The regulator revealed it is preparing legal action to tackle the consumer detriment it has found to make firms comply with protection law.
Mortgage Solutions understands the legal action is also likely to seek remediation for those homeowners who have suffered through a wide range of situations as a result of mis-selling or unfair contracts.
It is also understood that the CMA is not able to name companies or give examples of particular cases until the legal process is underway.
Developer bosses and solicitors
In its leasehold investigation update, the CMA said it was concerned checks and balances that ought to have operated to draw attention to changes in ground rent and their consequences did not prevent problems arising.
It questioned why executive and non-executive directors of several housebuilders did not steer their organisations away from practices which had resulted in detriment to homebuyers.
The CMA noted this had caused “if nothing else, adverse reputational consequences for them, and which in turn raises concerns about the adequacy of their governance arrangements”.
It added it was still considering the way in which legal advice was provided.
Concerns were raised about the use of conveyancers tied to developers as part of a panel, which it recognised had been criticised before despite potential practical advantages.
“The solicitor’s duty is to act in the best interests of their client, with independence, honesty and integrity,” the report said.
“There is a risk that this may be compromised if solicitors are concerned to avoid losing the recommendation that comes from the developer.
“This is a matter of concern and goes together with concerns about the effect of some inducements offered to purchasers to move to speedy exchange of contracts.”
Four serious issues
The regulator highlighted four key areas of leasehold arrangements which it had found serious issues in: ground rents; cost of the freehold; misleading information; and unreasonable fees.
Rapidly escalating ground rents have been the highest profile element of leasehold over the last two years, with government already banning the use for new build houses.
The CMA thinks the total value of the ground rent market, assessed as the value of the freeholds, is in the region of £10bn though some estimates put it much higher.
The regulator said it estimates the total number of properties with 10-year or 15-year doubling clauses is about 18,000.
And it noted there are at least 57,000 homes where levels of ground rent are already over the threshold for an assured tenancy and could open them up to repossession or a lease charge if they fall into arrears. The government has pledged to outlaw this possibility.
Cost of the freehold
The CMA reported it has seen evidence that people have been misled about the cost of converting their leasehold to freehold ownership.
When buying their home, some people were told the freehold would cost only a small sum, but later down the line this price had increased by thousands of pounds with little to no warning.
Many buyers reported not being told upfront that a property is leasehold and what that means. They complained that some developers were failing to explain the differences between leasehold and freehold when directly asked, and some actually told potential buyers that there was no difference.
However, by the time people found out the realities of owning a leasehold, including the regular charges to be paid, they were often unable to pull out of the purchase, or would face significant difficulties if they tried to do so.
Leasehold property owners regularly complained about being charged excessive and disproportionate fees for things like the routine maintenance of a building’s shared spaces or making home improvements.
The CMA said its investigation had shone light on issues relating to such charges, some of which lacked authority under the lease, were not transparent, or were not cost-reflective.
“In some cases it is difficult to see that they are either justifiable or necessary,” the CMA said.
It added: “If people want to challenge such charges, the process is often difficult and costly, meaning few people decide to go through with it.”
CMA chief executive Andrea Coscelli said: “We have found worrying evidence that people who buy leasehold properties are being misled and taken advantage of.
“Buying a home is one of the most important and expensive investments you can make, and once you’re living there you want to feel secure and happy. But for thousands of leasehold homeowners, this is not the case.
“We’ll be looking carefully at the problems we’ve found, which include escalating ground rents and misleading information, and will be taking our own enforcement action directly in the sector shortly.”
The regulator said it was also supporting action from the government and would be developing consumer advice for people who own, or are looking to buy, a leasehold property.
“The most comprehensive way to tackle problems in ground rent is through legislation, and we support the government’s proposal effectively to abolish ground rent in most future leases,” it said.
“However, while this will prevent problems arising in future it will not alleviate existing problems.”
‘Huge progress made’
Responding to the report, a Home Builders Federation spokesman said: “The industry has made huge progress to identify and address the issues raised on particular aspects of historic leasehold sales.
“We will continue to work with all parties, including the CMA and await the conclusion of its investigation. Where terms are appropriate, leasehold remains a safe and secure tenure for millions of households.
“The number of escalating ground rent leases identified by CMA represents a very small percentage of the leasehold properties built and sold over the past 20 years. Builders’ focus remains on ensuring new build owners and future buyers are treated fairly and have access to remedies where processes have fallen short.”
‘Developers not transparent’
NAEA Propertymark chief executive Mark Hayward welcomed the CMA report.
“For too long, housebuilders and developers have not been transparent enough about what it actually means to buy a leasehold, which in turn has meant many owners have been faced with escalating ground rents and unreasonable fees, leading them into financial difficulty,” he said.
“Our research shows 62 per cent of leaseholders feel they were mis-sold and therefore it’s vital enforcement action takes place as soon as possible to give some hope to those who are currently trapped with no easy route out.”
UK Finance director of mortgages Jackie Bennett added: “The inappropriate use of leasehold and the detrimental impact it can have on homeowners has been an area of concern for lenders.
“Leasehold is an appropriate tenure in the right circumstances, for example where properties have shared services or are built on land with specific restrictions but it’s crucial it works in the best interest of homebuyers, now and in the future.
“It’s therefore good to see the CMA taking action where unfair practices have been identified. This sends a clear signal that the terms of leasehold should be clear and transparent and that leaseholders should be treated fairly.”