Pre-legislative scrutiny of the draft Commonhold and Leasehold Reform Bill

Three successive UK governments have now secured electoral mandates to address onerous ground rent terms in existing leases. Leaseholders rightly expect the government to deliver on its commitment to “tackle unregulated and unaffordable ground rent charges” through legislation. Therefore, we welcome that Part 3 of the draft bill would introduce a universal cap on ground rents to provide immediate relief to leaseholders facing the most egregious ground rent charges. (Conclusion, Paragraph 31)

We have listened to the case made by some freeholders and institutional investors that a cap on ground rents would have a detrimental impact on pension funds and wider investment in the UK. In particular, we recognise that the proposals in the draft bill may have a significant financial impact on a small number of individuals who chose to invest large sums in ground rent funds, such as the TIME Freehold investment fund, sometimes acting on poor advice from professional financial advisers. However, it is always the case that investment decisions come with the risk that investors may lose money, and legislative reform has been a known risk for many years. We believe the government is right to pursue a policy which strikes a fair balance between these interests, while ensuring its democratic mandate to tackle unaffordable ground rent charges remains its guiding principle. (Conclusion, Paragraph 50)

The suggestion by some freeholders and their representatives that ground rent is a contribution towards building safety remediation is incorrect. Leaseholders do not believe and should not expect that ground rent is used as a proxy for an additional service charge. It is shameful that some freeholders have invoked a misleading narrative to suggest that residents may be endangered if the government caps ground rents. The potential that some freeholders could face insolvency due to lost ground rent income is a risk which the government has identified and can mitigate, although freeholders have provided no evidence to support their claim that a cap may result in “widespread insolvency” of freeholders. (Conclusion, Paragraph 51) 101

Based on the evidence we have heard, we believe that it is likely that the ground rent provisions in the draft bill, if passed in their current form, would be subject to a legal challenge on the grounds that they breach freeholders’ property rights under Article 1 of the 1st Protocol to the European Convention on Human Rights (ECHR). We do not believe the government is able to mitigate the risk of legal challenge completely, as there will always be an incentive for some businesses to seek to delay legislation which would end a significant revenue stream. Ministers must also be satisfied that a bill is compatible with the ECHR when it is introduced, so they can make a statement of compatibility under the Human Rights Act 1998. Therefore, it is right that the government should take a responsible and considered approach to strike a fair balance between the interests of leaseholders, freeholders, and those invested in ground rents in order to maximise the likelihood of winning a judicial review. (Conclusion, Paragraph 58)

However, the government should be emboldened by the fact that it has previously successfully defended judicial review cases in the High Court, including on leasehold reform. Therefore, it should push ahead with reasonable reforms to cap ground rents and fulfil its electoral mandate. Once passed, the Commonhold and Leasehold Reform Act will have a democratic mandate from Parliament on which the courts will place considerable weight, regardless of the significant resources of parties which may seek to impede its implementation until they have exhausted all avenues of appeal. (Conclusion, Paragraph 59)

We agree with the government’s rationale for a £250 cash cap, as this is a threshold where ground rent frequently affects the saleability and mortgageability of properties. A cap at this value will ensure leaseholders are protected from increases in ground rent to onerous levels. We heard from some property sector representatives who said they agreed with the principle of addressing onerous ground rent terms which affect the mortgageability of properties, but who did not wish to suggest an alternative to the government’s proposal of a £250 cap, to which they were opposed. In light of the Competition and Markets Authority’s finding that consumers do not receive anything in return for ground rent, we believe £250 is a reasonable cap in recognition that leaseholders expected to pay a modest ground rent when they bought their homes. A £250 cash cap is fair, clear for all to understand, and straightforward to administer. (Conclusion, Paragraph 64)

We support the government’s intention to change to peppercorn ground rent. However, it is not clear to us why the government has decided that a 40-year transitional period before a change to peppercorn is the most justified and fair policy. The government has said that it judges 40 years to represent a fair balance between the competing interests, but it has not presented sufficient evidence to justify why 40 years is the optimum period 102 to maximise the benefits for leaseholders whilst minimising the proportional financial transfer from freeholders to leaseholders. The government’s modelling shows that estimated value transfer is not linear across different transitional periods. We require more comprehensive and accurate data to come to a definitive judgement on the optimum transitional period. (Conclusion, Paragraph 73)

