ABU SATTAR | LEGAL JARGON WRITER
The Competition and Markets Authority (CMA), the UK’s competition watchdog, has launched an investigation into four of the UK’s biggest house-builders. Barratt Developments, Countryside Properties, Persimmon Homes and Taylor Wimpey are all accused of misleading homebuyers and ‘leasehold trapping’ them.
What is the investigation about? The background
Many properties in the UK are sold as leaseholds. Often buyers will have to take out a mortgage in order to purchase the leasehold, and also pay ground rent to the owners of the freehold. The launch of an investigation comes after the CMA found “troubling evidence of potentially unfair terms and potential mis-selling” of these leaseholds.
The CMA has found that developers failed to properly explain what ground rent is to buyers and included unfair terms in the lease that meant ground rent escalated quickly, doubling every 10 years in some cases. Such a term is a financial burden on many leaseholders, and it makes it very difficult to sell the leaseholds later on.
Developers are also being accused of misleading buyers about the availability of freehold properties and the cost. The CMA has found evidence that people were told properties would only be sold as leaseholds, only to later be sold as freeholds to third parties. Similarly, the CMA found that people would be quoted a relatively small sum for freehold properties, only for the price to increase by a substantial amount with little warning.
Lastly, developers are accused of unfair selling practices. For instance, imposing short deadlines to complete purchases, in order to force and rush buyers into purchasing a home they otherwise may not have bought.
At this stage, none of the companies have actually been found of any wrong doings. However, by name dropping, the CMA has given the house-builders bad coverage which has already resulted in shares falling in Barratt and Persimmon by 3% and 2% respectively. Furthermore, the investigation is a huge red flag and, unless the house-builders are cleared of wrongdoing, it could have a knock-on effect on the sale of properties to everyday people and other companies. Generally speaking, everyday people will be wary of doing business with those accused of breaching consumer rights law, and other companies simply may not want the bad publicity.
In 2017, Taylor Wimpey set aside £130m to settle disputes surrounding ground rents in anticipation of a government ban on the practice. If the investigation finds wrongdoing by the four companies then Taylor Wimpey, and the other three house-builders, may have to tap into funds to settle disputes that would undoubtably follow.
At present the CMA has written to the house-builders outlining their concerns and requested relevant information. How the investigation proceeds is, of course, dependent upon the CMA’s assessment of the evidence in relation to Part 2 of the Consumer Rights Act 2015 (CRA), and the Consumer Protection from the Unfair Trading Regulations 2008 (CPR).
Under the CRA, the CMA will likely employ the “fairness test” and the “transparency and prominence test”in order to gauge whether leasehold terms are fair and easily understood by consumers. The house-builders could also fall foul of the CPRs which prohibits unfair commercial practices in property sales. The prohibited practices include misleading customers and exerting undue pressure. The CPRs have a wider scope than the CRA and breach of the CPR could result in unlimited fines and/or imprisonment up to 2 years.
Additionally, the CMA could force the companies to legally commitment to change their policies and practices and, in extreme cases, take the companies to court.
Depending upon the outcome, this investigation could be the final nail in the coffin that is the sale of leaseholds on new properties. Meaningful leasehold reform, which has been in the works for some years now, could finally be introduced. It could also push the government to follow through on a promise made in 2017 to ban the sale of leaseholds on new properties and ground rents.
Abu is a law graduate with aspirations of becoming a commercial solicitor. His legal interests are in property, data protection and technology, but with enough information he can have an opinion on anything. He also wants to see and work towards greater diversification of the legal sector, particularly of more senior roles.
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