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Leasehold homeowners ‘misled’ and ‘treated unfairly’ by developers

Paloma Kubiak
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Paloma Kubiak

The competition watchdog is set to launch enforcement action on housing developers following evidence of potential mis-selling and unfair contract terms in the sector.

The Competition and Markets Authority (CMA), said it has found “troubling evidence” as part of its probe into the industry:

Ground rents

In the past decade or so, housebuilders have been selling new build houses as leaseholds, meaning buyers have to pay ground rents. The CMA said it is concerned about these ground rents as homeowners have to pay escalating rents, which in some cases can double every 10 or 15 years.

It estimates the total number of properties with 10-year or 15-year doubling clauses is about 18,000, while the total value of the ground rent market – assessed as the value of the freeholds – is in the region of £10bn. Increases are often built into contracts, meaning people struggle to sell or remortgage their homes, leaving them trapped.

Cost of freehold and misleading information

It is also worried about the cost of freehold with evidence suggesting people have been misled about the cost of converting their leasehold into freehold ownership.

The CMA said that some buyers were told the freehold would cost only a small sum, but later on this price had ballooned to thousands of pounds without prior warning.

In other cases, buyers reported not being told upfront that a property is leasehold and this wasn’t explained to them. As a freeholder, you own the land, but leaseholders don’t own the land the property sits on so they essentially rent the land.

However, some buyers were told there was no difference and by the time people found it, they were unable to pull out of the purchase.

Unreasonable fees

Another area of concern relates to unreasonable fees. The CMA said buyers were being charged excessive and disproportionate fees for routine maintenance of a building’s shared spaces or making home improvements. If people want to challenge such charges, the process is often difficult and costly, meaning few people decide to go through with it.

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.”

The CMA added it is completing legal work to launch direct enforcement action against companies it believes have broken consumer protection law. This could result in firms signing legal commitments to change how they do business and possible remediation for homeowners who have been negatively impacted.

If they fail to make the required changes, the CMA could take action through the courts to make them comply with the law.

Last year the government confirmed plans to abolish the selling of new houses as leasehold properties and reduce ground rents for new leases to zero. The CMA said it will continue to work with the government on its reform plans for the leasehold market.