Death knell for leasehold

18 months after election, government finally publishes draft Commonhold and Leasehold Reform Bill …

… But it sets out road map for the end of the pernicious leasehold system in England and Wales

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By Liam Spender

Today the government published its long awaited Commonhold and Leasehold Reform Bill. This sets out a plan to radically overhaul English property law. The most eye-catching measures are an end to new leasehold flats and a ban on ground rents above £250 a year. Monetary ground rents will also end after 40 years, bringing existing leases into line with leases granted from June 2022.

Other measures in the bill include a revised new form of ownership for new blocks of flats, called commonhold. First introduced in 2002 the commonhold system has not taken root. In the future all new flats will have to be commonhold. This will mean owners of flats are also part owners of the common areas of the property, meaning they have democratic control over the costs of running their buildings, as is common elsewhere in the world. The draft law also provides for existing sites to convert to commonhold.

The new law will sit alongside the radical reforms enacted by the last government in the Leasehold and Freehold Reform Act 2024. Those reforms included the right to a 990 year lease extension reducing the ground rent to a peppercorn, the removal of the obligation to pay marriage value on extending leases with less than 80 years to run and a cap of 0.1% of the freehold value of the amount of ground rent that could be taken into account in calculating the price of a lease extension.

The 2024 Act is yet to be brought into force. Partly because it is bogged down in a judicial review. Also because the government says the legislation contains errors that must be corrected by a new Act of Parliament. The draft bill published today does not give any information as to whether those errors will be corrected by this bill or via separate legislation.

The cap of £250 on ground rents is significant. The price payable both to extend a lease and to collectively buy the freehold of a block of flats depends on the amount of ground rent and the term of the lease. Setting a 40 year sunset on ground rents should also influence the discount rates used to calculate the price. The maximum discount period will be reduced to 40 years, as opposed to 99 years or more under the current system which implies a higher discount rate and a lower price payable.

There are also measures to benefit fleecehold houses. Typically the transfers of these properties will oblige the owner to pay an estate rentcharge for the upkeep of common areas and unadopted roads and utilities. The draconian sanction for non-payment of these rentcharges is that the beneficiary can grant itself a lease of the property until the arrears are paid off. The draft bill will abolish that right. Other measures in the 2024 Act will also require these charges to be properly demanded before they can be enforced and be subject to requirements of reasonableness.

A key omission from the bill is that there is (as yet) no measure to allow fleecehold estates to exercise the right to manage common areas. That may be something that is addressed in the final form of the bill when it is presented to Parliament, or else by amendment as it goes through the legislative process.

The draft bill published today may change significantly before it is formally presented to Parliament for approval.

There is also a raft of further consultation promised, on everything ranging from the value of the £250 cap to the mechanism for converting to commonhold.

Large freeholders, in the form of the Residential Freeholders’ Association, have already all but threatened to bring a judicial review. In a milquetoast letter released to the media yesterday, they also said that any steps to limit their ground rent income would derail attempts to remediate and improve the energy efficiency of buildings. The government has seen through their protestations and finally grasped that the only people who get the bills for the costs associated with these buildings are leaseholders.

Ultimately, the so-called professional freeholders have been the authors of their own misfortune. For years they operated in the shadows in a high-handed way. Even when exposed to the light as a result of Grenfell in 2017 they did not mend their ways, seeking to make leaseholders responsible for cladding costs and continuing to cream off commissions on ever increasing insurance costs. At least one is battling in the Supreme Court to wriggle out of any obligation to pay for remediation. Many have dragged their feet over signing grant funding agreements to remediate buildings. Their pet managing agents are filling their boots with Building Safety Act costs without a murmur of opposition from the freeholders. These freeholders put themselves firmly in successive government’s sights. Today they reap the whirlwind.

Today is a good day for leaseholders. But they will rightly be concerned that previous consultations, for example on insurance costs and legal charges, have still not produced any legal measures to deal with these problems. The 2024 Act is still largely not in legal effect. Any judicial review may mean it takes years before these reforms are brought into practical effect. The real hard work lies ahead. Leaseholders will have to continue to exercise eternal vigilance if they wish to finally be free of the iniquitous leasehold system.

Does this mean the proposal to abolish marriage value and allow 990 year lease extensions are gone?

No. They were dealt with in the Leasehold and Freehold Reform Act 2024. The relevant parts of that Act have yet to be brought into legal effect. That is because a group of freeholders brought a judicial review to challenge the Act, which failed in October 2025. The freeholders are currently trying to appeal that decision.

There is no timetable for bringing the 2024 Act into legal effect.

When will the reforms come into legal effect?

There is no clear timeline. The draft bill will need to be turned into an Act of Parliament. The government has announced a further round of consultations and it will feed the results of those consultations into the final bill presented to Parliament.

