RICS: input to the reform of commonhold and leasehold

As part of their manifesto for the 2024 General Election, the Labour Party promised to reform what they called the "feudal system" of leasehold, while promoting the idea of commonhold, a practice that is gaining further traction within the general housing market.

As it currently stands, the leasehold process sells the lease to a buyer, which gradually declines in its tenure, and therefore loses value over time without a potentially expensive process to increase it.

In addition, the landlord is allowed to charge ground rent (a regular amount for the ground on which the leasehold property is built), as well as a service charge for the management of the common areas shared by all the leaseholders. Ultimately, the leaseholder is financially continually beholden to the landlord without much control over what they are paying for.

Commonhold is a fairer method of home buying, where the ownership of the freehold is held by the owners of the multi-occupancy buildings. The most obvious and common example is a building that has been compartmentalised into flats. A limited company, run as a non-profit organisation, owns and maintains the common areas, such as hallways, the overall structure, the outdoor grounds and the roof. This is known as a commonhold association, of which each flat owner is a member, inputting to the decisions that will impact the use of the common areas and the flats themselves.

The beauty of the commonhold approach to flat ownership is that no one individual holds either the responsibility or the control of the communal areas or the management of the services. There is no ground rent to pay, while there is a charge for managing the areas used by the community.

The Commonhold and Leasehold Reform Bill is making its necessarily slow passage through Parliament, with a committee convened to obtain information and evidence from all those with a vested interest in how commonhold will work and how it will be implemented and eventually made operational.

Key to the discussions is the Royal Institution of Chartered Surveyors (RICS), the organisation being represented by Vanessa Griffiths MRICS (from estate agency consultants Knight Frank), who presented the points from RICS members.

As a concept, RICS confirmed that they were supportive of the Commonhold and Leasehold Reform, as it is "a significant step towards addressing long-standing concerns within the leasehold system".

Further, RICS stated that "the proposed reforms, such as strengthened leaseholder rights, reforming ground rents, mandatory reserve funds, and a simplified route to commonhold, represents meaningful progress towards ending… the leasehold model".

However, to balance that support, RICS also gave warnings on the implementation challenges and the unintended consequences of implementing the Bill as it currently stands. Specifically, RICS highlighted the preparedness of mortgage lenders to deal with commonhold purchases, the impact that reforming ground rent might have on future investments and repayments, and in ensuring consistent professional standards across the process from agents, valuation of the property, and dispute resolution.

Support for reform, but concerns about preparedness and readiness — while the Bill moves the sector closer to something that is fairer and more transparent, the transition to commonhold requires significant investment of time and resources to prepare for its implementation (lenders, estate agents and conveyancers were particularly mentioned). This is critical for helping the customer to be fully aware of what they are buying and what it means to them.

Mandatory reserves are essential — RICS strongly supports the need for mandatory reserve funds (for both commonhold and leasehold), which is necessary to protect the residents from the costs of any unexpected remedial works.

Regulation of estate agents — RICS has urged the Government to implement the remaining recommendations of the Regulation of Property Agents (RoPA) to ensure professional competence, necessary qualifications, and regulatory consistency across all types of property agents, supported by using existing regulatory bodies to reduce the impact on the taxpayer.

Practical barriers for the conversion to commonhold — while lowering the level of consent to 50% is helpful, say RICS, leaseholders will nevertheless require access to professional advice and appropriate insurance. RICS underlines the necessity for this in mixed-use or high-risk buildings.

Interaction with the Leasehold and Freehold Reform Act 2024 — the reform is awaiting secondary legislation, but the integration of any commonhold changes needs to be seamless and clear to avoid further market uncertainty as it is being implemented.

As Vanessa Griffiths commented:

There are a lot of outstanding and unanswered questions with the Commonhold and Leasehold Reform Bill in its current form, including the valuation methodology.

The Bill refers back to LAFRA 2024 which still awaits further consultation and secondary legislation.

The industry welcomes the opportunity to work with the Government to ensure that when this legislation does become effective, full and clear guidance is accessible, both for leaseholders and practitioners.

Education, consistency and the minimisation for misinterpretation is key to making this the success the Government intends it to be.

The Bill continues its passage through Parliament and further consultation is expected before secondary legislation is introduced. For leaseholders, buyers and property professionals, the direction of travel is clear but the details of how commonhold will work in practice remain to be confirmed.

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