Introduction
The system of leasehold ownership in England and Wales has long been a source of controversy, often characterised by a significant power imbalance favouring freeholders over homeowners. A lease, by its nature, is a diminishing asset, granting possession for a fixed term but leaving ultimate ownership and control with the freeholder. This has led to issues including escalating ground rents, high service charges, and expensive, complex routes to extending a lease or purchasing the freehold. The introduction of commonhold ownership through the Commonhold and Leasehold Reform Act 2002 was intended to provide a viable alternative, offering outright ownership without a time limit. More recently, Parliament has passed the Leasehold Reform (Ground Rent) Act 2022 and the Leasehold and Freehold Reform Act 2024, representing a concerted effort to address the system’s most significant problems. This essay will argue that while these reforms are important and do make positive steps towards rebalancing power, they do not yet go far enough. The failure of commonhold to gain traction, combined with key limitations in the new legislation, means that whilst the landscape has improved for many homeowners, a fundamental rebalancing of power has not yet been achieved.
The Power Imbalance in Leasehold Ownership
The relationship between a freeholder and a leaseholder is fundamentally unequal. The leaseholder owns a right to occupy a property for a set period, but the freeholder owns the property itself and the land it stands on. This has created a system where homeowners can be subject to various charges and restrictions that limit their autonomy and create financial burdens.
One of the most contentious issues has been ground rent. This is a regular payment made by the leaseholder to the freeholder for which no specific service is provided; it is simply rent for the ground the property occupies. While traditionally these were nominal ‘peppercorn’ rents, in recent decades developers began to insert clauses into leases that allowed ground rents to increase dramatically over time, sometimes doubling every ten years. This created "onerous" ground rents that could make properties difficult to sell or mortgage, trapping homeowners in properties with escalating costs (Competition and Markets Authority, 2021).
Another area of conflict is service charges. Leaseholders are required to pay for the upkeep, maintenance, and insurance of the building and any common areas. While this is a reasonable principle, the system has been open to abuse. Freeholders or their managing agents have been known to charge excessive fees for substandard work, or to demand large, unexpected payments for major works with little transparency or consultation, leaving leaseholders with huge bills and limited means to challenge them (House of Commons Library, 2023a).
Furthermore, the process for a leaseholder to exercise their statutory rights to extend their lease or purchase the freehold (a process known as enfranchisement) has historically been complex and expensive. The valuation process often included ‘marriage value’ – a payment representing the increase in the property’s value once the freehold and leasehold interests are ‘married’ together – which could significantly increase the cost for the leaseholder. The legal and valuation fees on both sides added further expense and uncertainty, creating a deterrent for many homeowners seeking to take full control of their property. This combination of ongoing financial obligations and the high cost of exit has firmly tilted the balance of power in the freeholder’s favour.
Commonhold: A Failed Alternative?
In an attempt to provide an escape from the leasehold model, the government introduced the concept of commonhold through the Commonhold and Leasehold Reform Act 2002. Commonhold allows for the freehold ownership of individual units (such as a flat) within a larger property, with the common parts (like stairwells and the building structure) owned and managed jointly by a Commonhold Association, of which all the unit-owners are members. This model eliminates the problems of a diminishing lease term and ground rents, and places management directly in the hands of the homeowners themselves.
In theory, commonhold offers a much fairer and more balanced system of ownership for flats and other multi-occupancy buildings. However, in practice, it has been a significant failure. Over two decades after its introduction, the number of commonhold developments in England and Wales is negligible. The reasons for this failure are numerous. Developers have had no incentive to build commonholds when the leasehold system allows them to create long-term income streams from ground rents and the eventual sale of the freehold. Mortgage lenders were initially hesitant to lend on commonhold properties due to their unfamiliarity. Furthermore, the process for existing leaseholders to convert their building to commonhold was complex, requiring the unanimous consent of all leaseholders and the freeholder, a hurdle that proved almost impossible to overcome in most situations (Law Commission, 2020).
