Tick Tock (or TikTok) for leasehold and ground rents

Sir Keir Starmer made a policy announcement via TikTok today that will have a huge effect not only on residential tenants, many of whom will no doubt welcome it, but to Pension Funds, Property Investors, Developers, Operators, Lenders (and lawyers!) in respect of residential property. 

This announcement is not a complete surprise and we have been expecting these changes in some guise or another for many years since the Law Commission issued three reports in 2020. Both main parties have trailed change in this area so there has been a certain inevitability about it.

Labour originally promised to enact these reforms in its first 100 days in Parliament but the proposals have been bogged down and delayed, apparently with Treasury officials and Rachel Reeves concerned about the economic impact and legal challenge. With Labour’s manifesto U-Turns being totted up by political journalists, and Keir Starmer under personal pressure in respect of his leadership, this time the Labour backbenchers and Angela Rayner have triumphed over the Treasury.

The debate has been couched in adversarial and evocative terms – bad Landlord actors use feudal leasehold or “fleecehold” to weaponise the terms of their lease versus the ordinary person on the street, tenants, hundreds of thousands of them “trapped” by onerous ground rents meaning they are unable to sell their flats. 

This binary and emotive framing never quite tells the full picture: commonhold is not a panacea and query whether it will be fit for purpose. The reality is very few ground rents double every 5 years and most freeholders manage service charges responsibly. Tenants also hold pensions and institutional investors are understandably concerned with billions being wiped off their investment, with interference in their property rights and with legislation having retrospective effect and the wider impact this has on our attractiveness for doing business. What else might retrospectively be changed without compensation is a common concern from the Freeholder lobby.

In summary the changes proposed are as follows.

• Ground rents for leaseholders in England and Wales to be capped at £250 a year, reducing to a peppercorn after 40 years (effectively capping to zero/abolition over that period). The ground rent cap is expected to come into force in late 2028, subject to parliamentary process.
• New leasehold flats are to be banned.
• Forfeiture (loss of home for small debts) to be abolished with a new enforcement regime to 
• A process for existing leaseholders to convert to commonhold will be brought in
• Enhanced transparency over service charges and stronger management rules for commonhold developments.
• Consultation launched on the transition to commonhold and limited exemptions to the leasehold flat ban.
• Regulation of estate rentcharge arrears

The ramifications of these legal changes should not be underestimated. No doubt this will be the biggest shake up to property legislation in a generation (and bearing in mind we have just had the Renters’ Rights Acts and Building Safety Act we are not without precedent for change). 

It will profoundly affect the day to day work we do as real estate lawyers, how housing developments in towns and cities in this country are structured legally, and therefore funded and delivered.  It’s not just that the Landlord and Tenant relationship will go in respect of an individual flat, there is the complex structuring put in place to govern numerous legal relationships between joint venture partners, investors, local authorities, utilities companies and affordable housing providers that will all be impacted. To make commonhold replicate on day 1 in the new statute what has evolved over many centuries will be no mean feat.

The headlines have been grabbed by the capping of ground rents but we think the bigger story is surely the abolition of leasehold flats making commonhold tenure compulsory. 

The cap on ground rents largely affects existing stock and may have been priced into funds’ values for some years (since new ground rents were abolished) but the Leasehold abolition will affect all new multi-family developments built to sell. 

And in a housing crisis, with various other pressures loaded onto developers affecting viability (high land prices, planning delays, taxation, build costs, lack of credit, low demand for sale stock and the Building Safety Act delays) the clock will also be ticking on the 1.5m homes target – it is hard to see how this will be a builder and not a blocker, and all of this from a TikToker.