Leasehold to commonhold – how will this impact investors?
The government’s proposed ban on new leasehold flats in England and Wales marks a significant shift in property ownership and so will be of keen interest to investors. The proposed transition towards commonhold, a system where homeowners collectively own and manage their buildings, aims to provide greater control and transparency for property owners. The intention is that this will create greater confidence in the market – but are there any considerations for brokers and their clients at this stage?
The Leasehold and Freehold Reform Act, which became law on 24th May last year, has already introduced key changes that will make it easier for leaseholders to buy their freehold, extend leases to 990 years, and challenge unreasonable service charges. The ban on new leasehold flats aligns with the government’s broader objective of moving away from a system that many see as outdated and unfair. However, the details of the transition from leasehold to commonhold are still emerging, and investors will need to stay informed as the government publishes further guidance.
Commonhold is being positioned as a viable alternative to leasehold, allowing homeowners to own their flats outright while sharing ownership of communal areas. This system eliminates many of the issues associated with leasehold, such as escalating ground rents, high service charges, and restrictive lease extension processes. Historically, some freeholders have taken advantage of leaseholders through excessive fees and mismanagement and the plans hope to limit leasehold abuses. For existing leasehold properties, the government is expected to introduce policies that will make it easier for leaseholders to convert to commonhold.
Despite the benefits attached to commonhold ownership, it hasn’t been widely adopted in the UK due to the complexity involved in transitioning the ownership system. Additionally, mortgage lenders have traditionally been reluctant to finance commonhold properties, fearing complications in management and resale value. Acknowledging these issues, the government has committed to introducing measures to facilitate commonhold adoption, including financial and legal reforms. A draft bill, expected later this year, will provide further clarity on the transition process, potential exemptions, and implementation strategies.
So, what does it mean for property investors? As ever, the devil is in the detail and, as is often the case, there isn’t a great deal of detail available currently. The underlying theme is that greater transparency and confidence in the ownership framework of a property will instil greater value in the market, although this will clearly be dependent on the propensity of mortgage lenders to lend on commonhold properties.
There may opportunities for current owners of leasehold properties to switch to commonhold, which could potentially increase value – but again, the process and any costs for this are yet to be defined.
The biggest considerations are likely to be for investors and developers who are creating multi-unit freehold blocks (MUFBs). Traditionally the individual properties in an MUFB might have been sold on a leasehold basis. With potential reforms around the corner, investors will need to decide on the best strategy for their scheme. A commonhold title, for example, may provide some future proofing to the investment, helping to support its value if the proposals do come into force, but it could also limit immediate resale potential if lenders continue to be cautious on commonhold properties.
The coming months will be critical as further details emerge about the transition to commonhold and how it will be implemented in existing leasehold properties. As brokers, all you can do in the meantime is to be proactive in advising your clients about the potential changes. As the market adapts, those who stay ahead of these changes will be best positioned to make informed investment decisions.
Anna Lewis, Commercial Director at Castle Trust Bank