Some of the government’s messaging indicates that the new law may not be enacted and in effect until the end of the current Parliament, so perhaps as late as 2028-2029.

The new law will also have to be commenced (“switched on”) before it comes into legal effect, adding time before any practical benefits are achieved.

How will the £250 cap and 40 year transition to a peppercorn work?

The cap and transition will be implemented in two ways.

First, the Leasehold Reform (Ground Rents) Act 2022 will be extended to existing leases. This will define any ground rent above £250 in a lease granted before 30 June 2022 (or 1 April 2023 for retirement properties) as a prohibited rent and will therefore no longer be payable. Any landlord who tries to collect more than £250 may be subject to a fine of up to £30,000 if it does so and if a local authority takes action.

Second and in addition, the proposed Commonhold and Leasehold Reform Act will give leaseholders the right to amend the rent clause in any intermediate leases. They will be able to make an amendment by serving a notice on the landlord reducing the ground rent to £250. Landlords will be able to contest this and disputes will end up in litigation. If the notice is accepted by the landlord or upheld following any litigation then the rent will be reduced to £250. This appears to be a measure to avoid a situation where there is a headlease requiring payment of a ground rent of more than £250 per flat.

Landlords will also be banned from charging administration fees to collect prohibited ground rents. For example, if the pre-adjustment ground rent is £350 then the landlord cannot charge a £100 administration fee to collect the new £250 maximum rent. A landlord also cannot charge an administration fee unless this is permitted in the terms of the lease.

There remains a potential loophole in the law: it is possible that a freeholder could create a headlease which carries a ground rent. Perhaps not described as such, for example it could be described as an estate service charge linked to RPI. The occupational leases of flats could then contain terms requiring the leaseholders to pay any costs arising under the head lease as a service charge. Unless the service charge could be shown to be unreasonably incurred this would give a potential way of continuing ground rents by the back door, at least for new buildings. It would not work for existing leases.

But why haven’t ground rents been abolished immediately?

The government has chosen a gradual approach. This is to avoid upsetting the property market. Allowing a transition over 40 years gives time for the market to adjust. This approach has been adopted in other countries, most notably Scotland.

The government is (rightly) worried about a legal challenge from the owners of these ground rents. Any challenge by the freeholders would be on the basis that the government is taking away their private property without compensation, which the freeholders will claim is a breach of their rights under Article 1 of Protocol 1 of the European Covention on Human Rights (“A1P1”).

The government can only take away private property without compensation if it can prove it has adopted a rational policy connected to a legitimate aim which is in the public interest and which could not be achieved by other means. The government must also prove the measure strikes a fair balance between public and private interests and in this case between the interests of freeholders and leaseholders.

One can see in the announcement today that the £250 cap followed by conversion to a peppercorn in 40 years is being cast as a modernisation of the property market that is long overdue, continuing reforms that have been ongoing since 1967. It is also being cast as bringing existing leases in line with post-2022 leases. That is the outline of the government’s defence to any A1P1 challenge.

Losing their £5m judicial review against the leasehold reforms threatens freeholders’ long era of primacy. So, what’s next?

A similar argument recently found favour with the Divisional Court, which threw out a challenge to the Leasehold and Freehold Reform Act 2024. In that case the freeholders argued that the end of marriage value payable on a lease extension was an interference with their A1P1 rights. The freeholders are currently trying to appeal that decision.

Inevitably the freeholders will bring a challenge. Many of the members of the Residential Freehold Association have borrowed hundreds of millions on the back of ground rent income. That will be money they may be unable to repay if the cap comes into force. They will say that £250 is an arbitrary number depriving them of their contractual rights under contracts that were entered into freely by the leaseholders. They will also say the move to a peppercorn after 40 years is an expropriation of their property without any compensation.

Assuming that their challenge to the Leasehold and Freehold Reform Act 2024 ultimately fails, their argument of “no compensation” will have to be weighed against their ability to receive compensation if leases are extended or if the freehold is collectively acquired.

Even under proposed reforms, if either of those events occurs then the freeholders will still be compensated, at least for 40 years, by reference to a formula that takes into account the £250 ground rent in calculating the price payable. If the 2024 Act comes into force before the new Commonhold and Leasehold Reform Act then they will also be compensated at current unaffected ground rent values provided these do not exceed 0.1% of the freehold vacant possession value.

Doubtless the freeholders will also say, as they did in their 2024 challenge, that it is unfair to reduce all ground rents to £250 because it disproportionately benefits wealthy leaseholders who live in very high value properties with ground rents of 10 or 20 times that amount.

Whether £250 cap survives any challenge depends on how a court views the matter.

