Commonhold and Leasehold Bill update: What is it all about?

A central element of the Bill is enabling easier conversion to commonhold.

It is important to remember that leaseholders already have the legal right to own and manage their buildings should they choose to.  Many leaseholders choose not to exercise existing rights - such as collective enfranchisement or the Right to Manage - which is often due to the practical responsibilities involved in managing multi‑occupancy buildings rather than legal barriers. Managing mid‑to-high‑rise buildings requires specialist knowledge, adherence to complex regulation, and in some cases exposes directors to potential legal liability.

For many leaseholders, the responsibility of running a building may not be one they wish to take on. Commonhold changes the ownership model, but the core responsibilities remain.

The social dynamics also continue. Under commonhold, disputes and enforcement occur directly between unit owners, without the buffer provided by a separate landlord entity.

Even where owners are willing to participate in management, collective decision‑making on budgets, reserve funds, major works and long‑term planning can be challenging. Changing tenure does not resolve these inherent operational issues. In short, the Bill may increase leasehold owner control but it does not resolve the practical burdens that accompany it and risks placing many leaseholders in roles they neither want nor are equipped to fulfil.  Guidance and regulation will therefore be essential in order to allow commonhold to be successful.

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The Bill, if enacted, will end the ability to create new leasehold flats, making commonhold the standard approach for new developments. Commonhold has existed since 2002, though uptake has been limited. Market hesitation has historically related to concerns about risk, governance, and long‑term financial resilience. While the Bill aims to address these concerns, further assessment by market participants will be required.

Removing the Industry’s ability to choose between commonhold and leasehold, particularly before the commonhold system has been properly ‘stress tested’ by the market, could result in a number of unintended consequences including:

• ‍Lender hesitation: Only around one‑third of UK mortgage lenders currently lend on commonhold. Without a dramatic shift in lender confidence, buyers could face reduced mortgage availability or higher borrowing costs. This could depress values and slow sales.‍
• Developer uncertainty: Developers face uncertainty about the Bill’s passage, timing, and transitional arrangements. Many may pause or avoid building flats until the position is clearer. At a time of acute housing shortage, a slowdown in delivery could be damaging.

The Bill’s ambition is clear, but the market will ultimately determine whether commonhold becomes viable. It is unclear at this stage how the Government plans to address these concerns.

Significant statutory protections already exist to regulate service charges. Despite this, service charges remain a frequent source of dissatisfaction. The Bill suggests that commonhold may address some concerns about cost and transparency. However, many of the factors contributing to rising service charges over the past decade - such as inflation, regulatory changes, higher insurance costs and increased maintenance demands apply regardless of tenure structure. They are a feature of owning a flat in a building, irrespective of the legal form that ownership takes.

This combination has driven substantial, unavoidable increases in service charges. The result is greater financial pressure on leaseholders during an already challenging cost of living crisis. Moving to commonhold does not eliminate these costs. In fact, leaseholder‑controlled blocks may see higher costs because:

• professional landlords can leverage economies of scale – often able to socialise core running costs across their portfolio
• institutional owners are often able to negotiate better contracts with more competitive rates
• commonhold associations lack the financial resilience of large landlords
• volunteer directors may struggle with procurement and oversight

These systemic issues have not been addressed within the Bill and, as above, guidance and regulation will be essential for its success.

Abolishing forfeiture, a long‑criticised and perceived draconian remedy, will be welcomed by many. The Bill replaces it with a more proportionate enforcement mechanism.

However, there is concern that the new process may be slower and more cumbersome, creating longer recovery periods for arrears. This could generate service charge deficits and delay critical works. Professional landlords can usually absorb these delays; commonhold associations may not. Again, it is unclear how the Government intends to address this.

The fundamental principle for forfeiture was to ensure payment of service charge and ground rent.  Service charge will still need to be paid, but how quickly and effectively that recovery will be under the new regime remains to be seen. The concern is heightened where management will fall on the shoulders of apartment owners; who in effect will need to cashflow the debts of their neighbours in order to ensure proper operation of the building even where neighbouring tenants do not pay.

The Bill proposes capping ground rents on existing leases at £250, falling to a peppercorn after 40 years, with no compensation.

This could be unintentionally prejudicial in the context of enfranchised buildings where leaseholders have collectively bought out the freehold it is common for ground rent income to be used to repay participants’ investment. Capping or abolishing ground rent may undermine financial assumptions and result in participating leaseholders facing losses or higher shared costs.  

This could also have a significant wider impact on the property market in England and Wales. Altering contractual arrangements retrospectively may prompt wider questions about certainty of long‑term property rights, which could erode investor confidence. Many investors and pension funds have already indicated that the retrospective removal of property rights without compensation will have a negative effect on the attractiveness of the UK investment market.  The rule of law and protection of property rights has been at the heart of the UK investment market since it began.  Such a fundamental change could have consequences which extend well beyond the investment in residential ground rents.

The overall impact will depend on how these measures are implemented and how affected parties respond. There is an ongoing judicial review of the Freehold and Leasehold Reform Act 2024 and we may see similar legal challenges in relation to this legislation.