Article author: Associate Arani Arunan
Commonhold was introduced to England and Wales in September 2004 by the Commonhold and Leasehold Reform Act 2002 (the "2002 Act"). This model of home ownership allows for single units in a commonhold development to be owned outright. Each unit owner also becomes a member of a commonhold association and jointly controls the communal areas with other unit-owners within the development.
However, the model has not been widely adopted and fewer than 20 commonhold developments have been created since the introduction of the 2002 Act. This is largely due to the perceived complexities of the legislation as drafted, and the continued revenue streams of ground rent and service charge that developers can enjoy under the existing leasehold system. Without any financial incentives and given the risk to sales of new builds in adopting an unknown regime early, there has simply been no commercial appetite to take the plunge.
Following an extensive review of the model and a consultation, the Law Commission published a report entitled "Reinvigorating commonhold: the alternative to leasehold ownership" in July 2020, with the intention of identifying and addressing the perceived blockers and seeking to jump start the commonhold model. In response to that report, in March this year, the Government set out its proposals for reinvigoration in a White Paper and indicated that it intends to publish a draft Leasehold and Commonhold Reform Bill in the second half of 2025.
By seeking to ensure that commonhold becomes the default tenure for flat owners and banning new leasehold flats, alongside reforms to short residential tenancies (see our article: Updated: Renters’ rights revamp – key points for landed estates for more information), the Government plans to fundamentally reform the real estate sector. This article examines the benefits of the commonhold model, the Government's proposed plans for this major legislative change and why charities should be aware of them.
Leasehold v commonhold
Under the law of England and Wales as it currently stands, there are two main ways in which a property can be owned: either freehold or leasehold. An individual with leasehold ownership of a property buys a right to occupy the relevant part for a set period (such as 199 years). The leaseholder does not own the property outright and generally ownership of the property reverts to the landowner when the lease ends.
The terms of the leaseholder's occupation are set out in a lease, with the leaseholder's obligations to the landlord likely including the payment of ground rent, service charges and additional fees for the management and maintenance of the property. There are various rights developed over time to extend the lease before it comes to an end as well as to acquire (or, in the case of the flats collectively acquire together with other flat owners) the freehold or indeed to manage it.
There are, however, significant issues for leaseholders relating to the obligation to pay ground rent, service charges and for the management of the building in general. Why should someone who has paid a premium for a property then have to go on paying rent? Why should they be beholden to what could be excessively high service charges, some of which may render the property unsaleable? Indeed, fundamentally, why should someone who has paid a significant premium for an asset find that their ownership could then come to an end and revert to the freehold owner of the building?
Review the key disadvantages associated with the leasehold ownership and the actions that have been taken over the last few years or will be taken by the Government to address them.
Disadvantage | Government action |
Critics point out that leasehold properties diminish in value over time as leases get shorter. | The Leasehold and Freehold Reform Act 2024 received royal assent on 24 May 2024 and amends existing legislation to strengthen leaseholder’s rights by increasing the standard lease extension term to 990 years and making it cheaper and simpler for leaseholders of residential properties to extend their leases, including by removing the “marriage value”. The legislation will give more leaseholders the right to extend their leases by removing the two-year ownership criteria. This means that, on probate sales, there will no longer be a need to extend the lease within a two-year window. The majority of this legislation will be in force once further consultations have taken place and secondary legislation has been passed. The regulations relating to the two-year rule came into force on 31 January 2025. In the summer of 2025, the Government also expects to consult on the rates to be used for calculating the cost of a statutory lease extension. |
Leaseholders can be concerned over their control of the management of their properties and the service charge bills that require payment. | There are strong statutory protections which protect leaseholders of residential properties from paying unreasonable service charges. The Leasehold and Freehold Reform Act 2024 aims to improve the transparency of service charges, administration charges and buildings insurance commissions. This legislation also aims to gives leaseholders a new right to request information about service charges and the management of their building. |
Although ground rent had historically been limited to a peppercorn rent, developers had started to raise this rent annually for new properties leading to high rent bills for leaseholders. | With the introduction of Leasehold Reform (Ground Rent) Act 2022, the ground rent requirement for newer properties was removed in most new leases from 30 June 2022. However, ground rents higher than a peppercorn rent are still payable by leaseholders for leases obtained prior to 30 June 2022. The Government seeks to regulate the ground rent for existing leaseholders with the Leasehold and Commonhold Reform Bill. |
The significant reforms to the leasehold system that have been enacted or are planned raises two key questions. Balancing the disadvantages above with the previous unpopularity of commonhold to date:
- will commonhold really be better than leasehold; and
- why is the Government aiming to ensure commonhold becomes the default tenure for flats?
