Competition watchdog set for enforcement action in leasehold sector

28 February 2020, 11:34

Miniature houses on top of pound coins and banknotes
Leasehold sector. Picture: PA

The Competition and Markets Authority found ‘worrying evidence that people who buy leasehold properties are being misled and taken advantage of’.

The competition watchdog is preparing to act over “worrying evidence” of potential mis-selling and unfair contract terms in the leasehold housing sector.

The Competition and Markets Authority (CMA) is set to launch enforcement action against companies it believes have broken consumer protection law.

It has not disclosed any names so far as it continues to investigate.

The CMA is completing legal work which it said could result in firms signing commitments to change how they do business. If they fail to make the required changes, the CMA could take action through the courts.

The CMA opened an investigation into the leasehold housing market in June 2019.

It said the evidence it has found supports the case for changes to the law.

The CMA said it will continue to work with the Government on its reform plans for the leasehold market, including supporting the move to ban the sale of new leasehold houses and reduce ground rents for new leases to zero.

With a leasehold property, people own their property for the length of their lease agreement with the freeholder. The leaseholder does not own the land the property is on and there may be charges such as ground rent to pay.

When the lease ends, ownership returns to the freeholder, unless the lease can be extended.

Flats are often owned leasehold, and some houses have also been sold on this basis.

As part of its probe into the industry, the CMA said it is concerned that leasehold home-owners have been unfairly treated and prospective buyers misled by housing developers.

Its concerns include home-owners having to pay escalating ground rents, which in some cases can double every 10 years. This increase is often built into contracts, meaning people can struggle to sell their homes and find themselves trapped.

The CMA said it has also seen evidence that people have been misled about the cost of converting their leasehold to freehold ownership.

When buying their home, some people were told the freehold would cost only a small sum, but later on find the price had increased by thousands of pounds with little to no warning.

The watchdog said some developers are failing to explain the differences between leasehold and freehold when directly asked, and some actually tell potential buyers that there is no difference.

By the time people find out the realities of owning a leasehold, including the regular charges to be paid, they are often unable to pull out of the purchase, or would face significant difficulties if they tried to do so.

The CMA also raised concerns about excessive and disproportionate fees for routine maintenance of a building’s shared spaces or making home improvements. If people want to challenge such charges, the process is often difficult and costly, meaning few decide to go through with it.

Chief executive Andrea Coscelli said: “We have found worrying evidence that people who buy leasehold properties are being misled and taken advantage of.

“Buying a home is one of the most important and expensive investments you can make, and once you’re living there you want to feel secure and happy. But for thousands of leasehold homeowners, this is not the case.

“We’ll be looking carefully at the problems we’ve found, which include escalating ground rents and misleading information, and will be taking our own enforcement action directly in the sector shortly.”

Jackie Bennett, director of mortgages at UK Finance, said: “Leasehold is an appropriate tenure in the right circumstances – for example, where properties have shared services or are built on land with specific restrictions – but it’s crucial it works in the best interest of home-buyers, now and in the future.

“It’s therefore good to see the CMA taking action where unfair practices have been identified.

“This sends a clear signal that the terms of leasehold should be clear and transparent and that leaseholders should be treated fairly.”

Mark Hayward, chief executive, NAEA (National Association of Estate Agents) Propertymark, said: “Our research shows three in five (62%) leaseholders feel they were mis-sold and therefore it’s vital enforcement action takes place as soon as possible to give some hope to those who are currently trapped with no easy route out.”

A spokesman for the Home Builders Federation (HBF) said: “The industry has made huge progress to identify and address the issues raised on particular aspects of historic leasehold sales.

“We will continue to work with all parties, including the CMA, and await the conclusion of its investigation. Where terms are appropriate, leasehold remains a safe and secure tenure for millions of households.

“The number of escalating ground rent leases identified by CMA represents a very small percentage of the leasehold properties built and sold over the past 20 years.

“Builders’ focus remains on ensuring new-build owners and future buyers are treated fairly and have access to remedies where processes have fallen short.”

By Press Association

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