The historic leasehold structure used in England and Wales has long fallen flat. We have previously reported on the government’s preliminary proposals for a switch to commonhold in early 2025, and now that the draft Commonhold and Leasehold Reform Bill is here, we ask what it means for key players in the residential development sector.
If you have previously developed a block of residential flats, the likelihood is that you sold the flats by way of long leases, before transferring the freehold (including the common parts) onto a professional third party or residents’ management company. This is a typical leasehold structure.
The draft Commonhold and Leasehold Reform Bill proposes to ban this leasehold structure for all new flats, subject to certain exemptions. Instead, the commonhold structure will require flats to be sold as freehold, with the common parts being owned and managed by a Commonhold Association, which will in turn be owned by the flat owners.
The commonhold structure seeks to offer owners greater control over how their block is managed and transparency over expenditure. Tenants whose blocks are currently managed by a residents’-owned management company may not see a stark difference between their experience under the leasehold and commonhold structures, given that they already enjoy a degree of collective control over their management company. However, the leasehold ban would enforce a more consistent approach to the ownership and management of such blocks and remove the role of third-party landlords.
Further details of the ban, and possible exemptions, are awaited. Developers will need to be alive to the extent of their changing role, in relation to incorporating, registering and overseeing commonhold associations before the final flat in a block is sold, and also to the initial impact these reforms may have on their sales and the timings of disposals.
There is also a risk that if the reforms are not owner/occupier-friendly, flat disposals will stall and developers will in turn choose to steer away from schemes involving flats (particularly in non-urban areas). As with all things then, the devil will be in the detail.
Ground rents require leasehold homeowners to pay a charge for the land on which their home is built, yet homeowners receive nothing in return. Given the unfair practice, the government have been pushing for reform of ground rents for some time and ground rents for new developments were abolished in England and Wales in 2022.
The draft bill now seeks to reduce and eventually abolish the vast majority of ground rents for existing leasehold homes. Ground rents are to be capped at £250 a year, changing to a peppercorn (nominal rent) after 40 years. Whilst not a change directly affecting new-build developers, many of whom moved away from ground rent disposals several years ago, the ripple-effect of this change may well be felt across the sector, given that various pension funds and private freeholders invested in ground rent portfolios which have historically been regarded as a safe revenue stream.
The draft bill also sees the abolition of out-dated forfeiture provisions. Currently, the law permits management companies to take enforcement action against homeowners who fail to pay service charge, including tenants of leasehold flats and owners of so-called ‘fleecehold’ properties. Such enforcement action is rarely taken, and increasingly we’ve seen developers foregoing these provisions from the outset - particularly because lenders are cautious of such forfeiture/re-entry provisions. Rather than signifying a material change to developers, this part of draft bill will likely align the legal position with where that market has moved already.
Developers looking to stay ahead of the commonhold curve should ensure that they are familiar with the changes currently proposed but also keep pace as further details are announced. The government has confirmed that the leasehold ban will not be fully implemented until commonhold processes are fully operational, but at the ‘drop dead’ date developers will need to be ready to build and dispose of commonhold flats. This leaves a question mark as to what developers do on partially progressed sites which, if large, could cross over the drop dead date, and may need to cover both old leasehold structures and new commonhold ones.
The challenge ahead is largely one of transition, from a legacy leasehold structure which has been the devil we know, to a reformed commonhold system which promises flat owners greater control and transparency. Those developers who engage with and embrace this transition will likely find themselves best placed to meet the challenges on their developments and wider market demands.
For more information, please contact Ian Ramsay Tompkins or Tillie Clark in the housebuilding and development team.
