The Competition and Markets Authority has launched an investigation into the mis-selling of leasehold properties.
The CMA will examine whether leasehold contract terms are unfair in relation to ground rent and controversial ‘permission charges’.
It says it will do this using consumer protection law powers, rather than by way of a market study at this stage, and has warned that enforcement proceedings against developers and freeholders could follow.
The CMA set out its position in a letter to Clive Betts MP, chair of the Housing, Communities and Local Government Committee. Betts had written to the CMA urging an investigation following evidence heard over the course of its inquiry into leasehold reform.
The CMA says it’s conscious that considerable information gathering on the general problems in the leasehold sector has already been done through the recent work of HCLGC, the APPG on Leasehold and Commonhold Reform, and other groups, and that proposals for market reform are already in progress at the Law Commission and in government.
The work that the CMA will do on the legal position, under consumer protection law, is envisaged within that overall context, and as complementary to the reform work already under way.
Betts says: “The Housing, Communities and Local Government Committee report into leasehold laid bare a system in urgent need of reform, where homebuyers are vulnerable to exploitation by freeholders, developers and managing agents. Worse still, we heard extensive evidence from leaseholders regarding onerous ground rent terms, high and opaque service charges and one-off bills, unfair and excessive permission charges, and unreasonable costs to enfranchise or extend leases.
“Over the course of the inquiry we heard evidence suggesting that there are a significant number of cases where homebuyers may have been deliberately mis-led about the terms they were signing up to. If the sale of leasehold house has taken place with the homebuyer under the impression that they were buying it freehold, or ‘equivalent to freehold’ as many were told, then action needs to be taken. Equally, if a homebuyer is told they will be able to buy the freehold in a couple of years, only to find out it has been sold on to another company, then this should be investigated.
“I am pleased that the Competitions and Markets Authority has taken positive action to understand the scale of mis-selling and onerous leasehold terms. Homebuyers need to be protected and, where evidence of mis-selling is proved it is right that the CMA take action.”
Submissions to the HCLG committee suggested that a lack of clarity in the sales process resulted in many leaseholders being unaware of the terms they were signing up for.
Many leaseholders were unaware of the differences between freehold and leasehold at the point of purchase, and in particular the additional costs and obligations that come with a leasehold property.
Evidence presented to the committee suggested some developers deliberately obscured these differences, with some leaseholders reporting that they had been told by sales staff that properties were ‘equivalent to freehold’.
Buyers were often told they would be able to purchase the freehold of their property at a later date, only for the leasehold to be sold to a third party, which would then vastly increase the cost;
Many leases also contained onerous ground rent clauses, where rents would eventually increase to the point where properties became unmortgageable and unsellable. A number of leases also contained ‘permission fees’ where leaseholders were required to pay a fee to make minor cosmetic changes to their homes.