CMA Preparing Legal Enforcement Action Against Leasehold Developers

The Competition Markets Authority (CMA) are set to ‘launch enforcement action’ against house builders and developers who mis-sold leasehold properties, trapping buyers in unfair contracts and unattractive or unsaleable properties.

Based on the evidence uncovered, the CMA are now completing the necessary legal preparations before committing to legal enforcement procedures against developers it feels have ‘broken consumer protection law.’

The CMA believe that developers will sign ‘legal commitments on how they do business,’ to avoid the CMA taking the issue through the courts.

It has also been suggested that the evidence found will help reshape and change the law for new build leaseholders and will assist the government in future reforms.

However, the press release states that changes will probably add strength to enforcing the ban on new leasehold homes and reducing ground rent to zero on new leases rather than helping existing leaseholders plagued with excessive ground rents and onerous conditions.

In addition to investigating legal action against unfair leasehold perpetrators, the CMA are also developing consumer advice for existing and future owners of leasehold property. The advice will offer ‘tips on what they can do when faced with permission fees and service charges they consider unjustified.’

The concerns raised included:

Ground rents escalating and potentially doubling within 10 years with increases built into contracts preventing people from selling their homes.

Many developers have lied or misled buyers about the cost of the freehold title.

Buyers were consistently and intentionally mis-sold their leasehold homes. The CMA found evidence of developers failing to explain the term leasehold or claiming that it is ‘just the same’ as freehold ownership.

Unreasonable and disproportionate fees being charged. Here, the CMA refer to both excessive and increasing ground rents as well as unreasonable charges imposed on routine maintenance and home improvements.

Law Society of England and Wales president Simon Davis said:

“We have long called for consumers to be provided early in the buying process with information about the key terms of the lease of the property they are considering. Developers and estate agents should be making the terms explicit from the outset – this is what they are required to do already under consumer protection law.

“We want the leasehold system to operate fairly for leaseholders and for it not to cause delays in the home buying and selling process.

“We also want it to be easier and cheaper for leaseholders to extend their lease, buy their freehold and take over management of their block.

“We will engage with the CMA in the next phase of its study as it considers the way in which legal advice was provided and we note the CMA’s concerns about developers recommending a specific solicitor or firm.

“This recommendation can be appropriate as it may simply be because they have handled a number of transactions on a development and are familiar with the documentation. However, there should be no penalty for buyers wanting to instruct a different firm, nor should they feel pressured to use a particular solicitor via financial enticements.

“Solicitors offer impartial advice to their clients independently of developers and/or estate agents. However greater transparency in those relationships could prove to be a benefit to all parties.

“We are pleased that the initial CMA report reflects a number of views, recommendations and concerns raised us by during the investigation and in our submission.”

Mark Hayward, Chief Executive of NAEA Propertymark, commented:

“We have long called for action to be taken to help leaseholders who have been misled and treated unfairly.

“For too long, housebuilders and developers have not been transparent enough about what it actually means to buy a leasehold, which in turn has meant many owners have been faced with escalating ground rents and unreasonable fees, leading them into financial difficulty.

“Our research shows three in five (62 per cent) 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.”

Andrea Coscelli, the CMA’s Chief Executive, 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.”

William Michael, head of Real Estate Residential London at JMW Solicitors, commented:

“It is reassuring for buyers (in particular first-time buyers) to know that the CMA are investigating the “mis-selling” of leasehold properties. Often, the only route onto the property ladder for most buyers is by purchasing a leasehold property. The concept of owning a property as a leasehold is often confusing for buyers, as is the differentiation between a property that is leasehold, freehold or share of freehold. It is easy for buyers to be intentionally or unintentionally misled as to what exactly they are buying and what their legal interest in the property actually means. Furthermore, with leasehold properties, there are often various annual costs associated with the same, typically in the form of ground rent and different forms of service charges. These charges can be quite excessive and the CMA will do well to ensure that developers and estate agents in particular are fully transparent and disclose as much of this crucial financial information at the earliest possible stage”.

Louie Burns, Managing Director of the Leasehold Solutions Group, said:

“We welcome this report and commend the CMA for its thorough research to date. This is a damning report that highlights numerous leasehold abuses and we are pleased to see that the CMA is prepared to act against the developers and freeholders responsible.

“Freeholders so often claim that it is just a few isolated cases or blame the leaseholders for not reading the lease properly. Thanks to the CMA, we finally have an official document which lists “numerous complaints” of freeholder abuses in undeniable and shaming detail.

“It is vital that the CMA takes robust action to hold those responsible for leasehold abuse to account and ensure that consumers are protected going forward. We also feel that leaseholders should have a clear and effective system of redress and a means to seek compensation where instances of mis-selling can be proven. We look forward to the forthcoming publication of the CMA’s proposed enforcement action.”