Competition and Markets Authority investigates leasehold market

It may have taken government consultations, a great deal of campaigning and a lot of adverse publicity highlighting perceived injustices, but finally the Competition and Markets Authority (CMA) has launched an official investigation into the leasehold market.

June’s investigation launch followed a letter written in May by Andrea Coscelli, Chief Executive of the CMA, which argued worrying areas such as permission fees and doubling ground rents needed urgent consideration.

The investigation will examine whether these typical leasehold features can be legally defined as ‘unfair terms’ and perhaps of most interest to those householders currently struggling with leasehold, will look into the potential mis-selling of leaseholds and whether the leaseholders in question were given sufficient information to make an informed decision to enter into a contract.

The investigation will take the form of contacting developers, lenders and freeholders to ask for information on the way in which the leaseholds were sold, including details of the terms included in contracts.

At the same time, the CMA will speak to the leaseholders themselves to gain a full understanding of the impact this situation has had on them and their lives.

Whilst the primary aim of the investigation is to protect purchasers in the future, those currently trapped in leasehold purgatory will be hoping that enforcement action is taken on the basis of unfair and onerous contractual terms and misleading information.

How did we arrive at this position?

The leasehold scandal really started to gain traction in the media in 2017 as more stories of the ‘unfair practices’ faced by unsuspecting leaseholders began to surface. Typically, these were purchasers of new-build homes, who were no longer faced with the historically low and usually uncollected ground rents.

There are two types of house sale – leasehold and freehold. In the past, the vast majority of houses were sold freehold, which meant that the purchaser had complete control and ownership of the property. They were a homeowner free to do what they wanted, given the usual planning constraints.

However, when a house was sold leasehold, the buyer was basically a tenant with extremely long rental terms. This meant that they would have to pay an annual ‘ground rent’ to the freeholder, and seek permission if they wanted to make changes to the property, like adding a conservatory.

For a long while this wasn’t a problem. The ground rents tended to be symbolic amounts such as £1 per year, which a lot of freeholders understandably didn’t actually bother to collect.

But as is often the way, someone spotted a chance to make money and developers began inserting clauses into contracts that set ground rents as much as £200-£400 per year. This would be bad enough, but some contracts stated the ground rent would double each decade.

A ground rent of £400 in 2010, for example, which doubled every ten years, would have risen to £12,800 by 2060. But this was not the only problem, as some freeholders have found other creative ways of extracting money from leaseholders.

There are leaseholders now expected to pay £100 to have a letter to the freeholder answered, or £2,500 for permission to build a conservatory – this is not planning permission, just an okay from the freeholder who offers nothing more for the fee paid.

What are a leaseholders options?

For the more than 100,000 homeowners struggling under these conditions, the simple option is to sell and move, but it’s not that simple. Some lenders refuse mortgages on properties with this kind of onerous leasehold now the problem has been highlighted.

Even if a buyer is interested, a conveyancing solicitor will often warn them off purchasing, unless the property can be acquired at a substantial discount.

A leaseholder can try to buy the freehold outright, but finding out who owns it can be tricky. These sources of guaranteed annual returns are much sought after by investors and can be wrapped up in complex ownership structures with little or no transparency.

In June, the Government announced plans to ban leaseholds on new-build properties, but as yet has not announced when the ban will come into force. It is not clear whether it will be applied retrospectively to ease the pain of homeowners already trapped in leasehold properties.

Will voluntary pledge deter legislation?

Another measure designed to tackle the problem came in May, with the announcement of a voluntary ‘pledge’, signed by more than 40 property developers. The pledge includes commitments such as:

• Varying leases with ground rent which doubles more than every 20 years
• Making sure that new homeowners don’t purchase a property with an ‘onerous’ doubling clause on the ground rent – this refers to a ground rent doubling more often than once every 20 years
• Ensuring buyers have a full understanding of the costs and obligations associated with a leasehold property
• Replacing the doubling of ground rent with a scheme which increases the rent in line with the retail price index
• Ensuring that all prospective purchasers have future costs such as administration fees and permission charges explained to them fully and accessibly before they purchase

The pledge was intended to form the basis of a future enforceable code of conduct and could be seen as an attempt by the industry to provide a guiding hand to government as it approached the matter of dealing with leaseholds.

Private Members Bill offers hope

It is apparent that the desire for change is gathering pace. A private members bill, introduced by Eddie Hughes, the Conservative Member of Parliament for Walsall North, on the issue of ground rents within the leasehold sector, has passed its first reading on 25th June 2019.

The Bill is designed to create a legal obligation on freeholders to grant a quick and simple lease variation to leaseholders where ground rent prohibits a sale. It also intends to ensure ground rents are capped at the lower of £250 per annum or 0.1% of the property value.,

Hughes also wants the original property developer to foot the leaseholder’s legal bills when varying certain ground rent contracts. Whilst these changes will bring a measure of relief to leaseholders, a date has not yet been scheduled for the Bill’s second reading, so nothing is likely to change any time soon.

The whole situation remains a mess and a real worry for leaseholders, but again this is another issue that highlights the need for property buyers to appoint an experienced conveyancing solicitor, well-versed in the full range of purchase options.

For a reliable independent conveyancer that does not pay referral fees, but has the experience to make a difference, please get in touch today and we’ll explain how Ansons make it happen. Talk to Julie Tomasik today on 0121 716 3732 or email jtomasik@ansons.law