Introduction
Amidst a backdrop of a significant number of ongoing reforms relating to the law governing leases and the relationship between landlords and tenants over the past few years, the Government has recently published its draft of the proposed Commonhold and Leasehold Reform Bill (hereinafter, “the Bill”). The Government states that this Bill will “bring forward reforms designed to modernise, strengthen and reinvigorate the commonhold and leasehold framework.”
This article will summarise the key features of the Bill, and assess the possible implications of the Bill’s proposed reforms amidst the current property law climate.
The Bill
The Bill ultimately seeks a gradual phase-out of long-term leasehold property ownership, and in place of leasehold ownership, aims to promote commonhold ownership as the new default for multiple-unit buildings. The Bill seeks to ban the use of leasehold for most new flats, and to make it easier for leaseholders to convert to commonhold. In its guidance document for the bill, the Government states that the bill is intended to give homeowners “greater security and agency over their homes” through commonhold ownership, and to tackle “abuse and bad practices within the leasehold system”.
As a brief explanation, commonhold ownership is essentially a form of freehold ownership, whereby homeowners of individual units within a multiple-unit properties will own their units outright without time limitations and will share responsibility for managing common parts of the building without the need for a third-party landlord.
Whilst commonhold was established as far back as 2002 with the Commonhold and Leasehold Reform Act 2002, the Government acknowledged that this had failed to take off for a variety of reasons, including a combination of limitations and flaws in the original law as drafted, and the requirement for unanimous consent of leaseholders for a building to be converted to commonhold. Noted in conjunction with this were the limited incentives for the industry to adopt commonhold more frequently as a form of tenure, when noting, among other things, the secondary income streams that leasehold can generate, which commonhold cannot.
As well as promoting commonhold as the default form of tenure over leasehold, the Bill also contains enhanced leaseholder protections for tenants subject to existing leases, with two key changes:
- The first such change relates to ground rent. Building upon the Leasehold Reform (Ground Rent) Act 2022, which banned ground rents for new properties, the Bill proposes to cap ground rents at £250 a year, before changing to a ‘peppercorn rent’ after a transitional period of 40 years.
- The second of these changes relates to forfeiture. The Bill seeks to abolish the right to forfeit long residential leases. It proposes to replace this with a fairer, more proportionate enforcement regime, which the Government aims to have increased judicial oversight and the power to grant remedies which the Court deems are just and proportionate in the circumstances, without automatic loss of the leaseholder’s home and equity built up in the Property.
By way of comment, it is noted that the Bill would appear to go beyond addressing the respective rights of leaseholders and freeholders. In fact, it also seeks to repeal sections 121 and 122 of the Law of Property Act 1925 to remove what the Government describes as “outdated and disproportionate enforcement powers linked to estate rent charges”. It looks to provide enhanced protections for freehold owners living on privately managed estates, in addition to the enhanced protections the Bill offers to leaseholders, highlighting the Bill’s comprehensive nature.
When noting the Bill’s proposals, it can be said that the Bill arguably follows in the spirit of the earlier Leasehold and Freehold Reform Act 2024, which received Royal Assent on 24 May 2024. Whilst not all provisions of the 2024 Act have yet come into force, the 2024 Act also sought to address the rights of Leaseholders as against Freeholders and, among other things, made it easier for leaseholders to extend their leases and qualify for the right to manage properties, and improve the transparency of service charges and administration charges.
Implications
The Bill follows many bills in recent years aiming to equalise the respective positions of landlords and tenants by improving the rights of leaseholders/tenants and the options open to them, which is perhaps unsurprising when noting the Government’s characterisation of leasehold tenure as being ‘feudal’ in nature. One such bill being the Renters’ Rights Act 2025, notable for its planned abolishment of ‘no-fault’ section 21 evictions, and the conversion of assured shorthold tenancies into assured periodic tenancies.
There are currently estimated to be five million leasehold properties across England and Wales. The Government accepts that leasehold as a tenure will continue to “be a feature of the housing market for many years to come”, and it is not apparent that the proposed reforms will have a sudden effect on the property industry. However, when noting the substantial number of leasehold properties and the broad reach of the proposed legislation, the possibility of more substantial long-term effects of the legislation, if passed largely in line with the Bill, is difficult to deny.
From the available draft, the Bill appears to take a two-pronged approach: firstly, to promote commonhold over leasehold in the long-term as the default tenure for new multiple-unit properties; and secondly, to provide enhanced protections for existing leaseholders in tandem with this. The apparent effect of the Bill’s provisions on ground rent and forfeiture (as arguably the strongest form of enforcement presently available to landlords against leaseholders) would be to improve the position of tenants who are unlikely to convert their tenure from leasehold to commonhold in the near future, perhaps seeking to reduce any imbalance between the position of leasehold proprietors and commonhold proprietors.
It also apparent that by seeking to reset the balance between landlords and tenants with the ground rent and forfeiture provisions, that the Bill may be characterised as stronger attempt to reduce some of the incentives within the property market that prevented commonhold tenancies from more widely adopting commonhold. In doing so, the Bill seeks to address the shortcomings of the Commonhold and Leasehold Reform Act 2002. Even if it remains difficult to say at this stage whether the Bill will encourage leaseholders to pursue conversion of their tenure from leasehold to commonhold, the Bill could also be considered a far more concerted effort by the Government to encourage conversions from leasehold to commonhold when compared to the 2002 Act.
It of course remains to be seen whether the bill will go far enough in preventing imbalance between commonhold and leasehold properties in accordance with the Government’s goals. Although making extensive reforms concerning commonhold tenure, ground rent and forfeiture, the Bill appears to afford less attention to service charges, a key factor defining the relationship between leaseholders and managing landlords. When noting the long timeframes contained within the bill, including the proposed 40-year transition period for the effective abolishment of ground rent, there is the potential for concern from tenants that the timeframes are too slow for reforms to have meaningful effect during their lifetimes.
A final point to consider is the reaction of the property market, and how it may react to the emergence of new commonhold properties alongside existing leasehold properties. Whilst speculative, in a scenario where commonhold properties become widely adopted, it is possible to envision that the sale of leasehold properties may therefore be affected if commonhold ends up being the more widely preferred tenure by homeowners.
Closing Thoughts
It remains to be seen where the Government will go next with the Bill, and depending on the response to the Bill, what provisions as initially drafted might change by the time the Bill receives Royal Assent. However, the provisions of the Bill, whilst still a considerable time away from being fully implemented and unlikely to have a substantial short-term impact on the property market, arguably represent the largest and most concerted effort by the Government in recent years to shake up the respective rights of landlords and tenants for homeowners in properties with longer tenure. If passed in its current form, it would be a substantial change to the status quo for which all involved parties should aim to be prepared for.