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You are here: Home / News / Some in leasehold sector declined to co-operate with mis-selling investigation, says CMA

Some in leasehold sector declined to co-operate with mis-selling investigation, says CMA

March 17, 2020 //  by Admin4

Sir Peter Bottomley in discussion with the CMA’s head of litigation Simon Jones, at the Westminster Legal Policy Forum on March 12

By Harry Scoffin

To carry out its investigation into leasehold mis-selling the Competition and Markets Authority sought to collect as much evidence as it could from key players in the sector, although some refused to co-operate.

This revelation came from Simon Jones, the CMA’s head of litigation, at the Westminster Legal Policy Forum on leasehold and commonhold reform on March 12 at the Caledonian Club in Belgravia, central London.

“We gathered a lot of information from property developers, freehold investors, and from lenders, and we met them all – unless they really didn’t want to meet.

“Of course, we received what I would simply term a significant number of emails and letters from leaseholders themselves,” he added.

The CMA investigation primarily addressed the mis-selling of leasehold houses and flats with highly aggressive ground rents which affect the properties’ value.

LKP vindicated by devastating CMA report into mis-selling of leasehold homes

But it was clear from Mr Jones’ speech that the CMA is unimpressed with many leasehold practices, including the monetisation of service charges by freehold owners and their managing agents.

“A service charge should be compensatory rather than a means of making a profit, although the terms of leases and the practice of landlords often appear to allow or enable a profit to be made through this mechanism.”

This point can be found in paragraphs 87-92 of the CMA report, which also used the phrase “captive consumers” to indicate that many leaseholders of flats are being negatively affected by their freeholders’ monopoly of management.

Hinting at the opaqueness of leases, Mr Jones said that “commonly” they “do not identify any specific costs associated with these services and permission”, something which “can lead to leaseholders being charged what may be unreasonable amounts to seek permission, regardless of whether there is any contractual basis.”

Competition watchdog backs upfront leasehold information – Law Society Gazette

On service charges specifically, he suggested that the CMA fears that service charge collection has been turned into a profit centre, which was never the intention of landlord and tenant law:

“Homeowners are also being charged rapidly escalating and potentially excessive service charges for work that is not as described, if indeed there has been any work done at all.”

He said that the strength of interest surrounding the CMA’s intervention last month over leasehold mis-selling and unfair contract terms suggests that the basis of how we buy and own our homes in England and Wales are fundamental concerns for people:

“I think the attention that it received is testament to the significance of the issues that we are investigating because for many, perhaps the majority of consumers, buying a house or flat will be their largest purchase and their most significant investment.

Their home ought to be a place of happiness and security … Many consumers, we fear, simply thought they were buying a home and … knew little or nothing about the different forms of ownership [that leasehold is a tenancy agreement which does not give them the underlying asset, whether a house or flat].”

Mr Jones said that the CMA has gleaned from its inquiry that ground rents serve no benefit to consumers.

In fact, those responsible for moving away from the traditional “peppercorn” – or zero ground rents – privately agreed that ground rent clauses in leases have in recent years been used as a means of extracting more cash from people’s homes.

“Many of those we spoke to – the institutions and businesses involved – accept that homeowners get nothing in return. That ground rent is simply an income stream for developers tacked onto a contract.”

Mr Jones repeated the body’s call to government for more thoroughgoing reform of leasehold, going beyond the heavily trailed ban of ground rents on new leases benefiting future buyers.

Crucially, he stopped short of saying that the tenure itself is the problem and that a long-term shift to commonhold would best protect consumers from seriously harmful practices from developers, freeholders and managing agents.

Asked by LKP patron Sir Peter Bottomley MP whether certain terms in leasehold contracts could be struck out because they are so harmful to consumers, the CMA’s head of litigation said:

“We ourselves do not have those powers. Our powers are to act as a sort of public prosecutor-litigator. We can go to court, we ask the court to do that. We will identify clauses that we think are unfair. We have to apply existing consumer protection law, so it is not a freestanding appreciation by us.

