United Kingdom Publishes Commonhold and Leasehold Reform Bill

Background

Commonhold is a form of land ownership where the unit owner owns outright the freehold title to his or her unit, with joint ownership and responsibility for shared areas through a collectively controlled company called a commonhold association.

Commonhold is not a new concept in England and Wales; it was first introduced under the Commonhold and Leasehold Reform Act 2002 ("CLRA 2002"), but there has been very little take up of it so far.

One reason for this is that under the CLRA 2002, conversion of existing leaseholds into commonhold requires unanimous consent from leaseholders, their lenders and freeholders. In practice, this is often a near-impossible task, given the differing objectives of those parties. The current framework also struggles to accommodate mixed-use developments and larger estates.

Phasing Out Long Leaseholds

The Bill aims to make commonhold the default ownership option for flats in England and Wales. Since the Bill targets the exploitation of homeowners, purpose-built rental blocks, including student accommodation and Build to Rent, are proposed to be excluded from the new rules.

Under the proposals, there will be a ban on creating or selling new residential leases exceeding 21 years for flats. There will be some limited exceptions, including shared ownership and home finance plans.

The ban catches flats that are developed through various routes, e.g. new-build blocks of flats, commercial buildings converted into flats, houses redeveloped as flats, and vacant residential buildings refurbished for sale as flats.

The ban does not, however, affect the validity of a transaction that contravenes the ban. Instead, the lessee of a banned lease will be given the right of redress, to convert the improperly granted long lease into a commonhold unit at no cost to them. The lessor of a banned lease may face financial penalties for contravening the ban.

In the context of existing long leaseholds, the Bill seeks to encourage existing leaseholders to convert to commonhold by replacing the existing threshold of unanimity under the CLRA 2002 with 50% of qualifying leaseholders.

Internal Governance of Commonhold

As a right of ownership, every unit-holder is entitled to membership in the commonhold association, which carries a legal right to vote in the decisions of the commonhold association.

For homeowners, two key documents define their rights: the Articles of Association, which guide voting procedures; and the Commonhold Community statement ("CCS"), which defines the legal rights and responsibilities of the commonhold association and those who live in the commonhold. The "Core CCS" will be standardised through national regulations. The Bill introduces the further possibility of local rules, specific to individual commonholds, adopted by 75% or more of members who participate in a vote.

Each commonhold must have at least two directors; these may be unit-holders or professionals, with provisions to appoint professional directors where there are no volunteers.

Mandatory public liability insurance will be required, to act as a safety net against large losses. Annual budgets must be agreed, with the previous year's binding in cases of disagreement.

The CCS must include provisions for a "reserve fund", requiring all unit owners to make relatively small contributions to prevent the occurrence of larger, sudden costs.

The Bill introduces the concept of "sections", allowing larger estates and mixed-use developments to be divided to compartmentalise decision-making. This means that unit owners will vote only on matters affecting their particular unit. This is reinforced by separate heads of cost, ensuring that individuals who have specific benefits are responsible for funding their maintenance.

More Protections for Residential Leaseholders

Long residential leases will still be with us for some time, so the Bill proposes some significant changes that will further protect leaseholders.

Capping Ground Rents. The Leasehold Reform (Ground Rent) Act 2022 had already abolished ground rents for most new residential leases granted on or after 30 June 2022. For leases granted prior to that, ground rents will be capped at £250 per year for a 40-year transitional period, before reducing to a peppercorn.

Abolition of Forfeiture. Forfeiture will be abolished for long residential leases, meaning that landlords will no longer be able to unilaterally terminate a lease for breach of covenant. Instead, landlords must apply to court for a "lease enforcement claim", where the court cannot terminate the lease, but may instead order remediation from the tenant or, in serious cases, order the sale of the property. (Forfeiture will not apply to commonholds.)

Estate Rentcharges—Curbing Disproportionate Remedies

For freehold homes on privately managed estates, the Bill would disapply the most draconian statutory remedies for estate rentcharge arrears, which currently allow the rentcharge owner possession or creation of a lease over the property for relatively small sums. Going forward, enforcement would require prior notice and proceed through more proportionate debt recovery.

Comment

The Bill is at an early stage, and key aspects such as exemptions to the long leasehold ban and the transitional period that will apply before the ban takes effect are yet to be settled. However, the government has already demonstrated through the Renters' Rights Act 2025 that it is willing to pass radical legislation in favour of residential occupiers. Developers and investors should therefore consider at an early stage how they will embed commonhold concepts from site assembly through to exit planning. Lenders will need to consider how loan documentation should address the existence and powers of the commonhold association and how their security may operate in that context.