However, based on information which the government has provided so far, it is not clear to us why a shorter transitional period of 20 years would not also represent a fair balance between the parties. Successive governments have indicated their intention to cap ground rents since at least 2017, and so we are not persuaded by the arguments of some freeholders and investors that they will require a transitional period of longer than 40 years to adjust and plan for the change. Whilst several freeholders and investors told us that 40 years would not allow them sufficient time to prepare, none was willing to propose an alternative transitional period that would be acceptable to them. Ultimately, the length of the final transitional period is a political judgement, which the government acknowledges will involve trade-offs. (Conclusion, Paragraph 74)

As part of its response to this report, the government must publish further evidence to justify why it has proposed a 40-year transitional period before a change to peppercorn ground rent, instead of a 20-year transition. This should include publishing the data behind its modelling of the estimated value transfer for transitional periods, to allow analysis of increments between 20 years and 40 years. (Recommendation, Paragraph 75)

There is likely to be broad cross-party support for the measures in this draft bill. The government has said that it is aiming to bring the cap into force in late 2028, subject to parliamentary timings and its consideration of “remaining policy choices”, such as whether to allow leaseholders to agree to pay a ground rent in exchange for a lower purchase price. We do not believe that time spent considering a small number of exemptions to the ground rent cap is in leaseholders’ interests. The vast majority of leaseholders simply want to see the £250 cap on ground rents implemented without undue delay. Subject to the government scheduling parliamentary time for both Houses to scrutinise the final bill, we believe the ground rent cap could come into force in late 2027. (Conclusion, Paragraph 78)

The final bill must include a commencement clause for the £250 cap on ground rents to come into force two months after the Act is given Royal Assent—not at a time to be decided by ministers, as is currently the case in the draft bill. (Recommendation, Paragraph 79) 103

The government must ensure the cap on ground rents in the final bill cannot be evaded by attributing ground rent to appurtenant (related) property, such as parking spaces, or by including charges similar to ground rent in headleases. (Recommendation, Paragraph 81) Strengthening leaseholders’ rights

It is deeply disappointing that the draft bill does not enact the remaining Law Commission recommendations—as the government previously said it would—as enacting these measures would provide short-term relief for all leaseholders by reducing the cost of extending their lease or buying their freehold. Making collective enfranchisement cheaper and easier will also ensure that the maximum number of leasehold blocks are able to convert to commonhold. Without including some of these measures in the final bill, the government risks limiting access to collective enfranchisement and commonhold conversion to blocks with wealthier residents who can most afford it, rather than providing the opportunity to the maximum number of leaseholders. (Conclusion, Paragraph 97)

The government must enact the remaining Law Commission recommendations on leasehold enfranchisement following the approach set out in the Appendix of this report. In particular, the government must enact measures to ensure leaseholders can avoid paying development value upfront by voluntarily agreeing to a restriction on future development of their property. (Recommendation, Paragraph 98)

The Law Commission’s recommendations on reforms to the right to manage process would simplify it and ensure more leaseholders are able to appoint their own managing agent through the statutory process. This would offer leaseholders who are unable to convert to commonhold an accessible, more affordable route to decide who runs their building, with greater oversight over their managing agent. (Conclusion, Paragraph 99)

The government must enact the Law Commission’s recommendations on the right to manage process during this Parliament, either through this bill or through a separate Right to Manage Bill to encompass the Law Commission’s ongoing project regarding freehold housing estates. (Recommendation, Paragraph 100)

It is a significant shortcoming of the draft bill that it does not include provisions to introduce regulation of property managing agents, which is long overdue. We have heard many cases of appalling standards of service from some organisations—particularly England’s largest managing agent, FirstPort. For too long, agents have operated in the interests of freeholders as their clients, rather than in the interests of the leaseholders who pay the building’s service charges. A credible, independent Regulator 104 with proper enforcement powers would be the most effective measure to deliver improvements to managing agents’ service during this Parliament, to the benefit of all leaseholders and future commonholders. (Conclusion, Paragraph 115)

