The UK government has unveiled significant reforms aimed at overhauling the leasehold system in England and Wales, as detailed in the draft Leasehold and Commonhold Reform Bill. Key changes include capping ground rent, banning the sale of new leasehold flats, and enhancing the control homeowners have over property management.
Understanding Leasehold and Ground Rent
In England and Wales, approximately five million properties operate under the leasehold system, with about 70% being flats. Under this arrangement, freeholders own the land and building outright, while leaseholders purchase the right to inhabit the property for a specified duration. Leasehold flats are prevalent in urban areas, ranging from converted Victorian houses to modern skyscrapers.
Ground rent represents the annual fee leaseholders pay for the land beneath their properties. Currently, this fee can increase significantly, sometimes doubling or rising with inflation, complicating sales and mortgage applications. Although ground rents for most new residential leaseholds were abolished in 2022, approximately 3.8 million existing properties still incur these charges, amounting to over £600 million annually by 2025. The average ground rent is projected at £304 for the 2023/2024 period. The new legislation will cap ground rent at £250 per year, transitioning to a nominal “peppercorn” rate after 40 years, with the changes expected to take effect by late 2028.
Transitioning to Commonhold
Advocates for reform have long highlighted the inequities within the current system, where leaseholders often have limited influence over their financial obligations. The Labour Party’s 2024 election manifesto commits to abolishing the leasehold system, barring specific exceptions. The proposed bill aims to eliminate leasehold for new flats, promoting a commonhold model where residents collectively own both the land and the building.
Sebastian O’Kelly, a prominent campaigner from the Leasehold Knowledge Partnership, hailed the bill as a transformative piece of legislation. However, the specifics regarding how existing leasehold properties will convert to commonhold remain unclear, with a consultation on the matter closing on 24 April.
Service Charges and Accountability
Leaseholders also face annual service charges for maintenance and repairs, which have surged in recent years. The previous Conservative government had already initiated moves to enhance transparency in service charges through the Leasehold and Freehold Reform Act 2024. The current administration’s bill will further compel landlords and managing agents to increase accountability.
Additionally, the government plans to abolish the “forfeiture” process, which allows freeholders to take legal action against leaseholders with service charge debts exceeding £350. This will be replaced by a more structured court-led process with stringent safeguards for extreme cases. Further measures to address charges for properties on private estates are also anticipated, although specifics are currently lacking.
Reaction from Freeholders
The government’s proposed reforms have drawn ire from freeholders. The Residential Freehold Association (RFA) unsuccessfully contested the previous government’s leasehold changes in court, arguing that the ground rent cap constitutes an unjust infringement on property rights. They warn that these reforms could deter professional freeholders from remaining in the sector, potentially jeopardising building safety initiatives and disrupting the daily lives of residents. The RFA has urged the government to prioritise other housing reforms, including regulating managing agents and improving transparency and professional standards.
Why it Matters
These proposed reforms mark a significant shift in the property landscape, potentially empowering leaseholders and reshaping the relationship between freeholders and residents. As the government moves to dismantle a system viewed by many as archaic, the implications for millions of homeowners could be profound, offering them newfound autonomy and potentially alleviating longstanding financial burdens. The success of these reforms will ultimately depend on their implementation and the government’s ability to navigate the complexities of transitioning from leasehold to commonhold.