“But, yes, that’s what we’re proposing to – well, when I say we will open enforcement cases, if we cannot reach a solution through a consensual process with institutions, to use the broad term, then we will go to court to ask the court to rule on some people. That’s how it works.”

The audience heard that consumer group Which?, one of a small number of organisations that can put “super-complaints” to the Competition and Markets Authority, had for five years repeatedly failed to heed concerns raised over the leasehold system.

“It is one of the reasons why we had to wait for this late run-up to the insiders at the CMA to give us the prospect of more help, so we’re grateful to that,” Sir Peter said.

Long Harbour executive Richard Silva said that more upfront information over tenure type, ground rent and service charges would be welcomed.

He also expressed frustration that the CMA’s investigation into “alleged mis-selling of new-build [leasehold] houses and flats” has not extensively engaged with the issues surrounding purchasers of leases on the secondary market:

“I think there’s been a general consensus throughout all of the sessions this morning around the room that better and more fuller information at an earlier point in the sale process, or the invitation to buy process for a flat, is a good thing. I don’t think there are any arguments around that.

“But what I find quite interesting to the CMA’s approach to the alleged mis-selling of new-build houses and flats over the last few years, number of years, however long, is that it hasn’t broadened, actually, into the same concept for the sale of second-hand properties where no incremental information, candidly [speaking], is available to the same consumer, whether the property was built by Hackney housebuilder day 1 or sold by Mrs Miggins day 2. I wondered whether you had any comments on that?”

Second-hand buyers should not be disadvantaged in terms of the information they receive when considering obtaining a leasehold tenancy on a property, said Mr Jones:

“We think that when a leasehold house or flat is marketed, the information that should be made available when its first marketed – sorry, we put this forward as a possibility – but things you should be told like whether it’s leasehold or freehold, if it’s leasehold then you should be told of the residual period on the lease and at the same time they should be told what the annual cost of owning the house [sic] is …

“I think what is helpful about the annual cost is that it goes together with the concern that I mentioned from our behavioural economist, which is that people simply don’t have a way of computing what the net consequence for them of the smaller fees and charges that they have to pay – when set against the obviously very large initial payment that they may have to make.

“We haven’t, I think, said that we think that approach to the initial upfront disclosure should be limited to new owners of leasehold houses. I think we are happy to discuss with people whether it is right that it should happen in relation to new and existing leaseholds. And one would think that for existing leaseholds, it should be easier to get the information together. It is inevitably an estimate of some sort when you’re talking about a new leasehold, less so for an existing property.”

Nigel Glen, CEO of the Association of Residential Managing Agents, remarked that flat buyers are vulnerable to big and unexpected major works bills because reserve funds are still not a statutory requirement, an issue compounded by the fact that some defective leases “don’t allow you to put a reserve fund in”.

He added that ARMA has been in talks with MHCLG, the ministry of housing, about changing the law to mandate reserve funds for every leasehold site because “reserve fund contributions can easily dwarf the service charge”.

“The unfair thing is somebody buys into a flat [on a development] and let’s say, the lift has been working for 15 years, I’ve sold it and I [they] move in, one year later [a bill for] £60,000 hits me,” Mr Glen said.

Related posts:

Will CMA investigation at last give cheated leaseholders the chance to sue plc house builders? Consumers' Association self-puffingConsumers’ Association boasts sorting ground rent scandal and prompting CMA mis-selling investigation LKP meets Competition and Markets Authority over leasehold house mis-selling Steinbeck GrangeBarratt off the hook from CMA over mis-selling leasehold homes Leasehold first-time buyers trapped in leasehold homes with £800 ground rents, says BBC

Category: Competition and Markets Authority / OFT, Latest News, NewsTag: CMA, Competition and Markets Authority, Harry Scoffin, Simon Jones, Sir Peter Bottomley, Westminster Legal Policy Forum

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