Whilst we acknowledge some leaseholders’ concerns with this approach— particularly the case that MHCLG should prioritise the shift to commonhold to give leaseholders greater control over the management of their blocks and the choice of managing agent—we believe that regulation of the sector is a necessary intervention to support all leaseholders, particularly those who are not able to benefit from conversion to commonhold. Managing agents will also continue to play a key role under the commonhold regime, as it is likely that many commonhold associations will opt to contract with them for services rather than run the blocks themselves, especially in larger and more complex blocks. Many of these contracts are likely to run for several years, and so the professionalisation of managing agents will be important for the success of commonhold. Whilst we recognise the Minister’s concern that the draft bill is already large, we do not believe this should require many additional clauses—the final bill could include regulation making powers to enable the establishment of an independent regulator, with further detail contained in secondary legislation. (Conclusion, Paragraph 116)

The final bill must include provisions to establish a new, independent public body as the Regulator for property managing agents, with enforcement powers. This must include powers for the Regulator to issue fines or revoke licences of managing agents who breach a statutory Code of Practice, in line with the recommendations of Lord Best’s report on the Regulation of Property Agents. (Recommendation, Paragraph 117)

The government should not pursue its current preferred option of mandatory qualifications being implemented by designated professional bodies, such as The Property Institute, as leaseholders are clear that they do not have confidence in industry bodies to carry out this duty impartially. (Recommendation, Paragraph 118)

Whilst we welcome the government’s plans to repeal powers which put homeowners on private estates at risk of losing their home for small debts, it is regrettable that clause 156 of the draft bill falls short of the government’s commitment to “bring the injustice of ‘fleecehold’ private housing estates to an end”. This commitment relates to a much bigger issue that goes far beyond the present intended focus of this legislation. The injustices which homeowners on private estates face are separate from, and should not be conflated with, the injustices of the leasehold system. We recognise that the government has consulted on what more can be done to enhance protections for homeowners on ‘fleecehold’ estates, and 105 how to reduce their prevalence in future. Ultimately, ‘fleecehold’ is in large part a product of stretched local authority finances, as authorities cannot afford to take on new maintenance responsibilities, and so the long- term solution to address it must be cross-government reform to put local government finances on a sustainable footing. The government must also require developers to deliver infrastructure to common standards, to ensure local authorities can adopt essential amenities on developments in future. (Conclusion, Paragraph 125)

The government is aware that the implementation of a significant portion of its leasehold and commonhold reform agenda—including measures which will be of the greatest financial benefit to leaseholders in the short- term—is contingent on fixing flaws which it has identified in the Leasehold and Freehold Reform Act 2024 (LAFRA). Therefore, it is concerning that provisions to rectify these flaws were not included in the draft bill, and they must be prioritised for inclusion in the final bill. (Conclusion, Paragraph 132)

The final bill must include provisions to fix the flaws which the government has identified in LAFRA. The government must urgently bring forward its consultation on the valuation rates used to calculate the cost of enfranchisement premiums. It should ensure these measures to make it cheaper for leaseholders to enfranchise are ready to be implemented two months after the Commonhold and Leasehold Reform Bill gains Royal Assent. (Recommendation, Paragraph 133) Making commonhold work

The commonhold model of homeownership promises to have a range of advantages over leasehold—above all the principle that homeowners should have a vote in decisions which affect their home and the building in which they live. Where a commonhold association chooses to appoint a managing agent, they will be accountable to homeowners, not faceless landlords, for the decisions they make and the charges which homeowners pay. (Conclusion, Paragraph 145)

Whilst commonhold will introduce greater market competition among agents to deliver value for homeowners as their clients, it will not address some of the drivers behind rising service charges, such as inflation. Nonetheless, commonhold will improve transparency around how homeowners’ contributions are determined and spent, and give them a say in decisions over what works are carried out and when. Commonhold associations will gain responsibility for making decisions over the long-term stewardship of the building, including the duty to hold a reserve fund to save up for the cost of major maintenance works. (Conclusion, Paragraph 146) 106