The key advantage of the commonhold model from the point of view of the current Labour Government is that individuals are directly involved in the upkeep of their units and their building, theoretically without input from third-party landlords. In the White Paper, the Government highlighted that the landlord/tenant relationship propagates "a sense of ‘them and us’ with respect to management of the block, with leaseholders feeling that decisions about their property are done to them". Commonhold offers full freehold ownership of units to its owners with no expiring term.
In the commonhold model, each unit owner will automatically become a member of the commonhold association and can exercise their voting rights. To the Government, commonholds offer unit-owners substantial control over the running and management of their buildings. For example, unit-owners will have a say on how service charges are set and can contest them before the charges are incurred. There is no requirement to pay ground rent for commonhold properties. In leasehold properties, the landlord generally requests service charge contributions once the expenditure has been decided on or already spent.
Arguably, in accordance with the 2002 Act, leaseholders should be consulted if any work that will cost any one leaseholder more than £250 is to be carried out, if the landlord wishes to enter into a long-term agreement which will cost any one leaseholder more than £100 a year, or the work under a long-term agreement will cost any one leaseholder more than £250. Leaseholders also have the right to challenge the reasonableness and payability of their service charges. However, the point that the Government wishes to highlight is that commonholds allow unit-owners to take part in the budget-setting in the first place.
In the White Paper, the Government identified that leases may vary within a block or from one block of flats to another and it can be expensive and time consuming to make an application to a tribunal where changes are disputed. In a commonhold, one Commonhold Community Statement ("CCS") will apply for each block and define the right and responsibilities for each unit-owner and will also be the governing document for the commonhold association. Commonhold owners can decide certain "local rules" to suit their individual commonholds. The Government considers that that it will be much easier for local rules to be amended compared to leases, which will in turn offer greater flexibility to unit-owners.
On the flip side though, for large buildings it will be necessary to appoint a professional manager, which will have its own commercial aims, and there will be a commonhold association with a multitude of members to navigate, along with all the associated legal requirements. It remains to be seen, therefore, whether commonhold will actually provide cheaper or more straightforward management.
Although the commonhold model has been available since 2002, it has not been embraced as the preferrable alternative to leaseholds to date. The Government attributes this reluctance to many factors, including the inflexibility of the 2002 Act and the lack of incentive for developers and lenders to be involved in commonhold properties. It therefore proposes to address these issues by adopting many of the recommendations set out in the Law Commission's July 2002 report. The question is: will that be enough to reverse years of leasehold and an embedded leasehold regime?
Why isn't commonhold more common? Our article explores the government's proposed changes to overhaul England's residential long leasehold landscape.
Key aspects of the Government's proposed reform
The Government will increase the commonhold model’s flexibility by introducing “sections”. A building can be divided into “sections” to separate the management of different areas so that only the unit-owners of the “section” can vote on matters relating to it. For example, for a mixed-use building with offices and flats can be separated into different “sections” if the two types of property do not use the same facilities.
Commonholds will be able to separate heads of costs in line with the different uses of a building and according to those who use the services. A new Code of Practice will provide transparency on how costs are apportioned in commonholds. There will also be safeguard mechanisms to allow errors in the apportionment of costs to be corrected.
Commonhold will be open to shared ownership and purchases using home purchase plans. However, the provider of these homeownership products will own the freehold of the commonhold unit. The shared owners and those using a home purchase plan will be leaseholders but with certain commonhold rights, including taking part in management decisions.
Developers can determine the rights they require in the CCS and clarify the handover procedure of units.
The threshold for changing the local rules will rise to 75%, thereby balancing flexibility with the need for preventing rules from being changed too easily.
