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OUR SERVICES: UPDATE

Comment on the CMA Investigation Update  Regarding the Selling of Leasehold Property

Comment on the CMA Investigation Update Regarding the Selling of Leasehold Property

The Competition and Markets Authority (“the CMA”) recently published an update on its ongoing investigation in to the selling of leasehold properties. This investigation is running parallel to the Law Commission’s leasehold reform consultation.
 
JB Leitch’s Head of Real Estate, Rob Denman, offers analysis and comment on the update and its potential implications.
 
The Report

Within the report, the CMA have identified six main areas of concern:

  1. Ground rents that increase significantly over time
  2. Grounds that may mean that a long lease is considered to be an assured tenancy under the provisions of the Housing Act 1988
  3. Ground rent increases linked to RPI
  4. Sales practices for leasehold houses 
  5. The cost of permission fees and service charges
  6. The lack of checks and balances protecting homeowners from potentially harmful terms and practices

The report is only an update at this time but the CMA have confirmed that they are preparing to take action through the powers of the Enterprise Act 2002 to “tackle certain instances of mis-selling of leasehold property” and “to address the problems faced by homeowners from high and increasing ground rents”.

Comment

The report raises some interesting points regarding developers sale processes and it is against developers that I envisage the CMA’s ire and future action will be initially directed.

Despite freeholders not being the immediate target of such action it is they who now hold the reversions of such properties and it is they who will bear the brunt of any enforced/agreed variations to existing lease terms. Freeholders will therefore need to consider their current relationship with developers that they have previously purchased freehold reversions from and what recourse they have against them (if any) if the freehold reversion values were to diminish due to enforced variations.

Rather surprisingly the CMA report does not refer to the 14 point government-backed ‘Public Pledge for Leaseholders” issued in March 2019 (“the Pledge”). The Pledge itself goes someway to address the concerns raised by leaseholders in the CMA report albeit that the CMA report does not agree with ground rents with RPI increases. Those signatories to the Pledge demonstrated their strong commitment to leasehold reform. Their commitment can be viewed in stark contrast to that of the government whose various agencies pontificate about such reform but never put any flesh on the bones of their findings. In any event it is those stakeholders in the industry itself that will bring about meaningful and practical change.

The CMA themselves have suggested that the requirement for action could be negated as “it is able to accept formal undertakings from traders in lieu of court action where they agree to address the CMA’s consumer protection concerns”. There have been a number of projects instigated by freeholders (following agreements with developers) to vary leases with supposed ‘onerous terms’.

If the CMA’s position does not change once they have concluded their investigation I envisage a potential scenario where developers provide the required undertakings to the CMA (following agreements between developers and freeholders who have subsequently purchased freehold reversions) to stave off court action so that all leases that are deemed onerous are varied accordingly.  This position could be further strengthened with a freeholder driven enhanced pledge for leaseholders which mirrors what the CMA and mortgage lenders consider to be acceptable lease terms for all stakeholders. This would give the CMA a much vaunted win but also allow the freehold sector to survive and potentially thrive in a scenario where all parties know what a ‘non-onerous’ lease is and how it can work.


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