CMA: Leasehold buyers ‘taken advantage of’ by dodgy developers

Leasehold buyers are victims of mis-selling and are being treated unfairly, new report suggests.

Thousands of people across the country who bought their property on a leasehold basis have been deceived over the ways that this form of ownership is different from freehold, and misled over the additional costs it may bring.

That’s according to the Competition and Markets Authority (CMA), which said that it has started the ball rolling on launching enforcement action against dodgy developers who have routinely tricked buyers by concealing from them all sorts of potentially negative aspects of leasehold ownership.

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Leasehold vs freehold

First off, it’s worth highlighting what leasehold ownership is and why it’s different.

When you buy a freehold property, then you own the land and the property.

Everything about that property is your responsibility, from organising buildings insurance to maintaining the upkeep of the property. And that freehold is yours for as long as you want it ‒ nobody can step in and take it away from you.

It’s a bit different with leasehold, where you essentially purchase the right to live within a property for a certain period, often around 99 years or so. Once that lease ends, then ownership transfers back to the freeholder.

What’s more, the freeholder is in charge of organising things like maintenance of the property, but the leaseholders pay for it, with the process of choosing which firms carry out that work ‒ and negotiations over the fee ‒ far from transparent.

There are other fees that also come with leasehold ownership, such as the annual ground rent, which can also prove problematic.

Leasehold & ground rents are often a Con by greedy developers. Strong action by the regulator & government is needed. It is often those on low income who get caught in the leasehold trap. Greed has become a viral disease in our society, nobody can justify the suffer it causes.

— Brian Warwick (@Wiltpensionista) February 28, 2020

Ripping people off

The CMA said that its investigation of the leasehold market had thrown up a number of troubling findings, which suggested that buyers were on the wrong end of mis-selling and being treated unfairly.

It highlighted four key areas of concern:

1. Ground rents

Leasehold buyers are facing escalating ground rents, which in some cases double every ten years. With this increase built into the contract of the lease, it leaves people trapped, unable to sell their homes and facing rapidly rising bills.

2. Freehold costs

The CMA said it had seen evidence that people were being misled about the cost of converting their leasehold into freehold ownership.

Some were told at the outset that this would only cost a small amount, only to find later on that this had increased by thousands of pounds with little to no warning.

3. Misleading information

The CMA found that some buyers were not being informed early on that the property they were purchasing was leasehold, and what that meant.

Developers were not explaining the differences, even when directly asked, and in some cases lied to buyers by saying there was no real difference.

According to the investigation, by the time people discovered the realities of how owning a leasehold property is different, it would be too late to pull out of the deal.

4. Unreasonable fees

The study found that leaseholders were being charged “excessive and disproportionate” fees for things like home improvements or the routine maintenance of a building’s shared spaces.

Should buyers want to challenge these high charges, the process was often difficult and expensive, meaning few actually went through with it.

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What comes next?

The CMA said it is now conducting the “necessary legal work” in order to launch direct enforcement action against the firms it believes have broken consumer protection law.

This may mean forcing those firms to sign legal commitments to change how they conduct their business, and potentially the CMA pursuing the firms through the courts.

But it also highlights the fact that real changes are needed to the laws covering leasehold. 

The Government has talked a good game about reforming leasehold, with plans such as banning the sale of new leasehold houses and reducing ground rents for new leases to zero.

Yet that requires legislation, and even with a stonking great majority, getting that legislation through parliament will take time. Fixing the many problems with the leasehold market is not going to happen overnight, or even in just a few months.

With that in mind, the CMA said that it is developing consumer advice for people who already own, or are interested in buying, a leasehold property which will cover things like what they can do when faced with fees and charges that they consider to be unjustified.

This is well-meaning, and any extra sources of information that might help people make better decisions is to be welcomed. But it’s not like there’s a shortage of information out there already about the dangers of leasehold. 

The issue isn’t how much information is out there, it’s how to make sure that the people who would most benefit from that information actually get to see it.

Because we apparently can’t rely on developers and estate agents – the people selling the properties – to always hold up their side of the bargain and ensure that buyers are truly informed on what they are buying, and what it will mean for their money, not just today, but years down the line.