The Law Commission published a series of comprehensive reports in 2020 aimed at ‘reinvigorating’ commonhold, proposing changes to make it easier to create new commonhold developments and to convert existing leasehold buildings. These proposals included removing the requirement for unanimous consent to convert and making the process more streamlined. However, the government has not yet acted upon the core of these recommendations. As a result, commonhold has not provided the rebalancing of power it promised, as it remains an inaccessible option for the vast majority of homeowners.
Recent Legislative Reforms
Recognising the failings of the existing system and the public outcry over the "leasehold trap", the government has recently enacted two significant pieces of legislation aimed at reform.
The Leasehold Reform (Ground Rent) Act 2022
The first major legislative change was the Leasehold Reform (Ground Rent) Act 2022. This Act addresses the issue of escalating ground rents head-on, but only for new leases. Its primary effect is to limit the ground rent chargeable on most new long residential leases created after 30 June 2022 to one peppercorn per year, which effectively means no financial rent can be charged (Leasehold Reform (Ground Rent) Act 2022, s 1). This is a crucial step forward, as it prevents the creation of new onerous ground rents and ensures that future homeowners will not be caught in the same trap as many current leaseholders.
However, the Act's most significant limitation is that it is not retrospective. It does not apply to leases that were already in existence before the Act came into force. This means that millions of current leaseholders with high and escalating ground rents receive no benefit from this legislation. While the Competition and Markets Authority has had some success in persuading major developers to voluntarily remove onerous ground rent terms (CMA, 2022), this does not provide a universal solution. Therefore, while the 2022 Act rebalances power for future homeowners, it leaves the existing imbalance in place for a large and disadvantaged cohort.
The Leasehold and Freehold Reform Act 2024
The Leasehold and Freehold Reform Act 2024 is a much broader piece of legislation that aims to tackle several of the other problems inherent in the leasehold system. The Act received Royal Assent in May 2024, and its provisions are aimed at making it easier and cheaper for leaseholders to take control of their homes. Its key measures include:
- Standard Lease Extension: The standard term for a lease extension for both houses and flats is increased to 990 years, up from 90 years for flats and 50 years for houses. This provides greater security and removes the need for multiple, costly extensions over time (Leasehold and Freehold Reform Act 2024).
- Abolition of Marriage Value: The Act abolishes the concept of ‘marriage value’ in the calculation of the premium for a lease extension or enfranchisement. This was often a very significant part of the cost and its removal is expected to make buying the freehold or extending a lease substantially cheaper for many (House of Commons Library, 2024).
- Service Charge Transparency: The Act introduces measures to increase the transparency of service charges by requiring standardised formats for bills, and it makes it easier for leaseholders to challenge unreasonable charges.
- Ban on Leasehold Houses: The Act bans the sale of new leasehold houses, except in a few exceptional circumstances, ensuring that the problems associated with leasehold are not replicated in future housing developments.
These are significant changes that directly address many of the financial burdens and complexities that have tilted power towards freeholders. Making enfranchisement cheaper and simpler empowers leaseholders by giving them a more realistic path to outright ownership.
Evaluation: Have the Reforms Gone Far Enough?
The central question is whether these reforms, taken together, go "far enough" to rebalance power. The answer must be a qualified "no". While the changes are undoubtedly the most significant in a generation and represent a clear shift in power towards homeowners, they stop short of a fundamental overhaul and leave key issues unresolved.
The positive impact cannot be understated. The 2022 Act has effectively stopped the creation of new, exploitative ground rents. The 2024 Act makes the pathway to securing a 990-year lease or owning the freehold a more achievable goal for many. This tackles the core problem of the lease being a wasting asset and gives leaseholders a stronger negotiating position.
However, the limitations are equally significant. The most obvious failure is the lack of a solution for existing leaseholders trapped with onerous ground rents. The government had previously consulted on capping existing ground rents but dropped this proposal from the 2024 Act, citing complexities (House of Commons Library, 2023b). This leaves a two-tier system where new leaseholders are protected but existing ones are not, perpetuating a major power imbalance for millions.
