While the Act has been devised to provide greater fairness and power to residential leaseholders, the changes it introduces have significant implications for properties with both commercial and residential elements.

Key Changes: What is coming?

The Act was enacted on the 24th of May 2024; however, most of the provisions of the Act are yet to come into force. With the Housing Minister Matthew Pennycook signing a regulation on the 22nd of January 2025 to implement the removal of the “two-year rule” which would prevent leasehold owners of homes acquiring the freehold prior to them having had two years of ownership, the government have proven their intention to implement these changes swiftly. This has made it even more pressing for freehold owners to proactively develop their long-term strategy – such as looking at lease restructures and addressing potential vulnerabilities – before the reforms come into force.

Commercial space minimum threshold

Under the reforms to be implemented by the Act, a mixed-use property will be at risk of collective enfranchisement (being the ability of leaseholders to acquire the freehold of the building that they occupy) or Right to Manage (“RTM”) claims if the non-residential space accounts for 50% or less of the entire property’s floor space (excluding common parts). Many mixed-use buildings will no longer be ‘protected’, particularly in cases where properties and portfolios were structured so that non-residential area was just over 25% to make collective enfranchisement and RTM claims unachievable for residential leaseholders.

Easier collective enfranchisement

The increased minimum threshold reduces the legal obstacles preventing residential leaseholders collectively acquiring the freehold.

Impact: Aside from the evident risk of losing the freehold of a property, the potential to lose control of the freehold or building management may have an effect on market perception of the property, making it more difficult to secure financing or buyers.

RTM expansion: With the criteria for RTM claims relaxed, commercial property landlords face an increased risk of RTM claims even where the commercial element of the building is considerable.

Operational impact: Conflicts may arise – especially in the licensed and leisure sector where operational management is paramount to the success of the business – because residential leaseholders’ interests will often clash with commercial tenants’ or managers’ operational requirements. Residential leaseholders managing the property may prioritise their own convenience in respect of shared or common spaces that benefit residential leaseholders (e.g., loading zones, parking spaces, signage placement) and may lack the experience to control maintenance, repairs, and other building management issues—factors that could directly affect commercial tenants.

Market impact: Potential commercial tenants (or existing commercial tenants in the case of renewals and extensions to the lease term), particularly those entering into long leases or making significant investments in their premises, may be deterred by the potential lack of operational freedom and fear of future poor management of the safety and maintenance/appearance of common areas. Another, but no less important, impact may be reduced rental value of the commercial lease.

What can commercial property owners do? Proactive strategies for protection...

We expect the expansion of RTM to be implemented in Spring 2025 and further legislation to be consulted on in Summer 2025 in relation to collective enfranchisement. Given the sweeping changes introduced by the Act and imminency, mixed-use property owners should adopt a proactive approach. Below are several steps to consider now and in preparation for implementation:

1. Reassess your property portfolio

Reassess the current structure of your property and identify where the non-residential areas comprise more than 50% of the property area (excluding common parts).

2. Maximise commercial space

Consider increasing the non-residential floor space of mixed-use building so that it exceeds 50% and therefore falls outside the scope of collective enfranchisement and RTM claims.

3. Restructure lease agreements

The risk of collective enfranchisement and RTM claims could be reduced by structuring leases to ensure that the owner, or the commercial tenant, has control over crucial areas such as maintenance and upkeep of common areas; increasing the term of commercial leases to disincentivise residential leaseholders; and providing alternative residential lease agreements that are outside the scope of the Act.

4. Explore strategic exits or sales:

In certain circumstances, it may be appropriate to consider restructuring ownership of the property.

How we can help protect your position

At Gosschalks, we specialise in advising commercial and mixed-use property owners, particularly in the licensed and leisure sector. With expert legal support you can navigate and stay head of these changes with confidence. Contact our team today on 01482 324252.

About the author: Lucy Turner