CMA launches investigation into leasehold mis-selling

Investigation welcomed by Commons HCLG committee after inquiry into leasehold reform.

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The Competition and Markets Authority (CMA) is to investigate the mis-selling of leasehold properties to test whether the most onerous leasehold terms, such as permission fees and doubling ground rents, might constitute ‘unfair terms’ as legally defined.

Chair of the Commons HCLG committee Clive Betts MP had written to the CMA urging an investigation, following evidence heard over the course of the committee’s inquiry into leasehold reform.

“We heard extensive evidence from leaseholders regarding onerous ground rent terms, high and opaque service charges and one-off bills, unfair and excessive permission charges, and unreasonable costs to enfranchise or extend leases,” said Betts.

“Over the course of the inquiry, we heard evidence suggesting that there are a significant number of cases where homebuyers may have been deliberately mis-led about the terms they were signing up to.

“If the sale of a leasehold house has taken place with the homebuyer under the impression that they were buying it freehold, or “equivalent to freehold” as many were told, then action needs to be taken.”

Betts added: “Equally, if a homebuyer is told they will be able to buy the freehold in a couple of years, only to find out it has been sold on to another company, then this should be investigated.”

In a letter to the committee, the CMA says it will examine whether the most onerous leasehold terms, such as permission fees and doubling ground rents, might constitute ‘unfair terms’ as legally defined.

These investigations may, in due course, lead to the CMA bringing enforcement proceedings against the developers and freeholders responsible.

There are approximately 4.2m leasehold properties in England, two-thirds of which are flats.

Submissions to the Committee suggested a lack of clarity in the sales process resulted in many leaseholders being unaware of the terms they were signing up for.

Evidence outlined:

  • Many leaseholders were unaware of the differences between freehold and leasehold at the point of purchase, in particular the additional costs and obligations that come with a leasehold property, and that some developers deliberately obscured these differences, with some leaseholders reporting that they had been told by sales staff that properties were “equivalent to freehold”
  • Buyers were told they would be able to purchase the freehold of their property at a later date only for the leasehold to be sold to a third party. Leaseholds were quickly sold on to third parties, despite homebuyers being told they would have the opportunity to buy the freehold, who would then vastly increase the cost
  • Ground rents increased to the point where properties became unmortgageable and unsellable
  • Leaseholders required to pay exorbitant fees to make minor cosmetic changes to their homes, such as changing a doorbell

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