Understanding the leasehold ban and its implications for landlords

The UK Government’s ambitious plans to reform property ownership laws promise to reshape the landscape for landlords, occupiers, estate managers, and investors. At the heart of these proposals is a fundamental shift: the prohibition of new leasehold flats in England and Wales, with the commonhold system poised to become the standard form of ownership.

This significant policy change aims to address longstanding criticisms of the leasehold model, but for those managing and investing in property, it raises pressing questions about future income streams, operational responsibilities, and legal compliance. In this evolving environment, a clear understanding of the reforms is not just advisable, it is essential.

The leasehold model

For centuries, the leasehold system has underpinned the ownership structure of flats (and some houses) across England and Wales. This model separates the freehold interest, typically held by a landlord or estate owner, from the leasehold interest, which grants individual leaseholders the right to occupy a flat for a defined period – often 90, 125, or even 999 years. In return, leaseholders pay ground rent and service charges, with additional fees often levied for permissions, such as making alterations or subletting the property.

For landlords and estate managers, the leasehold framework has provided a reliable and structured means of generating long-term predictable revenue. Ground rents offer a consistent income stream, while service charges facilitate the management of shared spaces and amenities. By appointing managing agents, landlords can maintain operational oversight while delegating the day-to-day responsibilities of maintenance, compliance, and dispute resolution. This system, however, has come under increasing scrutiny in recent years.

This is not the first government to take steps to limit perceived unfairness in leasehold flat sales. The previous Conservative government introduced legislation to restrict ground rents in 2022, effectively abolishing them for all new-build leasehold flats.

The proposed reforms

Despite its entrenched position, the leasehold system has faced growing criticism for perceived unfairness and lack of transparency. Leaseholders have long voiced concerns over escalating ground rents, opaque service charges, and the difficulties associated with extending leases or purchasing the freehold. Investigations into the sector revealed systemic abuses, including the imposition of onerous ground rent clauses, high service charge bills and excessive administrative fees.

The government’s proposed solution is to replace leasehold with commonhold – a model introduced in 2004 that offers flat owners outright ownership of their unit while sharing responsibility for communal areas through a commonhold association. This approach eliminates many of the grievances associated with leasehold. However, to date, most developers and landlords prefer to use the leasehold system because it is commercially more attractive than commonhold. The implications of this transition are profound.

What the reform would mean for landlords

Under the government’s proposals, the sale of new leasehold flats will be banned, with all future developments required to adopt the commonhold structure. To facilitate this change, the legal framework governing commonhold will be updated, particularly to accommodate complex and mixed-use developments. The reforms also aim to simplify the process of converting existing leasehold properties to commonhold, encouraging voluntary transitions.

For landlords and estate managers, these changes represent both a challenge and an opportunity. The abolition of new ground rents threatens a key revenue stream, while the transfer of management responsibilities to commonhold associations will reduce direct control over property portfolios. Yet, within this new framework lies the potential to offer new advisory services and operational support, creating alternative income avenues.

Income streams and operational shifts

The elimination of ground rents necessitates a fundamental reassessment of business models reliant on this revenue. Estate managers accustomed to collecting ground rents and service charges will need to explore alternative income-generating opportunities. These might include providing consultancy services to commonhold associations or offering bespoke management packages tailored to the specific needs of each development.

While the day-to-day management of communal areas will shift to commonhold associations, estate managers can still play a crucial role in providing expert guidance. From assisting with building maintenance and regulatory compliance to facilitating major works and resolving disputes, there is scope for experienced professionals to maintain a foothold in property management, albeit through new channels.

Legal complexities in transitioning to commonhold

The transition from leasehold to commonhold is unlikely to be without legal complications. Disputes over the valuation of existing leases, the resolution of outstanding service charge arrears, and the enforcement of legacy agreements all present potential challenges. Landlords must be prepared to navigate these complexities, ensuring their interests are protected while adhering to new regulatory requirements.

One significant change is likely to be the transfer of control from the landlord to the owners of the flats.  The commonhold association, made up of flat owners, will be able to take management decisions themselves, though they will need professional help to run their building efficiently.

Mixed-use developments present a further layer of complexity. These schemes, which combine residential, retail, and commercial spaces, require a nuanced approach to commonhold structuring. The government’s proposals acknowledge this, suggesting a system where separate commonhold sections manage different uses. For estate managers, this will necessitate a deep understanding of how to balance the rights and responsibilities of diverse stakeholders within a unified legal framework.

Financing and the lender perspective

Another critical consideration is how the reforms will affect financing arrangements. Historically, developers often sold the right to ground rents to a financial institution, the proceeds being ploughed into the project. The removal of ground rents makes it harder to fund new developments, potentially impacting the valuation of property portfolios.

However, from a lender’s perspective, the elimination of leasehold forfeiture risks may enhance the security of commonhold properties, paving the way for new financing models.

Estate managers and landlords should engage proactively with lenders to understand how these changes will influence borrowing terms and investment strategies. By staying ahead of these developments, property professionals can mitigate risks while capitalising on new opportunities arising from the reform.

Preparing for a commonhold future

The government’s drive to replace leasehold with commonhold marks a seismic shift in property ownership law. For landlords, occupiers, estate managers, and investors, adapting to this new reality will require a strategic and informed approach. While the reforms threaten established revenue models and management practices, they also open the door to innovative service offerings and operational efficiencies.

At Newmanor Law, our commercial property specialists are equipped to guide clients through the intricacies of these changes. We can provide the comprehensive legal advice to help landlords and estate managers navigate the potential transition from leasehold to commonhold with confidence. By partnering with us, you can stay ahead of the curve and ensure your interests remain protected in this evolving legal landscape.