In brief
- The draft Commonhold and Leasehold Reform Bill was published at the end of January and continues the Government's "major shake-up of the outdated leasehold system".
- The Bill proposes three key changes: capping ground rents in existing long residential leases; abolishing forfeiture in residential leases; and making commonhold the default tenure for new developments of flats.
- This is a draft Bill which has not yet been introduced to Parliament. The Government has launched a consultation to seek views on how the new rules should apply. The Bill may therefore change significantly before it becomes law.
This article looks at some key measures outlined in the Bill.
Ground rents – capped
Ground rents have already been banned for most new long residential leases of houses or flats since 30 June 2022.
The Government is now tackling ground rents for existing long residential leases. Ground rents will be capped at £250 per annum for an initial period of 40 years and will then go down to a peppercorn.
No compensation will be payable to landlords for this loss of income. There is no requirement for landlords to refund tenants with ground rent paid to date.
The Government has indicated that the ground rent cap could come into force in late 2028.
Forfeiture – abolished
Another significant reform is the abolition of forfeiture in long residential leases. This will apply to existing leases, so any provision in a lease which provides for termination by forfeiture will be unenforceable.
Forfeiture will be replaced with a new court-supervised lease enforcement scheme to give tenants greater protection.
The court can make a remedial order requiring specific action to be taken by the leaseholder, or grant an order for sale. This is viewed as less draconian than forfeiture, as the tenant will retain any equity in the property.
Reform of the commonhold system
The majority of the 200-page Bill deals with the commonhold system. The Government has indicated that it wants the new commonhold model to be available by 2029.
What is commonhold?
Commonhold is a form of ownership where residents collectively own and manage their building. Each flat owner (known as a unit-holder) owns their flat as a freehold. A "commonhold association" owns the common parts. The unit-holders are members of the association and elect the directors.
Commonhold was first introduced to England and Wales in 2002, but uptake has been slow, with fewer than 20 commonhold developments registered to date. Our previous article Commonhold: the answer to modern flat ownership? explains some of the reasons for this.
Commonhold to become the default tenure for new developments of flats
The Leasehold and Freehold Reform Act 2024 has already paved the way by banning the sale of new leasehold houses, although these provisions are not yet in force. The Government is now turning its attention to leasehold flats.
The Government intends to ban the sale of new long residential leases (over 21 years). Commonhold will become standard for new developments, with some exemptions such as shared ownership leases.
The ban will apply to newly constructed buildings. It will also catch the conversion of a house into flats, the refurbishment of a block of flats with vacant possession, or the conversion of commercial buildings into residential use.
What if the developer only has a leasehold interest?
A developer must own the freehold interest to register a development as commonhold. If a developer has only a leasehold interest, the Government consultation suggests they should be exempt from the ban if they acquired their interest before a certain date. This mirrors the approach taken with the ban on the grant of leasehold houses.
If this proposal becomes law, then if a developer has acquired a leasehold interest after a specified date, they will not be able to grant a long lease or sell units on a commonhold basis unless they acquire the freehold.
What about existing leasehold developments?
For an existing building completed before the ban comes into force, then the ban will not apply and the landlord can continue to grant new leases, but only if there is at least one registered long lease of a flat in the building on the commencement date.
If the building was completed before the ban comes into force but there are no such registered long leases at commencement, the ban will apply and the landlord will not be able to grant any new leasehold flats.
How easy is it for existing schemes to convert to commonhold?
The Government hopes existing leasehold schemes will choose to convert to commonhold and the Bill aims to simplify the process. The current rules require all the leaseholders in a block to consent, which is difficult to achieve in practice.
The Bill proposes different consent requirements depending on ownership structure. In many cases, only 50% of the leaseholders will need to consent.
If a building has not already been enfranchised, then the leaseholders will now be able to acquire the freehold and convert to commonhold in a single streamlined process.
What about leaseholders who don't want to convert to commonhold?
These "non-consenting leaseholders" will remain leaseholders. Their leases will be amended to align with the building converting to commonhold and they will enjoy voting rights.
However, the Government views this as a temporary arrangement and the Bill aims to phase out these leases. Non-consenting leaseholders will be unable to assign or extend their lease. Instead, at the point at which they would otherwise have sought to assign or extend, they will be required to convert to commonhold. This provision in the draft Bill may meet resistance in Parliament.
What are the other key changes?
The Bill introduces the idea of "sections" to allow each section in a commonhold development to be managed separately. This should make commonhold work better for large or mixed-use developments. It allows separate heads of costs, so only those who benefit from certain services pay the cost of these.
The Bill makes reserve funds compulsory to spread the cost of major works. It also allows commonhold associations to borrow money.
Greater flexibility is given to developers to continue developing the site after some of the units have been sold.
Mishcon de Reya’s comment on the draft Commonhold and Leasehold Reform Bill
The proposed ground rent cap will have a far greater impact on investors than the Leasehold and Freehold Reform Act 2024 (which only banned ground rents for new leases). Further legal challenges are expected.
It will be interesting to see whether the improvements to commonhold will encourage more leaseholders to convert to commonhold voluntarily. Commonhold-style systems are well established in many other countries, including Scotland, France, Germany and the United States, demonstrating that this model can work effectively.
For a smaller, straightforward building, a commonhold structure should be simple to manage and may make owning a flat more attractive. However, it is still difficult to see how commonhold will work for large, complex buildings, particularly where the Building Safety Act 2022 applies.
As with the Renters' Rights Act, we expect there to be much discussion both in the market and in Parliament and substantial changes to the draft Bill before it becomes law.