Furthermore, while the 2024 Act makes enfranchisement cheaper, it does not make it simple or free from cost. Leaseholders will still face substantial legal and valuation fees, and the process remains a legal one that can be daunting for individuals to navigate. The reforms reduce the financial power of the freeholder but do not entirely remove the structural advantage they hold in these legal processes.
Most importantly, the reforms do not abolish the system of leasehold for flats itself. The government has instead opted to reform the existing system rather than replace it wholesale with a universal commonhold system as recommended by the Law Commission. By not implementing the Commission's key proposals for reinvigorating commonhold, the reforms miss an opportunity to provide a truly empowering alternative. Instead, they make leasehold a more tolerable system, which may ironically entrench its existence for decades to come, rather than encouraging a move to a model based on outright ownership and collective self-management. The fundamental dynamic of a tenant-landlord relationship remains in place for flats, even if some of its harsher aspects have been softened.
Conclusion
In conclusion, the recent leasehold reforms and the long-standing option of commonhold represent a complex and evolving picture. The reforms, particularly the Leasehold and Freehold Reform Act 2024, have made tangible and positive changes that begin to rebalance power between freeholders and homeowners. By making it cheaper to extend a lease or buy a freehold and by banning new leasehold houses, Parliament has addressed some of the most criticised aspects of the system. The Leasehold Reform (Ground Rent) Act 2022 successfully prevents the problem of onerous ground rents from worsening for future buyers.
However, these reforms do not go far enough. Power has been partially rebalanced, but it has not been equalised. The failure to provide a legislative solution for existing leaseholders with high ground rents is a major omission that leaves millions of people disadvantaged. Furthermore, the decision to reform leasehold rather than to fully embrace commonhold as the default model for flats means that the fundamental structure of the power imbalance remains. Commonhold itself has failed to provide an alternative path to empowerment due to its practical failings. The result is a system that is fairer than it was, but which stops short of the complete overhaul that many critics and campaigners, including the Law Commission, believe is necessary to truly put homeowners in control of their own homes. The reforms are a significant step in the right direction, but the journey to a fully balanced and equitable system of property ownership is not yet complete.
References
Competition and Markets Authority (CMA). (2021) Leasehold housing: Final report. [Online] Available at: https://www.gov.uk/government/publications/leasehold-housing-market-study-final-report (Accessed: 10 August 2024).
Competition and Markets Authority (CMA). (2022) Leasehold: CMA secures more undertakings to protect homeowners. [Online] Available at: https://www.gov.uk/government/news/leasehold-cma-secures-more-undertakings-to-protect-homeowners (Accessed: 10 August 2024).
Commonhold and Leasehold Reform Act 2002. c.15.
House of Commons Library. (2023a) Leasehold high service charges in private properties. CBP-9371. [Online] Available at: https://researchbriefings.files.parliament.uk/documents/CBP-9371/CBP-9371.pdf (Accessed: 10 August 2024).
House of Commons Library. (2023b) Leasehold reform: Capping ground rents. CBP-9823. [Online] Available at: https://researchbriefings.files.parliament.uk/documents/CBP-9823/CBP-9823.pdf (Accessed: 10 August 2024).
House of Commons Library. (2024) Leasehold and Freehold Reform Act 2024. CBP-9929. [Online] Available at: https://researchbriefings.files.parliament.uk/documents/CBP-9929/CBP-9929.pdf (Accessed: 10 August 2024).
Law Commission. (2020) Reinvigorating commonhold: the alternative to leasehold ownership. Law Com No 394. [Online] Available at: https://www.lawcom.gov.uk/project/commonhold/ (Accessed: 10 August 2024).
Leasehold and Freehold Reform Act 2024. c.11.
Leasehold Reform (Ground Rent) Act 2022. c.1.
