Your Money or Your Lease: CMA orders Taylor Wimpey and Countryside to remove leasehold terms
May 7, 2021
3 min read
What's going on here?
The Competition and Markets Authority (CMA) has ordered the housebuilders Taylor Wimpey and Countryside Properties to remove unacceptable terms in their leasehold contracts with homeowners.
What does this mean?
New homes are often sold to buyers as long leases, which can last for around 125 years. This enables housebuilders to insert terms into contracts – known as ‘covenants’ – which dictate what these buyers must do while they own the property. This usually includes additional charges, such as Ground Rent or Service Fees: annual payments made to the housebuilders for the insurance, maintenance and upkeep of the residential development.
While these terms are typical, housebuilders have been charging ground rents that double every 10 to 15 years. This can make it increasingly difficult for subsequent owners of the property to sell it, since purchasers will be put off by the onerous terms. The CMA has advised both housebuilders that such terms breach consumer protection law and have requested undertakings to remove them from contracts.
What's the big picture effect?
Clearly, housebuilders are abusing their upper hand in house purchase negotiations. The scandal of housebuilders exploiting buyers came to light between 2010 and 2016, as housebuilders, who were keen to make as much profit as possible, began to charge high, and sometimes continuously increasing, ground rents.
At the same time, housebuilders such as Barratt Developments and Persimmon Homes did not properly explain to house buyers the difference between leaseholds (buying on a lease) and freeholds (buying the property outright). Some also misled buyers; after telling them that the freehold could be bought for a certain amount, they then sold the freehold to investment companies. This meant that buyers had to buy the freehold at an often much higher asking price than the original quote they received.
The CMA’s investigation follows intended changes to the property sector that seek to protect house buyers. In June 2019, the government announced that, in the future, new homes would be sold as freeholds rather than leaseholds, and that the charging of ground rent would be banned on new homes and flats. In order to help the sale of leaseholds, freehold owners would have to respond within 15 days to property information requests by leaseholders, and could not charge more than £200 for this service. It was also announced that new buyers who are incorrectly sold a leasehold home would be able to have the freehold transferred to them for free.
While these reforms are aimed at houses, leasehold owners of flats will also be assisted; in January 2021, the government announced that all leaseholders will be able to extend their leases to up to 990 years with zero ground rent, while all new retirement properties will be sold without a ground rent. There will, however, be a cost for any lease extension, since it involves the freeholder losing out on ground rent for an indefinite period.
It is questionable whether the government’s new stance on leaseholds, which is enforced by the CMA, is entirely justified. Ground rent, for example, is intended to partly compensate the company owning the freehold for taking on legal liabilities. Once a developer has finished building a development, they often sell the freehold to a management company. This company, rather than private freeholders, assumes responsibilities for the safety and management of the building, which brings potential criminal liability if found negligent. Abolishing ground rent, therefore, would transfer this liability onto private individuals, who are unlikely to have the financial means to afford costs of repair. In Scotland, for example, where long leaseholds were abolished in 2012, buildings have fallen into disrepair and residents have struggled to fund maintenance projects.
Long leases have got a bad name as a result of malpractice by housebuilders, which has spurred reform. It is questionable, however, whether the right response is to ban them outright, rather than limit what freeholders can charge for them.
Report written by Arun Allen
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