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MPs slam developers and conveyancers for leasehold failings and recommend referral fee ban

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  • 19/03/2019
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MPs slam developers and conveyancers for leasehold failings and recommend referral fee ban
The government should ban referral fees and other financial incentives paid to persuade customers to use particular conveyancing firms, MPs have recommended.

 

The recommendation is one of several made in a highly critical report into the whole leasehold process – particularly that surrounding the new build sector.

The Housing, Communities and Local Government Committee (HCLGC) also urged the Competition and Markets Authority (CMA) to investigate mis-selling in the leasehold sector.

It called for a standardised key features document to be given to property buyers at the start of the process, and recommended a cap of 0.1% of a property’s value or £250 on ground rent.

And it noted that it would be legally possible for the government to introduce legislation to remove onerous ground rents in existing leases.

In some cases, where the measures had been deemed anti-competitive, developers could even be forced to refund or compensate house buyers, the committee added.

 

Developers, estate agents and solicitors

It’s final 108-page report highlighted several key participants in the failure of the sector, but primarily targeted developers, estate agents and solicitors.

“At the start of our inquiry, we were particularly keen to explore the growing concerns relating to houses being sold on a leasehold basis, which we believe is an inappropriate tenure for houses and should cease,” the committee said.

“However, as our inquiry progressed, it became apparent that many of these issues were also faced by leaseholders in flats, and our recommendations reflect this.

“Too often, leaseholders—particularly in new-build properties—have been treated by developers, freeholders and managing agents, not as homeowners or customers, but as a source of steady profit.

“The balance of power in existing leases, legislation and public policy is too heavily weighted against leaseholders, and this must change. Our report sets out recommendations for how this might happen,” it added.

 

‘Surprising and revealing’

The committee was particularly concerned with housing developers’ sales processes, noting that it was “surprising—and revealing—how many similar stories we heard”.

This included the initial sales and information process and explanation of the leasehold itself, to the ability to purchase the leasehold after two years, where often the lease had been sold on to private investors and the price had rocketed.

Where solicitors were concerned, the committee said it received many examples of stories where purchasers were forced to use a certain conveyancer, sometimes by developers withholding documents or threatening to delay completions.

The committee noted that while developers have been accused of providing misleading sales information or imposing onerous terms in leases, ultimately it was the responsibility of conveyancing solicitors to ensure prospective purchasers of leasehold properties were aware of the ownership structure and lease terms and their effect.

 

Interests not served by coercion

“It is the conveyancing solicitors, as opposed to the developers, who could be legally liable for failing to highlight these terms to prospective leaseholders,” it said.

“It was concerning, therefore, to hear several reports from leaseholders that they had been advised, incentivised or required by the developer to use a specific conveyancing solicitor, who subsequently did not advise them of onerous terms in their leases.

“Consumers must be able to access independent and reliable legal advice when purchasing a property.”

In calling for the referral fee ban it added: “Their interests cannot be served where they are coerced into using developer-recommended conveyancing solicitors, who rely on repeat business from developers and may not be inclined to put their client’s interests first.”

 

 

The key recommendations raised by the committee are:

 

  • The Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation.

Developers denied that their sales teams deliberately misled leaseholders with partial sales information and false promises of purchasing their freeholds at an agreed price. But the number of near-identical stories from leaseholders reflects a serious cross-market failure of oversight of sales practices.

 

  • The Government should prohibit the offering of financial incentives to persuade a customer to use a particular solicitor.

Consumers must be able to access independent and reliable legal advice when purchasing a property. Their interests cannot be served where they are coerced into using developer-recommended conveyancing solicitors, who rely on repeat business from developers.

 

  • Our view is that existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year. They should not increase above £250 over time, by Retail Prices Index or any other mechanism.

 

  • The Competition and Markets Authority should indicate its view as to whether onerous leasehold terms constitute ‘unfair terms’ and would be, therefore, unenforceable.

Were the CMA to determine that onerous terms in existing leases are indeed unfair, or that they were mis-sold, the Government should take further action. Where it is determined that leaseholders have paid unreasonable permission fees or ground rents over the course of their leases so far, they should have those refunded by freeholders with interest.

 

  • We note that it would be legally possible for the government to introduce legislation to remove onerous ground rents in existing leases.

While it would be difficult to change the terms of existing leases, it would not be impossible. Legislation could be made compliant with human rights law. Freeholders would probably need to be compensated, but that does not necessarily need to be at full value.

 

 

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