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Leasehold reform has long been mooted ever since the Law Commission published three reports in July 2020, which made a number of recommendations addressing: (i) leasehold enfranchisement (ii) the right to manage and (iii) commonhold as an alternative to leasehold.
The current system is often described as “feudal” and stories of dramatically escalating ground rents in leasehold property and, the often, very high cost of lease extensions have regularly hit the news.
Just before the dissolution of Parliament on 30 May, the previous government pushed through the Leasehold and Freehold Reform Act 2024 on 24 May 2024. Although the Act addresses some of the Law Commission’s recommendations, it will be down to the new Labour government to deal with most of its implementation in due course.
The draft Leasehold and Commonhold Reform Bill
The King’s Speech introduced the draft Leasehold and Commonhold Reform Bill which aims to implement the rest of the Law Commission’s recommendations.
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The intention is to “bring the feudal leasehold system to an end” by:
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While the devil will be in the detail for most of these changes, one of the most notable aspects of the Bill is the proposal to ban the sale of new leasehold flats and to make commonhold the default tenure. With there being approximately five million leasehold dwellings in England and Wales, the proposal is expected to constitute an enormous shake-up of the current system of residential property ownership.
Commonhold v leasehold
The commonhold tenure was first introduced in 2002 as an alternative to leasehold, although it has failed to take off. This is because most developers and land-owners are more comfortable with leasehold ownership. There has definitely been a reluctance to step into the relative unknown of the commonhold. However, this might be about to change.
Whereas leaseholders own a property for a fixed period of time, those with a commonhold tenure own a property as a freehold indefinitely, becoming known as a “unit owner”. Unit owners are entitled to become a member of the commonhold association, which owns and manages the common parts of the building or estate. These typically include the structural and external parts of a building as well as shared areas such as the roof and stairs. The unit owners are also subject to the rules and obligations contained in a “rulebook” called the Commonhold Community Statement (the CCS).
The immediate, apparent benefit of a commonhold tenure is that it provides for ownership of a freehold property, rather than a leasehold which is a diminishing asset in terms of value. A freehold asset cannot be forfeited (note though as above that the draft bill proposes to remove forfeiture as a remedy for landlords entirely thus benefiting existing leaseholders) and, the standardised set of rules and obligations provided for by the CCS is likely to simplify the conveyancing process.
Nevertheless, it would seem that the main disadvantage of a commonhold tenure lies in the very nature of the commonhold association, which has responsibility for the upkeep, repair and insurance of the common parts. If the association fails to keep on top of these matters, there is a risk that the property could fall into disrepair and lose value; an unattractive proposition for mortgage lenders. This is because in most cases, a commonhold association is a limited company and is at risk of insolvency if unit holder(s) fail to make their required commonhold contributions due to the commonhold association being unable to exercise forfeiture rights.
Comment
Until we have a draft Bill before us, we do not know how far this proposed legislation will go, or to what extent the issues it seeks to address will be prioritised by the new government. What is clear though is that if the Bill goes anywhere near as far as has been proposed, there will be a seismic shift in the way in which we own property and the impacts that flow from this.
Construction and engineering
United Kingdom