The government should ensure the new requirement to hold a reserve fund applies to new and existing leaseholders, as well as commonhold blocks, to ensure parity between the duties placed on blocks of different tenures. Whilst we recognise that this new requirement may increase day-to-day charges for some homeowners, it will prevent financial hardship and distress caused by large, unexpected bills; share long-term costs more fairly between successive flat owners; and support the ongoing stewardship of blocks. (Recommendation, Paragraph 147)

The draft bill’s current proposal for a two-step process of converting to commonhold—first a collective enfranchisement, then a vote to convert to commonhold—presents a potential barrier to leaseholders realising its benefits. The government has said that it believes commonhold will be the preferred tenure of homeownership and that it wants to maximise uptake once its reforms are in place, so it is unclear why the ‘share of freehold’ model should remain in common use. Indeed, it is conceivable that some solicitors and practitioners could see perverse incentives to discourage leaseholders from converting to commonhold to preserve aspects of the leasehold system. (Conclusion, Paragraph 152)

To promote uptake of commonhold as the default ownership tenure and streamline the conversion process, the draft bill should establish conversion to commonhold as the default outcome of a collective enfranchisement. This would remove an additional layer of bureaucracy from the process, which in some cases may impede homeowners from realising the benefits of commonhold once they have already met the 50% threshold of support to buy their building’s freehold. To retain consumer choice, leaseholders should still be able to ‘opt-out’ of automatic conversion by a 50% vote. Only following a successful vote against automatic conversion to commonhold would leaseholders be able to proceed under a share of freehold model should they wish. (Recommendation, Paragraph 153)

We have identified that a non-consenting leaseholder who subsequently decides to participate in a commonhold, after their block has converted, may do so without contributing to the shared costs of collective enfranchisement paid by their neighbours. In an extreme scenario, a leaseholder could choose to join a commonhold days after it is established to deliberately avoid contributing towards shared costs. The perceived risk of such a scenario may foster mistrust between leaseholders and undermine support for conversion to commonhold. (Conclusion, Paragraph 158)

The government must clarify that a non-consenting leaseholder who subsequently participates in a conversion will be required to contribute to the shared costs incurred by those who did previously participate in a collective enfranchisement. The government must design a mechanism for non-consenting leaseholders to contribute towards the shared costs of a 107 collective enfranchisement if they choose to join a commonhold at a later date. In response to this report, the government must set out its plans for such a mechanism, which must include a contribution towards the premium paid for buying the freehold of a building’s common parts and the legal and other professional costs incurred. (Recommendation, Paragraph 159)

Currently, freeholders are not required to disclose information regarding building safety defects in a block as part of the enfranchisement process. Leaseholders must be fully informed of any liabilities they may be assuming during the enfranchisement process when converting to commonhold. Whilst we agree with the Minister that homeowners must always seek professional advice before deciding to convert to commonhold, this does not negate the need for freeholders to be open and transparent about any building safety defects. (Conclusion, Paragraph 163)

The final bill must include a requirement for freeholders to disclose information about the building safety status of a block as part of the enfranchisement process which leaseholders follow to convert to commonhold. The government must issue guidance after Royal Assent on the required format of this information. (Recommendation, Paragraph 164)

The effectiveness of commonhold associations will depend on unit-holders being supported to come to fair, informed decisions about the management of their block. Unit-holders must have access to complete information about their building and the background to different options which directors are presenting to commonhold associations, with time to consider these before a vote is taken. (Conclusion, Paragraph 170)

The government must issue guidance after Royal Assent on the relevant documents which directors must provide to unit-holders for different types of vote in a commonhold association. This should include guidance on what format the documents should be presented in, and with how much notice they should be provided before the vote is taken. (Recommendation, Paragraph 171)

The draft bill stipulates new procedural requirements in commonholds, which will be bound by company law. In some cases, such as strict time limits on filing annual accounts, these requirements may present additional challenges for commonhold associations which may not be in unit-holders’ interests. (Conclusion, Paragraph 175)

