The competition watchdog is investigating four of the UK’s biggest housebuilders after uncovering evidence that buyers of leasehold properties were misled and charged excessive fees.
Barratt, Persimmon, Taylor Wimpey and Countryside Properties all face action after the Competition and Markets Authority found “troubling evidence” of unfair practices.
The CMA said the developers may have broken consumer protection laws and has started enforcement action against them.
“It is unacceptable for housing developers to mislead or take advantage of homebuyers,” said Andrea Coscelli, the chief executive of the CMA. “Everyone involved in selling leasehold homes should take note: if our investigation demonstrates that there has been mis-selling or unfair contract terms, these will not be tolerated.”
What is a leasehold?
When a house is sold the buyer usually gets the freehold – ownership of the ground on which the building stands. This gives them complete control over the property. Leaseholds usually apply to flats, where there are several homes on the same ground. The leasehold is the right to live in that property for a set period of time outlined in the lease. A freeholder still owns the land, and when the lease ends the property becomes theirs too. Someone buying a leasehold house is effectively just a tenant with a long rental period. They will pay ground rent and need to ask the freeholder’s permission for certain changes.
How have people been affected?
Buyers have had to pay ground rents – these usually start low, but in some cases the housebuilders have written into the lease that the charge will double every 10 years. This adds a huge potential liability for buyers. Freeholders also charge for other things – in some cases homeowners have had to pay for a letter to be answered, in others they have been charged thousands for permission to make changes to their home. And when buyers try to buy their freeholds, they often find they have been sold on to investors, who in turn ask for large sums to be bought out.
What happens next?
The government said in 2017 that it would ban the sale of new leasehold houses and cut ground rents to zero. As a result, some housebuilders have not sold properties on this basis since. Existing leaseholders are still lobbying for help.
Among the practices highlighted by the watchdog were housebuilders charging escalating ground rents to buyers of new-build houses and flats – which in some cases were planned to double every 10 years – and people being told properties on an estate would only be sold as leasehold homes when they were later sold on a freehold basis to other buyers.
Other issues raised included leaseholders being told that converting to freehold ownership would be cheap, only for them to be told later and without warning that it would cost thousands of pounds.
There was also evidence of unfair selling practices, such as unnecessarily short deadlines to complete purchases to put pressure on people to make deals they may not have done with more time.
The CMA said that at this stage it should not be assumed that the developers have been involved in “any or all of the outlined practices”.
The leasehold scandal started to emerge several years ago as homeowners who had bought new-build properties discovered catches in the small print of their leases.
One couple told the Guardian their flat was worthless as a result of a clause that doubled ground rent, which meant banks and building societies were refusing to offer a mortgage on it. Others said they had been quoted tens of thousands of pounds to buy their freehold.
Sir Peter Bottomley, the co-chair of a parliamentary group on leasehold reform, said “fast and full” compensation was needed for those caught up in the scandal.
“This is a bad case of consumer injustice with housing barons exploiting mis-selling, unfair terms, inadequate law and developers’ lawyers being complicit in robbing leaseholders of quiet enjoyment of their homes and the prospect of fair prices on resale,” he said.
The housing secretary, Robert Jenrick, welcomed the CMA’s action and said he wanted “to see homeowners who have been affected by crippling ground rents obtain the justice and redress they deserve”.
He said: “Shameful practices of this kind have no place in our housing market and we are going to put an end to them.”
The CMA has written to the housebuilders outlining its concerns and requesting information.
The watchdog can demand legal commitments from the housing developers to change the way they conduct business or, if necessary, take the firms to court.
It is also investigating unnamed firms which bought freeholds from the four developers and have continued to use the same unfair leasehold contract terms, and has written to other builders telling them to check that they are treating their customers fairly.
The housebuilders said they would cooperate with the CMA’s investigation.
Shares in Barratt fell 3% in early trading, making it the biggest faller in the FTSE 100 index, and Persimmon fell by just over 2%.
