Unfairness in the leasehold market: Consumer protection and CMA investigationPrint publication
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 some of the essential legal principles underpinning the CMA’s investigations, and offers her 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, such that 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 disgruntled homeowners.
Set against this background, and alongside wider Government proposals to combat perceived unfairness within the leasehold housing market , 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, which in some cases can double every 10 years.
- 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 relevant to the investigation. Comments are invited by 12 July 2019 and contact details and further information are set out here.
What do stakeholders need to know?
Consumer protection laws that will underpin the CMA’s investigation include the Consumer Protection from Unfair Trading Regulations 2008 (the CPRs); and the Consumer Rights Act 2015 (CRA). Some of the key legal principles of which stakeholders should be aware are explained below.
Consumer Protection Regulations
Following the repeal of the industry-specific Property Misdescriptions Act 1991 in 2013, the provision of information to consumers in the context of property sales has been governed by the wider-reaching CPRs.
The CPRs prohibit property businesses from engaging in unfair commercial practices in their dealings with consumers, which includes giving false or misleading information (including information which is given verbally, in writing or visually); failing to give material information; exerting undue pressure on consumers; and engaging in any of the 31 specific banned practices listed at Schedule 1 .
It is important to note that, where a commercial practice is aimed at a target market, the definition of consumer will refer to a member of that market and where a group of consumers may be vulnerable in some way, for example first-time buyers or the elderly or infirm, the standards required of the business will be higher.
Also, crucially, in the context of this legislation, consumers are not only those people who actually buy from or pay a property business – they also include anyone who is a prospective customer.
The CPRs require businesses to be proactive. They impose a duty to disclose information that a consumer needs to make an informed transactional decision and a common trap for the unwary is that liability for misleading by omission cannot be avoided if you do not know the material information, but have taken no reasonable steps to find it out. The CPRs also prohibit commercial practices which intimidate or exploit consumers or which restrict or are likely to restrict how they act or make choices. The CPRs also place a general prohibition on commercial practices where a business fails to act in a professionally diligent manner.
The reach of the CPRs is, therefore, very wide – as are the enforcement provisions, which attract both civil and criminal liability. Depending on the circumstances, breach of the CPRs can result in unlimited fines and/or up to 2 years’ imprisonment. Reputational consequences can also, of course, be devastating.
Consumer Rights Act
The CRA covers all terms in a consumer contract and provides that a term which is unfair is not binding on the consumer. There are some key points to note:
- Under the CRA’s “fairness test”, a term is unfair if it causes a significant imbalance in the positions of the parties to the detriment of the consumer in a way which is contrary to the requirement of good faith. (The core provisions of a standard contract – that is, the main subject matter of the contract or terms concerning price or remuneration for goods or services sold – are excluded from the fairness test, but only so far as they are expressed in plain and intelligible language.
- The “transparency and prominence test”: A seller must use plain and intelligible language in his written terms and terms must be brought to the consumer’s attention in such a way that the average consumer would be aware of them. Terms which may otherwise escape the test of fairness (for example, core terms or the core bargain) will not do so if they are not expressed in plain and intelligible language and prominent.
- Part 1, Schedule 2 CRA contains a non-exhaustive list of terms which may be considered ufairand is known as the “grey list”. (http://www.legislation.gov.uk/ukpga/2015/15/schedule/2/enacted)
The CMA is likely to assess contractual terms relating to the payment of fees, charges, ground rents and freehold premiums against these CRA tests. Any such assessment should also take into account the overall factual matrix, such that the relationship and bargaining position between the parties, and any wider contractual provisions, could also come under scrutiny.
How businesses can protect themselves
If faced with a prosecution under the CPRs, it may be possible to raise a defence if the offence was committed because of a mistake, reliance on information supplied by another, another person’s act or default or because of some other accident or cause outside the retailers control; and if all reasonable precautions and due diligence were undertaken to try to avoid commission of the offence in the first place.
It will not be possible to raise the due diligence defence if a business knowingly or recklessly allows its or its employees’ conduct to fall below honest and professionally diligent standards.
There are, however, some practical steps that businesses can take to avoid commission of CPR offences. Following these should also assist with the production of evidence to support a due diligence defence if and when any complaint, investigation or prosecution is instigated:
- Providing training to all staff involved, directly or indirectly, with the sales and marketing (including production of hard and soft copy materials) of your services/products and retaining records and evidence of such training achievements.
- Taking care that all information, online and in all other forms, that is gathered and presented to consumers (potential and actual) is accurate, fair, not deceptive or misleading and does not leave out material facts. Having safeguards in place as to the accuracy and security of all such information.
- Updating (or introducing) policies and procedures regarding the review/maintenance/correction and updating of marketing material and other consumer-facing information.
- Signposting consumers to any publicly available information which might affect or assist with their transactional decision.
- Maintaining a comprehensive audit trail of all these efforts.
There are also some tools that can be deployed in defence of any complaint if necessary:
- Firstly, is the complaint actually time-barred? There is an applicable limitation period which provides that no prosecution can be brought more than three years after an offence was committed or one year after the discovery or report to trading standards, whichever is the earlier.
- Secondly, can a complaint be negotiated away? (If it can, note that negotiating a settlement with a consumer complainant may not, of itself, prevent a prosecution, and it may not guarantee confidentiality.) Property businesses should seek specialist legal advice to assist with any settlement negotiations and to make sure that any agreements are properly documented and include confidentiality obligations.
- Treat every customer and potential complainant fairly, politely and professionally, and be honest and open in all dealings, so as to foster good relationships. Good customer relations can avoid or quickly resolve complaints and can help to avoid reports to the authorities.
- Finally, consider whether the due diligence defence can be raised.
In relation to any potentially onerous or unfair terms, property businesses should urgently seek specialist advice so that a comprehensive review and fairness/transparency assessment of all relevant terms, policies and practices can be carried out and so that any areas of vulnerability and potential liability can be addressed as swiftly – and as privately – as possible.
Fundamentally, enhanced fairness for consumers, transparency and increased due diligence on the part of the property business underpin the CPRs and the CRA alike. 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 do not hesitate to contact Louise Power, who will be very happy to assist.
 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.