As a leaseholder, you may be familiar with the challenges of living in a property that’s held under a lease, from dealing with rising ground rents to uncertainty about the future of your lease. The good news is that the UK government is finally looking to address these issues with the Commonhold and Leasehold Reform Bill which is a piece of legislation that promises to make big changes to the leasehold system.
What’s the Commonhold and Leasehold Reform Bill?
The Commonhold and Leasehold Reform Bill is a set of government proposals to change the law and improve the leasehold system. If passed, the bill aims to give leaseholders more control over their properties. One key proposal is to make commonhold the default ownership model for new properties, while also making it easier for existing leaseholders to switch to commonhold. For those already holding a lease, the bill proposes capping ground rents at £250 per year for the next 40 years, after which they will drop to a peppercorn (effectively nothing). The bill also removes the ability for landlords to seize properties by abolishing forfeiture provisions and repealing parts of the Law of Property Act 1925, which currently allow landlords to grant a new lease and take possession of a property when charges go unpaid.
Here are the key changes that the bill proposes and what they could mean for you as a leaseholder.
1. Making Commonhold a Viable Option
For New Builds: Commonhold as the Standard
One of the key proposals in the Commonhold and Leasehold Reform Bill is to make commonhold the default form of ownership for new build flats.
Currently, most new build flats are sold under leasehold agreements, meaning the buyer owns the right to occupy the property for a fixed number of years but doesn’t own the land on which the property sits. This can lead to a range of issues for leaseholders, including rising ground rents, complex lease extensions, and the eventual expiration of the lease term.
The bill proposes that, once introduced, newly built flats will be sold as commonhold rather than leasehold.
For Current Leaseholders: The Option to Convert to Commonhold
In addition to making commonhold the default for new build flats, the Commonhold and Leasehold Reform Bill also gives current leaseholders the option to convert their leasehold properties into commonhold ownership.
For many leaseholders, this would mean they could transition from the uncertainties of a leasehold to the security of full ownership. Under the new bill, the threshold for conversion will be lowered significantly. Currently, converting a leasehold development to commonhold requires 100% of the leaseholders in a building to agree. However, under the proposed bill, only 50% of leaseholders will need to agree for the conversion to take place. This reduced threshold will make it much easier for leaseholders to collectively move to commonhold, particularly in developments where gaining unanimous agreement was previously difficult.
So, what is Commonhold?
Commonhold is a form of freehold ownership that allows homeowners to own their individual property outright, without the time limitations or uncertainty of leasehold. In a commonhold system, the owner of a flat holds the freehold of their “unit” and also owns a share in the common parts of the building, such as hallways, staircases, and shared facilities. This means there’s no lease involved, and no need to worry about lease extensions or ground rent payments. It provides long-term security for owners, as their property doesn’t have a set expiry date like leasehold does.
A key feature of commonhold is the commonhold association, which is a company formed by all the unit owners to manage and maintain the building. This association is responsible for decisions regarding the upkeep of the common parts, such as repairs, maintenance, and any upgrades to the building. The association is managed democratically, with all unit owners having an equal say in decision-making. This system removes the need for a third-party landlord, meaning the owners are in full control of how the property is managed.
Under commonhold, each unit owner has voting rights in the commonhold association, which means that decisions about the building are made collectively by the residents. If any changes are needed, such as repairs or building upgrades, the owners vote on how to proceed, ensuring that the interests of all owners are aligned. The system is designed to be fair and transparent, with clear rules set out in the Commonhold Community Statement (CCS), which defines the rights, responsibilities, and obligations of each unit owner. This helps prevent disputes and ensures smooth operation of the property.
2. Lowering Ground Rents for Existing Leaseholders
For existing leaseholders, the Commonhold and Leasehold Reform Bill brings important reforms to ground rent. Ground rent is the annual fee that leaseholders pay to the freeholder for the land on which their property sits. Many leaseholders have faced increasing ground rents, which can make homeownership more expensive and unpredictable.
The bill will cap ground rents for existing leases that predate the Leasehold Reform (Ground Rent) Act 2022 at £250 per year for the next 40 years, after which ground rents will be reduced to a peppercorn (effectively meaning no charge). This reform builds on the Leasehold Reform (Ground Rent) Act 2022, which banned ground rents in new leases from being more than a peppercorn. For older leases, this change offers leaseholders relief from escalating ground rents, providing greater financial stability and helping them plan more effectively for the future.
However, it's important to note that landlords will not be required to reimburse leaseholders for any ground rent paid before the new cap comes into force, where those payments exceed the new limits. Despite this, the new cap will offer substantial relief for many leaseholders moving forward, ensuring that ground rent payments are more predictable and manageable.
3. Abolishing Forfeiture Provisions
Under the current leasehold system, many leaseholders face the risk of losing their home if they fall behind on ground rent or service charges, or breach certain lease terms even if the breach is minor. This is because landlords have the power to forfeit a lease, which means they can terminate your lease and repossess your property. This system has often been seen as unfair and disproportionate, as it can lead to leaseholders losing both their home and any equity they’ve built up for relatively small issues.
The Commonhold and Leasehold Reform Bill seeks to abolish forfeiture completely, replacing it with a fairer, more balanced enforcement process. Instead of landlords taking possession of your property for minor breaches, the bill will ensure that judicial oversight is introduced. This means that if you do fall behind on payments or breach the lease in some way, the courts will be involved to determine the best course of action. The remedies will be fair and proportionate, based on the severity of the breach, so you won’t face the risk of losing your home over something small.
For leaseholders, this means that the risk of eviction for minor breaches will be reduced, and decisions about what happens in such cases will be subject to judicial oversight. However, it also means that breaches of the lease will still need to be dealt with, but there will be more protection in place to prevent disproportionate consequences like losing the property over small issues.
4. Repealing Sections 121 & 122 of the Law of Property Act 1925
Currently, if a property owner falls behind on paying estate rentcharges (charges for maintaining communal areas or services on the estate), the rentcharge owner has the legal power to take drastic action. Under Sections 121 and 122 of the Law of Property Act 1925, if rentcharges are unpaid for 40 days or more, the rentcharge owner can take possession of the property or grant a new lease over the property. This means that homeowners could lose their homes over relatively small debts, often without realising they owed money in the first place.
The Commonhold and Leasehold Reform Bill will repeal these provisions, removing the rentcharge owner's ability to take possession of the property or grant a new lease over unpaid rentcharges. This will prevent homeowners and leaseholders from losing their homes because of minor or unpaid debts, giving them greater security.
In place of this, the bill requires that Rentcharge owners will now have to provide clear notice of any outstanding debts before taking any enforcement action.
What Does This Mean for You?
The Commonhold and Leasehold Reform Bill proposes changes that could have a significant impact on leaseholders. If passed, it will cap ground rents at £250 per year for the next 40 years, reducing them to a peppercorn thereafter. The bill also allows current leaseholders the option to convert to commonhold, providing a more secure form of property ownership.
Additionally, the bill aims to abolish forfeiture provisions, preventing landlords from taking possession of properties due to minor arrears or breaches. This will give leaseholders more security and protection from losing their homes over small issues.
Conclusion
The Commonhold and Leasehold Reform Bill presents potential changes that could improve the leasehold system, providing more stability and clarity for leaseholders. While it’s not an instant fix, the reforms, if passed, could lead to a more balanced and transparent system for property owners.
As a property litigation solicitor, I am following the progress of the bill closely and will continue to provide updates on how these changes may affect leaseholders. If you have questions or would like advice on how these reforms might impact your lease or property situation, please feel free to contact me at claire.liddy@mfgsolicitors.com or call 01527 831691.