The final bill must include provisions to give the First-tier Tribunal in England and the Leasehold Valuation Tribunal in Wales discretion to waive some breaches of the statutory process. This should include technical breaches of procedure, such as a failure to meet time limits, where these do not affect the result of decisions made by members of a commonhold association. (Recommendation, Paragraph 176) 108

The draft bill is not clear what voting rights shared owners will have during the 10-year initial repair period, as this is to be determined in secondary legislation. This has understandably led to concern among shared owners that they may be shut out of decisions which directly affect them for several years. This has left many shared owners unsure whether they can fully embrace the commonhold tenure. (Conclusion, Paragraph 184)

The government must urgently clarify the circumstances in which shared ownership providers will exercise the vote of a shared ownership property— either by publishing draft regulations alongside the final bill, or by publishing a statement which sets out the “specified purposes” under which shared owners may not have a vote during the 10-year initial repair period. (Recommendation, Paragraph 185)

The final bill should make provision for shared owners and the shared ownership provider to share the unit’s vote during the 10-year initial repair period, rather than treat the shared ownership provider as the member of the commonhold association. If there are any circumstances where the government believes shared owners should not be able to share the vote, the final bill must allow shared owners to attend and participate as non-voting members of commonhold association meetings in those circumstances. (Recommendation, Paragraph 186)

Failure to modernise HM Land Registry’s legacy systems poses a risk to the successful implementation of commonhold. We are concerned that the government may not have supported the organisation with sufficient funding to undertake this work. Greater digitisation and automation would support the organisation to address its backlog of casework and prepare for an increase in commonhold applications. (Conclusion, Paragraph 192)

The government must invest in digitising HM Land Registry’s systems, making them more accessible and user-friendly, to support the move to commonhold. This will ensure HM Land Registry is prepared to respond to an increased demand for its services as commonhold becomes more prevalent. (Recommendation, Paragraph 193) Banning leasehold for new flats

Clause 109—which provides for a ban on new leasehold flats—is among the most important provisions in the draft bill to advance commonhold as the default tenure, as many development stakeholders lack incentives to transition away from leasehold voluntarily. Overall, we heard that developers, housing associations, and mortgage lenders are supportive of the move to commonhold in principle, but will require close consultation in 109 advance of and during its implementation, to understand further detail of what commonhold will mean for their systems and operations in practice. (Conclusion, Paragraph 205)

While the government is right to be mindful of its wider housing policy objectives, including its target to deliver 1.5 million homes during this Parliament, we believe that phasing out leasehold flats is an imperative to deliver greater security and affordability for future flat buyers. Blocks of flats will remain an important part of the housing mix in the coming years, but meeting the 1.5 million homes target by entrenching leasehold would not constitute success. (Conclusion, Paragraph 206)

The government must continue close engagement with industry throughout the passage of the legislation, to ensure a transition to commonhold that minimises unintended impacts on the wider housing market. However, alongside considering the responses to its ongoing consultation, the government should continue with its fundamental aim of introducing the ban on new leasehold flats as soon as possible. (Recommendation, Paragraph 207)

Whilst the care model and complex financing of some retirement housing— particularly Integrated Retirement Communities—may justify a different approach to other leasehold housing, we have heard evidence that homeowners in retirement housing are still exposed to some of the worst features of leasehold. In particular, the shocking record of McCarthy Stone, one of the country’s largest providers of specialist retirement housing, demonstrates why homeowners in retirement housing must also see the benefits of leasehold and commonhold reform. (Conclusion, Paragraph 211)

The government must ensure that any exemptions for the retirement housing sector from the ban on new leasehold flats, or other aspects of the legislation, are strictly limited. Retirement housing providers must also be included in the regulation of property managing agents scheme we have proposed in chapter 3, so that homeowners have access to meaningful redress. (Recommendation, Paragraph 212) Implementation

