Developers face CMA action over consumer law breaches

Enforcement action against residential developers for serious leasehold mis-selling is to be launched by the Competition and Markets Authority (CMA).

The UK’s competition watchdog said it has uncovered “troubling” evidence of potential mis-selling and unfair contract terms in the leasehold housing sector, with buyers “being taken advantage of”.

The CMA expressed concern that checks and balances that should have protected homeowners from potentially harmful terms and practices were ineffective.

It follows a probe by the regulator into leasehold housing following concerns that leasehold homeowners have been unfairly treated, and prospective buyers misled by housing developers.

The investigation began in June 2019 and is still ongoing.

In its initial report just published, the CMA identified serious concerns around issues it said “have caused, and will continue to cause, significant harm to leasehold homeowners”.

There was evidence of individuals being misled – to the tune of thousands of pounds in some instances – about how much it would cost to convert the leasehold to freehold.

Developers did not explain the differences between the two types of ownership – even when specifically asked; and some purchasers were told there was no difference.

It found that ground rents were escalating to such an extent that in some cases it doubled every 10 years.

With it often being a contractual obligation, homeowners potentially struggle to remortgage or sell their homes.

As a result of being given misleading or wrong information by developers, the CMA said by the time people find out the realities of owning a leasehold, it is often too late to pull out of the purchase – or would face significant difficulties if they tried to.

Unreasonable fees was another major issue, with leasehold homeowners charged excessive and disproportionate fees in relation to things such as routine maintenance of communal areas.

However, when they came to challenge a fee it was often a difficult and costly process.

The regulator said it will bring action against companies it suspects have broken consumer protection law.

CMA chief executive Andrea Coscelli said: “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.”

The regulator also wants to see reforms to the law, including a ban on the sale of new leasehold houses and the reduction of ground rents for new leases to zero.

Law Society 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.

He said the Society wants the leasehold system to operate fairly for leaseholders; for it not to cause delays in the home buying and selling process; and it wants it to be easier and cheaper for them to extend the lease, buy their freehold and take over management of their block.

According to the CMA's report, estimates suggest there are between four and seven million properties in the leasehold market.

Almost all new-build residential flat transactions from 2000 to 2018 were leasehold, representing 86 per cent of the total number (800,000) of new-build leasehold residential property sales - the rest were leasehold houses.