What future for flat owners under the Commonhold and Leasehold Reforms Bill?

What is 'ground rent'

Ground rent is the fee that is paid by the leaseholder to the freeholder in order to have the right to occupy the land that the property is built on. This especially affects owners of flats in England and Wales, because flats are usually owned on a leasehold basis.

Lower costs

These reforms mean that ground rent bills will be significantly lower for leaseholders in the future. Those who are paying more than £250.00 ground rent per year will experience immediate cost relief and savings once the law comes into effect and will eventually stop paying ground rent altogether. There are proposals for some exemptions, but this is still under consultation.  Regardless, millions of leaseholders across England and Wales will save thousands of pounds over the lifetime of their lease. This aims to relieve people of the financial pressures associated with increasing costs of living by having access to a greater portion of their annual income.

Another benefit of this implementation is that properties will be easier to sell and mortgage which leads to improved affordability.  High or increasing ground rent has previously caused lenders to be cautious about financing leasehold properties due to high annual charges, and the new laws would eliminate this concern. By capping ground rent at £250.00 (and at zero after 40 years), more leasehold properties will meet the criteria of lenders, therefore making it easier to get a mortgage. When considering this reform against the purchase price and costs of financing, leasehold properties will become more affordable.

A push toward ‘commonhold’

The changes set by the government will allow flat owners to gain more control over the management of the building, as it will allow owners to convert from leasehold to commonhold, reducing the current “100% of lenders and owners” (unanimous consent) rule down to 50% of qualifying leaseholders, bringing it in line with collective enfranchisement. The key differences between leasehold and commonhold ownership are that a leasehold has a landlord-tenant relationship with time limited interest, whereas with commonhold, there is no landlord, and freehold ownership exists. This means that flat owners jointly own and manage the shared parts of the building (which are owned in commonhold) and allows owners to own their property outright. It is important to highlight that leasehold properties may require ground rent to be paid, and commonhold has no ground rent. This is how the reform facilitates a shift in the type of ownership from leasehold to commonhold.

Broader changes

These benefits are associated with wider reforms which aim to rebalance the power between leaseholder and freeholder by strengthening leaseholders’ rights and promoting fairness and transparency. In wider measures, the Bill seeks to abolish forfeiture entirely for long residential leases (replacing it with a statutory lease enforcement scheme) and, ultimately, ban the sale of new leasehold flats entirely, with commonhold intended to be the default and mandatory tenure for new developments.  This seeks to eliminate the threat of forfeiture for small unpaid debts, and rather enforces debts proportionately without fear of losing the entire asset over minor unpaid sums. The changes are very much aimed at significantly reducing the vulnerability of leaseholders.

Implementation and conclusion

This law is expected to come into force in 2028, subject to parliamentary processes and approval. These reforms will only apply in England and Wales, as Scotland and Northern Ireland operate on their own systems.

This reform will ultimately have a positive effect on flat owners as they predict future savings and better affordability, as well as better prospects to sell or mortgage a flat. The transition from leasehold to commonhold which will be facilitated by the reform, strengthens the rights of owners and their control over management of the building.