By Raam Kanbi, partner, Real Estate Residential London, JMW Solicitors
The Competition and Markets Authority (CMA) released its results of their probe into the leasehold practices on 28 February 2020, and found evidence of potential mis-selling and unfair contract terms in the leasehold housing sector. The Chief Executive of the CMA, Andrea Coscelli, commented on the results in the press release, saying:
“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.”
It is reassuring for buyers (in particular first-time buyers) to know that the CMA are now planning enforcement action. Often, the only route onto the property ladder for most buyers is by purchasing a leasehold property. For many first-time buyers, this means using their lifetime savings that they have worked hard to create over many years and pouring them into their first home. In some cases, this is not enough and many buyers are also relying on the bank of mum and dad (their life savings too being utilised) to help finance a purchase.
The concept of owning a property as a leasehold is often very confusing for buyers, as is the differentiation between a property that is leasehold, freehold or share of freehold. It is easy for buyers to be intentionally or unintentionally misled as to what exactly they are buying and what their legal interest in the property actually means. Often, the differences and consequences are not explained until much further into the transaction, at which point the prospective buyer will have already made financial and personal commitments to the transaction and find themselves with no option but to continue with the purchase.
The costs attached to buying and owning a leasehold property can also be quite significant, which was included within the scope of the CMA review. With leasehold properties, there are often various annual costs associated with the same, typically in the form of a rising ground rent and different forms of service charges. These charges can be quite excessive and not laid out to buyers at the point of offer or reservation, and the CMA will do well to ensure that developers and estate agents in particular are fully transparent and disclose as much of this crucial financial information at the earliest possible stage.
The result of the CMA investigation is another clear signal that there must be a reform in the sale of leasehold properties. There have been longstanding concerns on the levels of ground rent and the increase mechanisms being unreasonable or unfair, which led to the consultation on tackling unfair practices in the leasehold market by the Ministry of Housing, Communities & Local Government in 2017.There was an overwhelming response calling for ground rents to be abolished and to level the playing field for both buyers and existing leaseholders.
Since the 2017 consultation, there has been some progress in the restriction of new build leasehold houses and a gradual move away from doubling ground rents (which are now largely unacceptable to lenders) to increases in line with RPI. Some developers and landlords have also taken steps to offer a variation of lease terms to existing leaseholders with doubling ground rent. However, there is still much to be done to protect buyers and owners from unfair practices, not just when initially purchasing a property but also during the ownership of the lease, such as the route to challenging service charges and purchasing the freehold.
It is not yet clear what enforcement action the CMA will take or when this will happen, but it is encouraging to see further recognition that this is a problem that needs to be address, and the beginnings of steps being taken to ensure that consumer protection laws are upheld when marketing and selling leasehold properties.
About Raam Kanbi
Raam is a new build specialist and often acts on off-plan purchases and contract assignments. He also advises first time buyers and purchasers using the Help to Buy Equity Loan Scheme. Raam also acts in all manners of residential conveyancing transactions such as sales, purchases and re-mortgages for first time buyers and property investors.