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News Analysis: Leaseholders trapped into paying spiralling charges

Developers accused of duping buyers over punitive clauses in freeholds

News that the Competition and Markets Authority will investigate mis-selling claims in the leasehold sector has been welcomed by leaseholders and campaign groups. But is this the right course of action – and what should developers do to put things right?

Stories of mis-selling have been rife ever since the ‘leasehold scandal’ hit the headlines. Various reports including Leasehold: A Life Sentence? by NAEA Propertymark and the Leasehold Reform report by the Housing, Communities and Local Government Committee have suggested developers were not just at fault occasionally during the sales process, but routinely.

The fact that many leasehold properties were sold using the Help to Buy scheme compounds leaseholders’ complaints. Both the name of the government scheme and developer’s marketing literature led them to believe they were buying a home. But it was only when the deal was done and contracts signed, that their true position as a freeholder’s tenant became clear.

HCLG committee chair Clive Betts MP says: “Developers are adamant that they have not deliberately misled buyers with false promises or partial sales information. However, the pattern of near-identical stories demonstrates significant failings in the process.”

Joanne Darbyshire is one of the founder members of the National Leasehold Campaign, and her story is typical.

She says: “In my case, I was told the freehold would cost about £5,000. It was sold on 11 months later for £7,375 and for me to enfranchise from the freeholder will now cost about £30,000. Had I been informed about the planned onward sale and the dire financial consequences, I would have bought the freehold at the point of sale for £5,000. Everyone would. Information that was critical to my decision-making was withheld.”

The National Leasehold Campaign now has more than 14,000 members, many of whom have similar stories of mis-information or withholding of critical information at the point of sale. London Money director Martin Stewart is a bit more sanguine towards developers’ sales staff. He says: “I would be surprised if the sales team went into this detail, but let’s give them the benefit of the doubt and assume they did. I dare say they would not necessarily understand what they were saying, which is one of the fundamental differences between salespeople and professional advisers. It sounds like a script to me and therefore once repeated, it is easily forgotten.

“The other side of the equation being: would the consumer who might purchase a property once every 10 years even understand what this really meant? And if they did I am pretty sure they wouldn’t necessarily understand its implications. There is some culpability here on the legal side as well. It is all well and good asking a question in order to tick a box for the file, but that is a worthless exercise when it leads to consumer detriment.”

Stewart concedes that there needs to be “some sort of retrospective action somewhere”, either by developers or solicitors. However, the NLC is clear on what it wants to happen next. It says developers should be forced to put people back into the same financial position they were had they been fully informed at the point of sale.

As well as being misled about the future of their freeholds, many leaseholders also have issues with ground rent escalation clauses – many of which see annual payments double every decade – as well as controversial ‘permission fees’ to make even minor alterations to their home.

It is difficult to imagine that anyone clearly told how these fees and charges would be calculated and how they would increase, would keenly sign up to buy a new home and therefore a lifetime of paying ever-increasing fees to a third party. Many leaseholders have found that once the freehold was sold to an investor, permission fees for alterations, such as adding an extension or building a shed, inexplicably rose.

Some freeholders also charge leaseholders each time they remortgage or, if they let their property, sign an assured shorthold tenancy with a new tenant.

Darbyshire says: “Many leaseholders thought they were buying the property, but not the land; without realising that they do not own a brick, they own a lease.”

While it appears the CMA’s work will mainly examine developers’ actions during the sales process, other parties are looking at the culpability of conveyancers. Law firm Simpson Millar is representing several hundred people who claim their conveyancers failed to fully inform them of the restrictions and rising costs associated with the leasehold agreements.

In time, both these legal negligence cases, and the results of the CMA’s investigations, should hopefully present a clearer picture of who is truly to blame for the leasehold scandal.

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