The local rules will be separated from the CCS to make it easier to identify which are the local rules and what are the standard rules that apply to all commonholds. The Government hopes that this will make it easier for commonhold units to be bought or sold.
A clearer process will be set out for the appointment of directors. Also, an annual election for directors will be introduced, together with the ability for commonholds to replace directors in the case of mismanagement.
Unit-owners will be able to vote on the standard of repair through the introduction of local rules.
Unit-owners will be able to vote on the budget annually, and a majority of owners will need to support the proposed budget for it to pass. If the new yearly budget is not accepted, the previous yearly budget will be carried over.
A reserve fund will become mandatory for all commonholds and should be held on statutory trust. Commonholds can set up reserve funds based on their specific needs.
The Government proposes to allow commonholds to take out loans using some or all of the building as collateral. Commonholds can also obtain a floating charge so that money can be borrowed against future commonhold contributors.
Mediation and other dispute resolution procedures will be promoted to resolve disagreements.
Lenders will be informed if a unit-owner’s debt reaches a level that requires their unit to be sold. There will also be a mechanism for interested parties, such as lenders and unit-owners, to apply to the tribunal to appoint directors if the commonhold owners have not done so themselves.
For unit-owners who are outvoted on decisions, there will be a new right to challenge certain important decisions made by the commonhold associations such as decisions relating to varying the terms of the CCS, creating sections, combining sections and approving budgets that exceed the threshold set in the CCS.
Key takeaways for charities
Together with the changes to the long leasehold regime, charities receiving gifts of long residential leaseholds and freeholds containing residential units should be aware of the impact that the overhaul may have on valuation and saleability. The changes to lease extensions have already created a flux and uncertainty in valuations, and the almost complete stalling of freehold sales. If and when commonhold starts to be adopted, there is likely to be more of this to come. Although, at present, there is no requirement for leasehold structures to be converted to a commonhold, as change progresses one tenure may become more or less desirable.
As for legacy property, the key concern for charities will be that of value. Careful advice should be taken if considering the acquisition of portfolios including residential property.
Charities involved in development themselves or through joint ventures will need to be prepared for discussions around choice of structure. The timing for the transition to commonhold in place of a leasehold on all new developments – and ultimately the ban on the sale of new leasehold flats – has not yet been decided but keeping up to speed with developments is key. Read our article for more key points for developers.
Other key takeaways
While there are benefits to the commonhold model, it is important to note that it may still face similar problems to leasehold properties, such as high service costs, delays caused by difficult or reluctant unit-owners or poor management agents. It is expected that the draft Leasehold and Commonhold Reform Bill published in the second half of 2025 will provide sufficient detail on how commonholds will operate in practice. This will enable industry and consumers groups to scrutinise and fully test the model before the new Act comes into force.
The Government will also be working on certain arears of reform including:
- The process for converting existing leasehold developments to commonholds, particularly if leaseholders do not consent to this change.
- The process for dealing with "micro-commonholds" or small properties where it would be unduly onerous to implement the commonhold regime.
- The implementation of the proposed ban on new leasehold flats.
The Government understands that the success of the reformed commonhold model is dependent on how this tenure is embraced by developers, consumers and lenders. Accordingly, it intends to liaise with and help the industry to prepare for the commonhold to become the standard tenure. It will also consult the property industry later this year on the process for introducing the proposed ban on new leasehold flats and other transitional provisions that will be required.
Given the significance of the changes proposed, the Government is encouraging the property industry to start preparing for the eventuality that commonholds become the standard tenure for all consumers. This will be difficult as the draft Leasehold and Commonhold Reform Bill and consultation will contain much of the detail needed for this process. As a starting point, we recommend stakeholders in the property industry to familiarise themselves with commonholds and to ensure their staff have sufficient awareness of the model. It is also essential that existing processes are considered and are ear-marked for review in time for the Government's consultations.
Although the White Paper mostly discusses commonhold with reference to residential flats and houses, it also highlights the potential applications of the commonhold model for commercial blocks, retail and industrial parks and shopping centres. Consequently, commercial property owners and other interested parties should also keep an eye on the developments.
For more information on the commonhold model and the proposed legislative changes, please contact Anna Phillips or any member of our team.
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