In brief
The draft Commonhold and Leasehold Reform Bill (“draft Bill”) sets out proposals for an ambitious overhaul of residential property ownership in England and Wales. Key proposals include a cap on ground rents for existing leases, a ban on the creation of new long leases, the introduction of a new statutory mechanism to replace forfeiture and significant structural reform of the existing, but barely used, commonhold regime, with the aim to redress a longstanding perceived imbalance of power between residential landlords and tenants.
In more detail
Commonhold as the default tenure
The draft Bill’s overarching intention is that all new flats will be sold as commonhold, replacing leasehold as the default tenure of property ownership in England and Wales. Unlike leasehold, commonhold ownership grants a perpetual proprietary interest, allowing freehold-equivalent ownership of individual flats within a building. This regime shift would be allied with a formal shared responsibility between flat owners for the collective ownership and management of common areas in their building through a “commonhold association”, a company in which all unit owners participate.
The proposal for perpetual, rather than time-limited, ownership of flats is not a new one. Commonhold has existed in England and Wales since 2002, though take up has been minimal to date. The draft Bill seeks to address the commercial, structural and governance barriers that have historically limited its adoption, particularly in larger and more complex developments.
Under the draft Bill, the marketing or sale of new long residential leases of flats with terms exceeding 21 years would be prohibited, subject to limited exemptions and permitted leases (e.g., shared ownership, home finance plans). The government is currently consulting on scope, exemptions and transitional arrangements under the draft Bill. A penalty regime (with penalties proportionate to the severity of the breach) is proposed for breach.
The timeline for the proposed changes to take effect is uncertain but will almost inevitably be future-dated rather than retrospective. Existing leasehold flats will remain unaffected by the draft Bill’s proposals, even where the lease is subsequently varied or extended.
Governance of Commonhold structures
Conscious of previous difficulties with successful adoption and implementation of commonhold, the draft Bill includes provisions to improve the operation and transparency of commonhold structures. Key reforms include the establishment of:
- A Commonhold Community Statement, effectively a commonhold “rulebook”, with provisions prescribed by legislation taking automatic effect, supplemented by local provisions specific to the commonhold building.
- A mandatory reserve fund for each commonhold to ensure ongoing cover for major works or repairs.
- Strengthened governance, by giving the First-tier Tribunal new powers to appoint directors to take on managerial roles within the commonhold in cases of limited take-up amongst owners, or to remove those who fail to perform director obligations. Creation of a clear dispute mechanism is also proposed, where conflict or disengagement arises within the commonhold association.
Practical governance issues associated with the adoption and success of commonhold structures are strategically targeted by the draft Bill to encourage the adoption of commonhold at scale. For example:
- Existing leasehold buildings currently require unanimous consent for conversion to commonhold. Under the draft Bill the threshold would be set at 50% of qualifying leaseholders, with mechanisms to phase out any residual leaseholds (e.g., mandatory leasebacks) to enable conversion.
- The draft Bill suggests a new “sectional” mechanism to allow different parts of the commonhold (for example, a commercial section of a mixed-use development) to benefit from varying voting rights or service cost obligations appropriate to that section.
- The Bill proposes an enhanced debt recovery mechanism that would allow a commonhold association to apply for an order for sale against a unitholder who fails to meet contribution obligations.
New protections for existing leaseholders and freeholders
A key change is the proposed abolition of the current forfeiture regime for long residential leases. If enacted, this would remove a landlord’s ability to terminate a lease for breach of covenant and substitute a statutory lease enforcement claim process to address breaches without immediate termination rights. This approach aims to ensure issues are resolved proportionately through a range of enforcement measures overseen by the court, including remedial and cost orders, and orders for sale.
The Law of Property Act 1925 would also be amended by repealing existing, draconian statutory enforcement rights for the non-payment of estate rentcharges (i.e., maintenance charges levied by landlords and/or management companies). Rentcharge owners would no longer be able to take possession or grant overriding leases in case of non-payment, protecting landowners from losing their property or diminishing its value.
Ground rent
Ground rents, often with mechanisms permitting periodic increase, are an annual charge levied on many residential leaseholders. According to government sources, currently around 3.8 million leaseholders in the UK are subject to ground rent charges. Under the draft Bill, ground rent under existing leases would be capped at GBP 250 per year for a transitional period of 40 years, before being reduced to a peppercorn. The target for full implementation of the cap (following supplemental regulation) is widely trailed as late-2028 for existing leases. New leases are already given protection under the Leasehold Reform (Ground Rent) Act 2022, which caps ground rents for most leases granted after June 2022 at a peppercorn.
Consultation
The “Moving to Commonhold” consultation was launched in parallel with the Bill and seeks to gauge stakeholders' responses to the proposals (including as to scope, exemptions, and timing) and also to the transitional provisions needed to phase in commonhold in a practical and meaningful way.
The implementation of a new, strengthened commonhold regime would in all likelihood result in buildings with parallel ownership systems at play. Existing buildings could find themselves with both older leases, and new commonhold units, bringing potential complications as to the interim management of the structure and common parts. It remains to be seen in practice whether the alignment of retained leasehold units and the commonhold management system could occur without friction. No clear, unified framework exists for how enfranchisement rights, partially reformed under the Leasehold and Freehold Reform Act 2024, will interact with the transition to commonhold, which risks creating a fragmented two-tier system. Even in wholly commonhold developments, teething issues are likely as the precise mechanics of day-to-day operation are implemented.
Structural change in the residential sector is undoubtedly welcome and the proposals, if implemented, would eliminate some of the issues inherent in a leasehold framework, but this substantial reform is to subject to the support of stakeholders for whom there are diverse implications:
- Lenders and investors: The perceived value of commonhold property is tied to both market confidence in, uptake of and active management within the new system of flat ownership. Capped ground rents and an inability to rely on forfeiture for debt recovery may cause concerns surrounding cash flow, returns and security of investment.
- Owners: Commonhold Associations will depend upon the active involvement of flat owners in building management and maintenance, which may be unrealistic and lead to friction amongst co-owners. Mandatory reserve funds may result in higher upfront payment obligations which owners may be unable to support.
- Developers: The draft Bill reframes developers’ rights in the commonhold context. The requirement to sell new flats as commonhold may impact financial recovery upon exit and the scope for phased development. However, statutory development rights are likely to be introduced to allow developers to build out their sites notwithstanding the ongoing sale of individual commonhold units.
Stakeholders across the property sector are encouraged to respond to the consultation, which is open until 24 April 2026, and to assess how their current and future assets may be affected by the proposed reforms, particularly those involved in live leasehold projects.
Please do not hesitate to contact us for further guidance on the draft Bill's proposed changes and its implications for you.