Reviewed: the CMA’s approach to tackling the leasehold market

Michael Walsh reflects on recent recommendations set out by the CMA in its Leasehold Housing report. The Competition & Markets Authority (CMA) recently released an updated report entitled Leasehold Housing following its investigation into whether there have been breaches of consumer protection law in the leasehold housing market. The report identifies a number of areas of concern where the CMA intends to take enforcement action. Summary The initial phase of the CMA’s investigation has been concluded, and it has identified six key areas of concern: Ground rent: lease terms which require ground rents to increase significantly over time, as they can create difficultly for leaseholders who need to meet obligations or who wish to sell or mortgage their homes; Ground rent: high or escalating ground rents that raise the prospect of a lease becoming an assured tenancy under the Housing Act 1988; Ground rent: reservations about RPI-linked increases to ground rent; Sales practices in relation to leasehold houses: there have been complaints of developers mis-selling leasehold houses or unduly influencing buyers early in the sales process; Permission fees and service charges: there have been complaints over landlords or managing agents charging high amounts in connection with leaseholder requests; and Checks and balances: checks and balances that ought to have protected homeowners from harmful practices are ineffective. Ground rent The CMA report concludes that ground rent is not legally necessary for there to be a valid lease, nor is it commercially necessary. It further states that many leaseholders are obliged to pay ground rents and do not know what the money goes towards, receiving little in return. There are particular concerns over leases that require homeowners to pay significant amounts of ground rent – which may increase substantially – and the amount of the increase is frequently unclear or uncertain. The CMA considers that the most comprehensive way to tackle this is through legislation, and it supports the government’s proposal to effectively abolish ground rent in future leases. The CMA is also preparing to take enforcement action to address difficulties faced by homeowners from high and increasing ground rents. The CMA supports amendments to the Housing Act 1988 to provide better protection for homeowners with leases that are longer than 21 years. This could be done by either removing such leases from the scope of the Act or by excepting leases of more than 21 years which are inconsistent with long-term home ownership, such as Grounds 7, 7A, 7B and Ground 8 of Schedule 2. There is no doubt that ground rents that double or escalate according to another mechanism to make them exorbitant ought to be unlawful. As the report identifies, these are damaging to the security of tenure and the long-term value and saleability of the property. But abolishing ground rents altogether is not necessarily the solution, and may have unintended consequences. There is a case for retaining ground rents at a level that make the purchase of the freehold attractive for responsible investors. While some lessees would like to own a share of their freehold and take an active part in the management of their building, this is not always the case. There are blocks of flats of varying sizes with long-leasehold owners who have no interest in managing their building. In this scenario, there needs to be a willing pool of investors, who will receive reasonable yields in exchange for taking on the obligations of a landlord. If ground rents are abolished, the freehold of that block is unlikely to be an attractive investment and the residents are likely to own the freehold, thereby taking the responsibility that comes with managing a large block. A balance ought to be struck between ground rents being high enough for investors to be interested in the modest yield for their capital but low enough that ordinary leaseholders are not paying punitive rates, when they have already spent a significant amount on their lease. This could easily be achieved by the maximum permissible ground rent being set by statutory instrument and reviewed periodically to ensure it strikes a balance. Where ground rents are too low for an investor to make a reasonable return on their investment, the unscrupulous landlord will look for other ways to maximise profit, such as by appointing their own management company to run the building, often with high fees for little in return. This will lead to constant battles between the lessees and the landlord in the First-tier Tribunal over service charges.    Mis-selling The CMA report says complaints received regarding mis-selling raise concerns that purchaser behaviour has been influenced at a crucial part of the sales process, such as during conversations with developers’ sales staff. The CMA is preparing to take enforcement action with regard to this. It was also recognised by the CMA that, while people purchasing a property will receive legal advice regarding the acquisition of a long lease, they do not usually receive advice regarding the merits of the purchase. Enforcement action against those developers that have mis-sold properties to purchasers will be welcome. As the report acknowledges, the purchase of a house or flat is likely to be the biggest investment a homeowner will make, and they will not usually be familiar with the conveyancing process and jargon. However, it might be said that criticism ought not to be reserved exclusively for the developers. Many of the conveyancers acting for purchasers of these leases with doubling ground rents and high fees will have appropriately advised their clients in the report on title. But the sheer number of people who have bought these types of leases is symptomatic of a failure by many conveyancers to warn of the financial consequences associated with such onerous lease terms. In the fullness of time we shall also see the extent to which the use of developers’ panel conveyancers contributed to the problem. The criticism of this system is highlighted by the CMA in its report. Reform The CMA’s report comes at a time when there are wider questions about leasehold reform. Indeed, it has been said that, as a tenure of ownership, long leases ought to be abolished altogether. However, as I argued in An English (leasehold) reformation? (EG, 15 November 2015, p108), that is impractical and likely to cause more problems than it prevents. The most urgent reforms require regulation of the maximum amount of ground rent and, perhaps more radically, the abolition of terms for new leases and those extended under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993. Michael Walsh is a barrister at Tanfield Chambers Click here to view the CMA report. Photo: Jeff Blackler/Shutterstock