UK Markets closed

Mis-selling allegations in leasehold sector should be investigated, say MPs

The Housing, Communities and Local Government Committee said the Competition and Markets Authority should investigate mis-selling claims.

The property leasehold system has left people trapped in unsellable and unmortgageable homes in the worst cases and wide-ranging reforms are needed, according to a committee of MPs.

Too often, leaseholders – particularly in new-build properties – have been treated as a source of steady profit and the balance of power is weighted too heavily against them, the Housing, Communities and Local Government Committee (HCLG) said.

The Competition and Markets Authority (CMA) should investigate mis-selling claims and make recommendations for any appropriate compensation, according to the committee.

Developers have denied that sales teams deliberately misled leaseholders with partial sales information and false promises of purchasing their freeholds at an agreed price.

But the committee said “near-identical” stories from leaseholders indicate significant failings in the process.

It also wants to see a standardised key features document provided at the start of the sales process by a developer or estate agent.

Its report said: “It is clear that many of the leaseholders we heard from were not aware 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.”

Leaseholders, in effect, purchase the right to live in their property for an agreed period, the report said.

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 people may extend their lease or buy the freehold.

People with leasehold properties are in a “landlord and tenant” relationship with their freeholder, the report said.

Leases usually impose obligations on the leaseholder, such as the payment of a ground rent.

While estimates of the numbers of leasehold properties vary, Government figures suggest there were 4.2 million leasehold properties in England in 2015–16.

Committee chairman Clive Betts said: “Over the course of this inquiry we have heard a number of claims that individuals have been mis-sold.

“Developers are adamant that they have not deliberately misled buyers with false promises or partial sales information.

“However, the pattern of near-identical stories demonstrate significant failings in the process.”

Aspects of the system which the committee highlighted as needing attention include claims of onerous ground rents, high and opaque service charges and one-off bills, unfair permission charges, imbalanced dispute mechanisms, inadequate advisory services, and unreasonable costs to extend leases.

Existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year, it said.

Mr Betts said: “Buildings require effective management to ensure they are kept up to a sufficient standard of repair, but to spread responsibility for covering the costs.

“Yet in too many cases, leasehold has failed to do this, and acted primarily as means of providing a steady income for developers, freeholders or managing agents.

“In the worst cases, people have been left trapped in unsellable and unmortgageable homes, needing permission or having to pay high fees for even minor cosmetic changes.”

Mr Betts said some practices should stop outright, saying: “There is no reasonable case for a house to be sold as leasehold.”

The committee recommended that commonhold becomes the primary model of ownership of flats in England and Wales.

The report said while the most complex, mixed-use developments and some retirement properties may continue to require some form of leasehold ownership, “there is no reason why the majority of residential buildings could not be held in commonhold; free from ground rents, lease extensions, and with greater control for residents over service charges and major works”.

Mr Betts said: “Commonhold works well in other countries but remains little used in England and Wales.”

He continued: “There is little evidence that professional freeholders provide a better level of service than can be provided by leaseholders themselves.”

A spokesman for the Home Builders Federation said: “Very few new-build houses are now sold as leasehold, and in the few instances where it is necessary to do so, builders are ensuring the terms and conditions are fair.”

He said leasehold has worked effectively for centuries and provides secure arrangements for millions of existing homeowners.

He continued: “Whilst we must always ensure terms are fair, leasehold remains the best alternative for properties with shared facilities and it is disappointing that the committee fails to acknowledge its benefits.

“Without a major legislative overhaul, it is very unlikely that commonhold could provide a suitable alternative to the leasehold structure that works for many millions of households.”

A CMA spokeswoman said: “We recognise the problems that exist in leasehold contracts, which is why the CMA has already worked closely with the Government on issues like ground rent.

“We will consider this report carefully.

“However only a court, rather than the CMA, can decide whether a term is unfair under consumer law.”