01 Apr 2020
[by Tola Amodu] Many years ago, there was an advertisement on TV suggesting that a certain alcoholic beverage – those showing their age will know which one – “refreshed the parts other beers cannot reach”. In a similar vein, it is just possible that the Competition and Markets Authority will manage to do something similar in the case of the sale of leasehold houses. The recent CMA report probing the activities of house builders and developers has focused on the unfair treatment of homeowners and the possible misleading of prospective buyers. Will the CMA be more effective than specific legislation for redressing the problem?
The adverse effects have been appreciated for some time. Specific legislation has been contemplated but it has been mired in the legislative process. Back in 2017, the then Communities Secretary, Sajid Javid announced measures to eliminate unfair and abusive practices for all leaseholders. These included a ban on the sale of almost all leasehold houses where, as is often reported in the media, ground rents can increase exponentially over time leaving home owners with unsaleable and un-mortgageable properties. Government then asked the Law Commission, the law reform body for England and Wales, to investigate reform of the leasehold system generally. In June of that year, the Government announced further measures banning the sale of all new leasehold houses unless there were exceptional reasons for doing so, and “immediate action to ban Help to Buy being used to support the practice”. Although a Bill (the Leasehold Reform Bill 2017-19) was introduced in 2018, it did not explicitly address the “leasehold homes scandal” (aside from proposing an independent inquiry into leasehold practices). It failed to complete its passage through Parliament and so did not hit the statute book. Fast forward to 2019 and, with the long running Brexit saga in full flow, no new measures were in place. This effectively left homeowners with little or no direct redress and the prospect of legislation receding over the horizon. As is so often the case, any measures introduced in the future would be prospective and so not help those already caught in the “leasehold homes trap”.
Enter the CMA. On 11th June 2019, the Authority opened a consumer protection investigation into the leasehold housing market . This covered both (a) potential mis-selling: in the sense that buyers did not always know that they were buying a leasehold as opposed to a freehold home; and (b) potentially unfair terms: with buyers being exposed to a risk of incurring significant costs, including the payment of ground rent which could double every decade and leave properties unsaleable. In many respects the probe replicated the research of the Law Commission, as instructed by the Department of Housing Communities and Local Government, and the pronouncements of Government itself. Furthermore, the CMA is still awaiting promised new powers to fine firms for breaching consumer law. However, the CMA does have the ability to open a full market investigation which could be extremely uncomfortable for housebuilders as that legal option does have very strong existing powers. It also has a longer-term focus that means the issue will not disappear with the next political whim or crisis. This provides reason to hope that we will see better behaviour by house builders and developers without having to wait for specific leasehold reform legislation.
In regulatory terms, law itself can be seen as a limited mechanism to engender real change. The presence of overarching and all-encompassing general powers such as those of the CMA can be seen as more efficient and effective in securing changes in behaviour, not least because of the Authority’s extensive remit. Of course, this leaves open the question of whether consumers will actually receive any form of compensation. This can be contrasted with the long and uncertain route of legislating specifically, where for many reasons the legislation may or may not ever hit the statute book or even if it does, might not cover specifically the issue (as with the Leasehold Reform Bill 2017-19). It is possible that the remit of the CMA including its existing reputation, the extensive powers it has or has been promised, and how it interacts with markets, combine to give it the ability to get things done when others cannot.