14 Jul 2021
(by Tola Amodu) The Competition and Markets Authority (CMA) has recently secured formal commitments to tackle the continuing problems experienced by leaseholders of houses. This could be heralded as a turning point in the ongoing debacle regarding the rights of leaseholders – those who while owning a property acquire only a time limited (leasehold) right to it. As the Law Commission explained in its 2020 report on the issue, ‘In England and Wales, properties can either be owned as freehold or as leasehold. Leasehold is a form of ownership where a person owns a property for a set number of years (typically, 99 or 125 years) on a lease from a landlord, who owns the freehold. Flats are almost always owned on a leasehold basis, but in recent years it has also increasingly been used for newly built houses. It is estimated that there are over 4 million leasehold homes in England alone’. The central problem is that in exchange for acquiring the leasehold interest, the leaseholder typically has to pay ground rent and certain service charges to owner of the freehold. Buyers may not fully understand that ground rents and service charges can increase exponentially over time, or that this can make the subsequent sale of the property economically unviable. This blog post explores the consequences of the CMA’s intervention and asks whether the commitments do enough to address this problem.
The landlord, may see the granting of a leasehold interest as an investment, generating an income stream given the revenue received from ground rents and service charges and the “locking in” and retaining of the freehold’s capital value. As the Law Commission identified, developers can gain from selling the property and then selling the freehold to an investor. For this reason it is unsurprising that Developers who sell leasehold houses will offer significant resistance to attempts to prevent them from doing so. The CMA expressed concerns, when it launched its investigation into leasehold homes, about ground rents in leases, the mis-selling of leasehold houses, service charges and permission fees, and a failure of “checks and balances” in the leasehold system on 11 June 2019. One notable concern was escalating ground rents. After beginning enforcement action against four housing developers in September 2020, the CMA has now secured binding undertakings from the developer Persimmon and the investment company Aviva (the latter having bought up a large number of freeholds as an investment).
Their intervention has resulted in Aviva making binding commitments to remove clauses which have the effect of doubling the ground rent payable by homeowners or tying payments to the Retail Prices Index, and agreeing to repay those who as homeowners were affected by the tactic. Persimmon Homes, the developer, meanwhile has agreed to offer house owners the right to acquire the freehold of their property at a discount. So far so good. However, many other developers and investment companies pursue similar strategies and it remains to be seen whether those big developers Countryside Properties, Taylor Wimpey and Barratt Developments (all of whom fall within the scope of the CMA’s investigation) and the other investment companies in the CMA’s sights will follow suit.
Although the number of new-build leasehold homes being sold is reducing dramatically, the stakes remain high. It is possible to see arguments about the added value (in terms of protecting the overall amenity of the estate including its community space through management structures to the benefit of those living on the estate, especially those of significant size) where the landlord – whether the developer or investor, retains control by enabling the uniform enforcement of covenants, and the streamlining of contributions towards maintenance costs in an efficient and effective manner. As the current law stands, the enforcement of positive obligations between freeholders remains problematic in law. The instrument of the rentcharge (a legal construct used to enforce positive obligations as between freeholders) can be a basis to recoup excessive charges from freeholders. Many estates retain privately own roads and parking areas in addition to street lighting and the consequences of a badly managed estate of houses. On the face of it, the argument for retaining leasehold houses seems slight but these factors, as we all know from poorly managed blocks of flats can affect property values and indeed saleability. Additionally, the argument may be put forward that the result of enforcement action which has the effect of depriving landowners of their interests in property could be seen as an unlawful interference with property rights (termed a, ”taking”) without commensurate compensation being given. Accordingly, any regulatory activity having retrospective effect (unlike legislation which normally has prospective effect) of this kind could be viewed with suspicion.
Leasehold for the time being remains integral to the property market within England and Wales (as the Law Commission identified) and those owning flats will not be seeing the benefit. Caveat emptor remains the watchword for all buying property and the symbolic and cultural attachment surrounding property “ownership” and the nature of the “home” shows little sign of abating. Further as regulators know ‘creative compliance’ might suggest that given that existing problems surrounding freehold interests remain (in particular the rentcharge noted above), the issues could resurface in a different guise. Following the Law Commission Report, Government is committed to passing legislation banning the sale of leasehold houses, granting existing leaseholders more rights and restrict ground rents in new residential leases to a peppercorn rent. The Leasehold Reform (Ground Rent) Bill was introduced in the House of Lords on 12 May 2021. Given that Parliamentary time is always a scarce resource, when this will become law is, as yet, to be determined. The actions of the CMA while addressing the current issue to a degree – note that leasehold in the case of flats remain beyond the scope of the investigation, possibly because of its cultural embeddedness, do little to address the fundamental changes to property law required. Regulation here in attacking the consumer aspect, does little to change the fundamental propositions of the existing law. Only legislation can hope to do that.