforcement action.
Our view:
There is much to be welcomed in the draft Bill, particularly the new enforcement mechanisms that will replace forfeiture and the reforms to freehold estate rentcharge powers.As for the flagship policy of abolishing leasehold ownership and moving to commonhold, the problem is not necessarily with the system of ownership, but with standards of management.
Leasehold gets a very bad rap in the press, but we remain unconvinced that replacing landlords with commonhold company directors will cure all ills. Service charge disputes, issues between neighbours living in close-proximity and management conflicts will remain irrespective of how ownership is structured. What often makes a real difference is how good the people are that manage multi-let properties.
On that front, it is encouraging that the government has said that it is committed to implementing measures that will strengthen regulation and accountability of managing agents, both in relation to flats and freehold estates.
As for timing, the government aims to implement the changes in 2028 but this seems optimistic given the challenges the draft Bill will likely face both in Parliament and through the Courts from institutions that have invested billions on ground rent assets. Whether it will become law within the term of the current government remains to be seen. If it does not, the Bill’s future may depend very heavily on the outcome of the next election.
