The government unveiled the draft Commonhold and Leasehold Reform Bill at the end of January. This follows the adoption of the Renters' Rights Act, which ends “no-fault” evictions, and the ban on upwards-only rent reviews in commercial leases. This proposed legislation represents a significant overhaul of residential property ownership structures, with the potential to impact over five million existing leaseholders.
The centrepiece of these reforms is a cap on ground rents at £250 annually from late 2028, dropping to a nominal peppercorn rate after 40 years. For many leaseholders currently facing escalating ground rents – particularly those trapped by doubling clauses – this provides substantial savings throughout their lease term as well as certainty over costs. The changes will be particularly welcomed by homeowners whose properties became difficult to mortgage or sell due to onerous ground rent terms.
The legislation also looks to abolish the controversial and widely criticised forfeiture system. Under current rules, leaseholders can lose their homes and equity over debts as low as £350. The new enforcement regime introduces a structured court process. Where properties must be sold, leaseholders will receive any balance after landlords' claims and mortgage debts are settled.
However, this retrospective capping of existing contractual arrangements is a significant departure from traditional legal principles and is likely to face legal challenges from investors who have acquired ground rent income streams in the past.
The End of New Leases
Building on the 2022 ban on new leasehold houses and ground rent ban on new flat leases, the Bill prohibits new leasehold flats entirely. Instead, newly built residential developments will use commonhold structures, where homeowners collectively own both their individual properties and a proportional share in the building itself. This offers greater control to those ultimately bearing the costs.
However, commonhold isn't without challenges, and despite being introduced in 2002 has seen low levels of take-up. Owners will still need to grapple with collective decision-making and shared responsibilities – issues familiar to anyone involved in right-to-manage companies or share of freehold arrangements. Owners of commonhold properties will also be legally responsible for building safety requirements, with failure to adhere to rules opening owners up to legal action, fines or even imprisonment. If commonhold owners don’t want to collectively manage their buildings, they may choose to engage a managing agent. However, management companies, used to dealing with single freeholders, may also find it more challenging and more costly to engage with multiple commonhold owners or committees, most of whom are unlikely to have previous property management experience. This lack of track record may also prove challenging for lenders, with newly established commonhold structures unable to demonstrate the managerial and financial track record larger management companies or freehold owners can offer. All of which means the success of commonhold will depend heavily on whether the updated framework addresses these practical complexities effectively.
For developers this also represents a fundamental shift away from the traditional model of retaining or selling on freehold ownership. However, the ban includes exemptions for ‘permitted leases’ which looks to include build-to-rent schemes, purpose-built student accommodation and social housing.
Conversion of Existing Leaseholds
Existing leaseholders aren't left behind. The reforms attempt to simplify conversion to commonhold, replacing the current unanimous consent requirement with a 50% threshold. Buildings will be able to maintain mixed ownership during transition periods, with mechanisms ensuring effective management whilst preserving rights for homeowners.
Implications
These changes will impact both leaseholders and those who invest, lend and develop in the sector. Freehold investors, including several pension funds, face reduced income streams, while developers lose a traditional revenue source from freehold sales, potentially affecting development viability.
For homebuyers, commonhold developments may become increasingly attractive due to enhanced transparency and owner control. But the ability to convert should prevent market segmentation between leasehold and commonhold properties.
For lenders, the transition period may also cause legal and valuation headaches. The removal of “marriage value” in lease extensions will significantly reduce the cost of extending a lease but also distorts long established and legally ratified approaches to valuation used to assess the differential in the value of short lease properties. This could lead to uncertainty around true value and cause issues for those looking to lend or secure finance on short lease properties.
Timeline
Currently in draft form, the legislation faces parliamentary scrutiny and likely legal challenges. The ground rent cap won't take effect until late 2028, providing time for market adjustment and legal resolution.
The transition presents challenges, particularly for existing investors, but the legislation promises greater security and control for millions of homeowners. Ultimately success will be measured by the extent to which these complex reforms deliver the improved homeownership experience the government promises, both for current leaseholders and future residents.
JLL Research
JLL’s Residential and Living team consists of over 300 professionals who provide a comprehensive end-to-end service across all residential property types, including social housing, private residential, build to rent, co-living, later living, healthcare and student housing.
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