The provision of education and advice for homeowners will be vital to the success of commonhold. Many leaseholders are positive about the prospect of commonhold but will need impartial legal advice and guidance to take advantage of their new rights. We support the government’s plan to expand the Leasehold Advisory Service’s (LEASE) provision of advice and guidance on commonhold, and to direct the organisation to prioritise this aspect of its existing remit in the coming years. However, as a small organisation with 110 a modest number of employees, LEASE will likely need to expand its staff capacity to prepare for the transition to commonhold, while continuing its current service provision for leasehold blocks. (Conclusion, Paragraph 219)

The government must match this service expansion with new funding for LEASE, to enable it to advise both leaseholders and commonholders. MHCLG must work closely with LEASE to develop a suite of practical guidance to promote awareness and understanding of commonhold, and to support both leaseholders who are converting to commonhold and consumers buying properties in new commonhold developments. These resources must be published and additional staff recruited ahead of the new commonhold legal framework becoming available for use. The government must also extend the organisation’s provision of government-funded legal advice to support homeowners to make informed decisions about their blocks’ conversion to commonhold. (Recommendation, Paragraph 220)

Throughout our inquiry, leaseholders have called on the government to act with greater urgency to bring forward the reforms they need, both through this legislation and by implementing LAFRA. The government must pursue an ambitious parliamentary timetable for the final bill, to ensure its provisions are implemented in time for leaseholders to see a tangible change in their experience of homeownership during this Parliament. (Conclusion, Paragraph 224)

The government must provide its initial response to each of the recommendations in this report within two months. It must introduce the final bill to Parliament in autumn 2026, and schedule Second Reading before the November recess. The government should aim to ensure the final bill receives Royal Assent in mid-2027, so that some of the provisions, such as the cap on ground rent, can come into force in late 2027. (Recommendation, Paragraph 225)

Some of the powers to make secondary legislation in the draft bill are drafted too broadly and too vaguely, and in places have not been adequately justified. While we agree that there is a proper role for delegated powers in the final bill, each must be clearly justified and tightly drafted so that secondary legislation may only be used by ministers for the precise purpose Parliament intends. Henry VIII clauses should not be added to legislation “just in case” they are needed. (Conclusion, Paragraph 231)

The government must reconsider and redraft provisions in the draft bill that would introduce sweeping delegated powers which have not been adequately justified, as set out in Table 3. (Recommendation, Paragraph 232) 111

We recommend that the government must consider incorporating the proposed drafting changes set out in Annex 1 of this report into the final bill. (Recommendation, Paragraph 233)

Overall, we welcome the draft Commonhold and Leasehold Reform Bill, which, once implemented, will make a significant step towards replacing leasehold with commonhold and give homeowners greater control. The legislation also offers an opportunity for the government to introduce measures during this Parliament which will significantly improve all leaseholders’ experience of homeownership in the short-term. However, we are concerned that the government’s commitment to “bring the feudal leasehold system to an end” has left leaseholders with mixed expectations and understandings of what the draft bill will achieve. If passed, this legislation would not end leasehold overnight: many leaseholders will be unable to convert to commonhold; it may be several years before the use of commonhold is mandated; and some properties, for example shared ownership flats, will continue to be “permitted leases”. (Conclusion, Paragraph 238)

The government must consider how it communicates the advantages of this legislation for homeowners responsibly and honestly. Messages from government suggesting that this legislation alone will “end leasehold” once it is passed, or that it will tackle all the injustices which leaseholders face in the short-term, risk undermining the government’s ability to promote the benefits of commonhold to homeowners clearly. (Recommendation, Paragraph 239)

The government must use the months ahead of the introduction of the final bill to ensure it has a clear strategy to deliver its manifesto commitments on leasehold reform during this Parliament. This must include a clear timetable for implementation of measures in this bill and in LAFRA, and preparation to bring forward further primary legislation on those manifesto commitments for which clauses cannot be drafted in time to be included in this bill. The government must set out its initial plans for further legislation in response to this report. Once this bill is passed, the government’s leasehold and commonhold reform agenda will stand or fall on whether leaseholders see meaningful change to improve their experience of homeownership before the end of this Parliament. The final bill must now be strengthened, in line with our recommendations, to meet this test. (Recommendation, Paragraph 240) 112 113