Builders ordered to pull 'illegal' ground rent doubling clauses

The Government is finally taking action over the poor treatment of leaseholders.

Buying a property on a leasehold basis is renowned for being a touch more difficult ‒ and potentially more stressful ‒ for years to come after you get hold of the keys.

Sure, you have a freeholder who is responsible for the maintenance of the property itself, which can seem like something of a relief.

But there are so many other issues to try to keep track of, from the length of the lease to the additional payments you have to account for each year for things like the maintenance of the property.

And then there’s the ground rent, a fee you pay to the freeholder each month so that you can live on that land. These were often set at what’s called ‘peppercorn’ rates, meaning they are barely even worth worrying about.

However, some developers have seen them as a way to milk leaseholders for yet more cash.

And that shoddy approach has now led to the involvement of the Government.

Breaking the law

Last year the Competition and Markets Authority (CMA) announced it was taking enforcement action against four of the nation’s biggest housebuilders: Countryside Properties, Taylor Wimpey, Barratt Developments and Persimmon Homes.

With those first two firms, the issue came down to contract terms which the CMA believed were possibly unfair, while with the later two the concerns centered on the possible mis-selling of leasehold homes.

After demanding more information from the businesses themselves about their conduct, the CMA has now taken its first piece of actual action by instructing Countryside and Taylor Wimpey to remove certain contract terms covering the ground rent leaseholders have to pay, after concluding that these terms breach consumer protection law.  

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I can't move!

Both developers were found to include clauses in the contracts they issue leaseholders that mean the ground rent increases regularly.

These weren’t small increases either, with the rent doubling every 10 to 15 years.

The repercussions of these enormous increases went beyond simply causing financial worries for the leaseholders too.

The CMA noted that because the increases were built into the contracts, it could mean the leaseholders then had issues arranging new mortgages against the property ‒ keeping them on expensive standard variable rates rather than being able to remortgage to a cheaper deal ‒ or made selling virtually impossible.

In effect, if you made the mistake of buying a home like this, you ended up being effectively trapped and unable to move on.

Unacceptable

The CMA has now instructed both firms to remove those clauses, not just from their existing contracts but also to ensure that they aren’t included in future contracts either.

Andrea Coscelli, chief executive of the CMA, said that it was “unacceptable” that these ground rent terms had meant that homeowners were essentially trapped, and warned that they must be removed entirely if Countryside and Taylor Wimpey want to be on “the right side of the law”.

She added: “If these developers do not address our concerns, we will take further action, including through the courts, if necessary.”

This, for me, is the crucial part. The developers have been told what they have to do in order to meet the expectations of the law, and they know full well what lies ahead if they try to drag their heels.

Not before time

It’s really encouraging that the CMA has taken this action. It’s not exactly been a secret that leaseholders have been taken advantage of by greedy developers, writing terms like this into contracts that are completely unjustifiable.

It’s one thing for ground rent to increase slightly over time to take inflation into account. But for it to double every decade has always been hard to justify.

The CMA has also set an important precedent for the other developers it is investigating, showing that it will expect them to cut out the actions where they may think they have got away with ignoring the law. 

However, the real proof of the pudding will come in the compensation paid to those homeowners who have been misled, mis-sold and taken advantage of.

Housing secretary Robert Jenrick said he looked forward to “appropriate redress” being paid, so there’s a clear expectation that these builders will have to put their hands in their pockets to make things right.

Let’s hope it’s paid quickly.

Nonetheless, the issue once again exposes the lack of powers at the CMA’s disposal. If an energy supplier breaks the rules, then the energy regulator Ofgem has the power to fine them, and to force that supplier to pay compensation.

The CMA has no powers to levy fines and is effectively reliant on the threat of court time ‒ and the potential outcomes of that legal action ‒ to push businesses into doing what’s right.

Given that, is it any wonder that some businesses will continue to push their luck and see what they can get away with?