It is obviously in leaseholders’ interests that they are relieved of the burden of paying money for nothing in the form of a ground rent. Particularly so considering the issues that these ground rents cause in buying, selling and mortgaging property.

Reducing or removing ground rent also makes it easier to extend a lease or to buy the freehold for a block of flats, because the price is set primarily by reference to the ground rent income and the length of the relevant lease(s). Capping the rent at £250 should therefore reduce the cost of extending a lease or collectively buying the freehold.

Against that, there is a large body of case law in the European Court of Human Rights that frowns on rent caps, particualrly when they are set at monetary figures. The A1P1 cases also generally look unfavourably on property being taken away with no compensation at all. This body of case law has generally only considered pure rental arrangements which are unlike English leasehold. In 1986 the European Court of Human Rights considered the 1967 Leasehold Reform Act and found it was A1P1 compliant, partly because it was part of a measure to modernise an outdated system of property ownership.

In two Norwegian cases, Lindheim and Karibu Foundation, the European Court of Human Rights considered Norwegian leases which were closer to but still quite far removed from English leasehold. In Karibu Foundation the European Court found that a ground rent cap of 0.6% of the property’s value was a fair cap compliant with the land owner’s A1P1 rights but that a cap of 0.1% in Lindheim was not A1P1 compliant.

But haven’t other countries abolished leasehold faster and without compensation?

“No” is the simple answer.

Scotland retained feudal land ownership until 2004. England abolished the feudal system of land ownership in 1660.

In 1974 Parliament passed the Land Tenure Reform (Scotland) Act. The 1974 Act abolished banned the creation of new feuduties, which were roughly equivalent to English ground rents. Hansard reports during the passage of the bill refer to around 675,000 feu duties existing at that time.

The 1974 Act required that feuduties were terminated on sale and that the landowner was entitled to compensation. The compensation was calculated by reference to the yield on 2.5% Consolidated Loan Stock, a type of government bond.

In 2000 the newly created Scottish Parliament acted to abolish feudal land tenure altogether. It passed the Abolition of Feudal Tenure Act. This followed a 1999 Scottish Law Commission Report. The Scottish Law Commission found that the 1974 Act had significantly reduced the number of feuduties in existence. Its report does not give the number of feuduties remaining, but it does mention that some feuduties had been so eroded by inflation that they were no longer economic to collect.

Under the 200 Act The owners of feuduties were entitled to compensation if they claimed it. They had 2 years to claim compensation. The compensation was also linked to the yield on 2.5% Consolidated Loan Stock. The 2000 Act came into force in 2004, 32 years after the reforms began.

Scotland therefore adopted an approach equivalent to that being proposed by the government and over a roughly equivalent period of time. This gradualist approach avoided any big bang reform and allowed private parties to reach agreement on compensation. THis appears to have avoided any A1P1 challenge.

Ireland also had a leasehold system similar to England. In 1967 the Irish parliament passed an act allowing leaseholders to buy their freeholds. The price payable was left to agreement between landlord and tenant. In 1978 the Irish parliament passed a new act that banned the creation of new ground rents. It also prescribed a formula for buying out the rent if the landlord and tenant could not reach an agreement. The Irish Land Registry estimates that around 80,000 ground rents have been bought out under these laws.

In 2011 the Irish Parliament also passed the Multi-Unit Developments Act. This Act required control of all common parts of blocks of flats to be held by an Owners Management Corporation. This is broadly equivalent to the commonhold system proposed for future flat ownership in England and Wales.

How will the abolition of forfeiture work?

Forfeiture is the legal right of the landlord to take back the lease without compensation if the leaseholder is in breach of its terms.

Very few claims of forfeiture actually result in a lease being forfeit. It is often avoided by paying up any outstanding sum. The issue with the process is that as soon as leaseholder falls behind with payments a landlord will put a “rent stop” on their account. This means charges continue to accrue without being demanded of the leaseholder. The landlord is also entitled to recover all of its costs of preparing to forfeit even if this is eventually avoided.

Unscrupulous solicitors also game the current system by adding “breach of lease fees” of £350 to turn every case into a potential forfeiture case.

This leads to a situation where a leaseholder is overdue with a few hundred pounds facing legal costs of many times that amount. Where there is a mortgage a mortgage lender will often pay off the landlord and add the debt to the mortgage, increasing both principal and interest payments.

When brought into legal effect, landlords will no longer be able to exercise the right to forfeit a lease. Instead, they will be able to claim a remedy to enforce the lease which does not necessarily involve bringing the lease to an end. The remedy will be at the discretion of a judge. Where a sale is ordered then a landlord will have to account for any equity in the property after the outstanding amount is paid off.

The new regime will also limit the legal costs that landlords are able to recover in taking steps to enforce any against any breach of lease.