Mis-selling and unfair contract terms in new leaseholds

In a move welcomed by leasehold campaign groups, the Competition & Markets Authority (CMA) is investigating four of the UK’s largest household builders about how leaseholds are being sold.

Buyers have complained about being caught in a leasehold trap, with rising ground rents and unfair fees. In September 2020, the CMA requested information from the developers. The CMA has made clear that any findings of mis-selling or unfair contract terms won’t be tolerated.

The difference between a freeholder and a leaseholder

Someone who owns a property outright, including the land it’s built on, is a freeholder. A leaseholder is the person who owns a lease, which gives them the right to use the property. But they must get their freeholder’s permission for any work or changes to their home.

When a leasehold flat or house is first sold, a lease is granted for a fixed period of time, typically between 99 and 125 years, but sometimes up to 999 years. Although leaseholders may extend their lease or buy the freehold.

Why the CMA investigation?

Millions of properties in England and Wales have been sold as leaseholds, usually with the buyer getting a mortgage to live in the property, but also having to pay ground rent to the freeholder.

New buyers/leaseholders have complained that they’re tied into leases that see ground rents increasing expensively, with the freehold sometimes having been sold on to a third party. Some assert that they also face large fees when planning extensions to their property or even basic home improvements. Campaigners have estimated that 100,000 people have been affected.

The CMA’s concerns include:

• (i) some leasehold buyers facing ground rents that rise considerably every decade and said that others had allegedly been told that they were unable to buy the freehold on a site;
• (ii) the mis-selling allegations placing pressure on potential buyers to complete a purchase quickly with some being apparently told that they would be able to buy the freehold for a small sum, only to later find this cost had increased considerably; and
• (iii) many new leaseholders being seemingly stuck in a position of never being able to sell as the increased ground rents and costs of freehold purchase being unattractive to buyers.

What happens next?

The CMA has written to the four developers requesting information about how they operated. It’s also telling other companies to review their policies. In addition, the CMA is also investigating some companies that bought freeholds from these developers and have continued to use the same “…leasehold contract terms…”

Depending on the outcome of the CMA investigation, the CMA could require companies to change their leasehold selling process and, of course, the option of Court proceedings remains open with refunds being a possibility. The CMA is committed to working with the government on these issues, which could include supporting the move to stop new leasehold house sales and implement nil ground rents in new leases.

No doubt campaigners and those affected will be very keen to know the outcome of the CMA’s investigation when it next reports.

Our specialist Dispute Resolution Solicitors have many years’ experience in the law surrounding disputes between leaseholders and freeholders. If you require our advice, please call us on 0330 822 3451 or request a call back online at your convenience.