Newsflash: CMA investigation into consumer protection in the leasehold housing market

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Walker Morris has periodically reported on the Government’s review of perceived unfairness within the leasehold market, with our most recent article highlighting various proposals which aim to reform this market on a ground-breaking scale.  In line with some of those reported proposals, the Competition and Markets Authority (CMA) has, as of 11 June 2019, launched a formal investigation into potential breaches of consumer protection law within the leasehold housing market.

Walker Morris partner Louise Power, an expert in consumer protection laws in the real estate/housing context, explains the CMA’s investigation, and offers practical advice for interested parties such as land owners, housebuilders/developers, Local Authorities/social housing providers and managing agents.

What is the CMA’s investigation all about?

In an earlier Walker Morris briefing we explained the issue that some leasehold houses and flats have been sold by housebuilders to consumers where the lease includes clauses which may permit the ground rent payable by the homeowner to increase at a significant and, importantly, an unexpected rate. That problem is compounded in cases where developers have then sold the freehold interest in the property to another party, who collects those rents and refuses to sell the freehold to the homeowner except in return for a large premium.  Some leasehold owners consequently feel trapped in a home where they are forced to pay higher ground rents than anticipated, cannot afford to buy out the freehold owner and cannot sell the property on because the issue has come to light and is adversely affecting saleability. In some instances, some retail lenders have also refused to provide mortgages on properties containing onerous ground rent clauses.

Over recent years housebuilders have faced a variety of related complaints, including: the allegation that, certainly in the case of detached and semi-detached houses, the leasehold structure is unnecessary and has been put in place merely to extract value via ground rent obligations and sale of the freehold to investors; the detail and significance of the ground rent clauses were not sufficiently brought to the attention of customers prior to and at the point of sale; customers were misled about the potential for them to purchase the freehold and/or the freehold was then sold out from under them to private investment companies; customers felt under pressure to appoint solicitors recommended by the developer (and those solicitors did not then properly advise their client); and that excessive administration fees are charged by developers each time a query or complaint is made by homeowners.

Set against this background, and alongside wider Government proposals to combat perceived unfairness within the leasehold housing market [1], the CMA’s investigation will focus on two key areas of consumer protection:

  • Potential mis-selling – that is, whether leasehold home owners are given the information they need to fully understand the obligations they are taking on (for example, in relation to the payment of ground rent over time) and in relation to their ability to purchase the freehold; and
  • Potential unfair terms – that is, whether leasehold home owners are having to pay excessive fees due to unfair contract terms. This will include administration fees, service charges and ‘permission’ charges (where homeowners must pay freeholders and managing agents before making home improvements), as well as ground rents.

If the CMA thinks that a company’s practices are misleading or that its contracts contain unfair clauses it could take enforcement action to require the company to change how it operates.

The CMA is liaising with various stakeholders across the sector, including developers, lenders and freeholders, to obtain information about how leaseholds are sold and managed, and the terms their contracts contain. As the CMA wants to understand the impact on homeowners, it is also calling on individual homeowners to share their experiences that are relevant to the investigation.  Comments are invited by 12 July 2019 and contact details and further information are set out here.

WM Comment

The consumer protection legislation on which the CMA’s investigation will be based is fundamentally concerned with enhanced fairness for consumers and transparency and increased due diligence on the part of property businesses in their marketing, sales and complaints processes. Stakeholders must, therefore, ensure that they are familiar and compliant with their various consumer protection responsibilities and obligations – at all levels of their business.

For further information, for expert advice tailored to your business, and/or for comprehensive staff training on consumer protection obligations in the housing/property context, please see our more detailed briefing and please do not hesitate to contact Louise Power, who will be very happy to assist.


[1] including…stop press… the Government’s very recent announcement, on Friday 28 June 2019, that all new-build houses will be sold as freehold and that ground rents for new leases will be reduced to zero.