New leasehold flats are on the verge of being banned under a transformative set of government proposals aimed at establishing commonhold as the default ownership tenure. This shift is designed to empower homeowners with greater control over their properties. Housing Minister Matthew Pennycook asserted that these reforms signify “the beginning of the end” for the outdated leasehold system, which has been criticized for subjecting homeowners to “unfair practices and unreasonable costs.”
Here, The i Paper explores the implications of abolishing the leasehold system for homebuyers.
What is a Leasehold?
In England and Wales, property ownership primarily exists in two forms: freehold and leasehold. A freehold grants complete ownership of both the property and the land it occupies. Conversely, purchasing a leasehold means acquiring the right to reside in the property for a predetermined number of years.
The leasehold system has its origins in medieval England, where powerful families retained ownership of land as freeholders, renting out plots for habitation and work. This historical context has shaped the contemporary leasehold landscape, particularly for flats, but it has also been extended to new-build houses, often involving shared-ownership schemes.
Under the current leasehold framework, third-party landlords are empowered to make decisions on behalf of homeowners. Leaseholders are typically obligated to pay ground rent, which can increase over time, as well as service charges dictated by landlords, adding to the financial burden. Furthermore, landlords have control over the management of the buildings in which leaseholders reside.
Why is the Government Abolishing the Leasehold System?
The government’s proposal to phase out the leasehold system follows persistent campaigning and grievances from leaseholders about exorbitant service charges and inadequate, sometimes hazardous, living conditions.
Many leaseholders have been disproportionately affected by the cladding scandal, facing substantial costs for remedial work and safety upgrades, or finding themselves trapped in properties that have become unsellable in the wake of incidents like the Grenfell Tower fire.
This initiative aligns with the government’s commitment outlined in its manifesto. Pennycook emphasized, “This Government promised not only to provide immediate relief to leaseholders suffering now but to do what is necessary to bring the feudal leasehold system to an end – and that is precisely what we are doing.” He further remarked that these reforms build upon Labour’s Plan for Change, aiming to enhance living standards and create a housing system appropriate for the 21st century.
What is a Commonhold?
The government intends to make commonhold the standard form of tenure in England and Wales. Commonhold represents a different ownership structure primarily for multi-occupancy developments. In this model, each unit-holder owns their individual home, while a collective or third-party entity manages and owns the common areas.
This arrangement is designed to give property owners more authority over their homes, yet it remains a less common structure compared to leaseholds. The recent government proposals aim to change this dynamic significantly.
A Commonhold White Paper released on Monday indicates that commonhold will be “reinvigorated” through a new legal framework, and the sale of new leasehold flats will be prohibited. Pennycook stated that by decisively promoting commonhold and establishing it as the default tenure, the government will ensure that property owners, rather than third-party landlords, have ownership and a say in the management of their residences and associated costs.
Moreover, the government has expressed its determination to facilitate the conversion to commonhold for existing leaseholders.
What Will the Changes Mean for Home Buyers?
This legislative reform will impact England and Wales, where approximately 5 million homes are currently leasehold. The Ministry of Housing has asserted that these changes will allow homeowners to possess a stake in the ownership of their buildings from the outset, eliminate ground rent obligations, and grant them control over the management and costs associated with their residences.
Homeowners will become part of a commonhold association, which will be responsible for managing the building. They will also gain the authority to hire or dismiss a managing agent who acts in their best interests, contrasting with the leasehold system where such agents are appointed by the landlord.
How Does the System Operate in Other Countries?
England and Wales are among the few regions globally that still utilize the leasehold system for selling homes and flats. The analogous system in Scotland was abolished in 2004. Conversely, commonhold has seen success in various countries, including several in Europe, New Zealand, Australia, and the United States.
