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By J
29/02/2020

Residential Leasehold: The Competition and Markets Authority speaks

There are some major problems in the residential leasehold property market. They range from the simply inexcusable (e.g. the doubling ground rents that continue for the whole term of the lease), to the unintended legislative loophole (e.g. the long lease as an assured (shorthold) tenancy problem), through to a broader debate about what “ownership” and, in particular “home ownership” means in the popular imagination as against the property law concept of a leasehold estate.

The Competition and Markets Authority has been looking at the regulatory and market based flaws in leasehold property and has just published an “updated report” which, in effect, amounts to interim findings and an outline of the direction of travel. It’s only 30 pages long so well worth a read if this is your area of interest and you can find it here.

In short:

(a) on ground rent, the CMA does not really understand the purpose of ground rent in modern leases and considers that ground rent clauses are often hard to understand so that consumers may not know what they are agreeing to pay. This problem is not necessarily solved by linking increases to RPI. Likewise, and for obvious reasons, ground rents which turn the long lease into an assured (shorthold) tenancy are a major concern. The CMA supports proposals to abolish ground rents on a prospective basis and is preparing to take enforcement action in respect of existing leases.

  •  I struggle slightly with this. The CMA does not seem to have recognised that whilst ground rents are not necessary, they have existed  for quite a considerable time and, in particular, have proved a particularly important source of income for pension funds (both public and private sector). Now, that is not (I accept) a reason to keep them forever. But the implications for the whole economy need to be considered before we make significant changes to *existing* ground rents (not to mention the A1/P1 implications). I have no problem (and would wholeheartedly support), solving the assured tenancy problem. The CMA correctly notes that there are two possible solutions. Either amend the HA 1988 so that a lease for a term of more than 21 years cannot be an assured tenancy (because I want to prevent long leases from ever falling within the 1988 Act), or amend the mandaory grounds in Sch.2.

(b) The sales practices of new build developers are a source of concern. Purchasers are pressured to complete within a short period of time. They are often not told critical information (such as tenure!) until late in the process. They are given incorrect information about ground rent and future enfranchisement costs.

  • This comes back to a bugbear of mine. I’ve long thought people should be given a basic legal education in school so they have some idea of the rules that govern them in adult life. It’d include a basic guide to the powers of the police and criminal law; to contract law (a case-study on a mobile phone contract, for example) and the main differences between freehold and leasehold property. But, more practically, if the CMA has evidence of misselling then they should go after individuals responsible with the full power of their office.

(c) Permission fees and service charges are often very high. The proposals here seem a bit less developed. The CMA will publish guides and fact sheets  to assist consumers, but it also proposes some sort  of new (quick) redress scheme and invoking a right to self-help.

  • The FTT(PC) already provides that redress scheme. I agree that there  is scope for reform of the FTT (both procedurally and in terms of substantive law), indeed, the FTT itself has been active in indentifying areas of reform (e.g. the “dual hatting” powers). But a self-help provision makes me nervous. You’d need primary legislation – and *very* carefully written legislation at that – to protect against forfeiture in such cases.

(d) The checks and balances that one would expect to find in a properly regulated market are absent. Here, what the CMA means is that it would have expected the directors of the companies involved in this sector to try to push their companies away from such behaviour, if only for reputational reasons. There is also concern about the role of solicitors in this process.

  • You expect ethical behaviour from capitalists and companies whose officers have a legal duty to maximise returns (and bonus based personal incentives to prioritise short term retuns)? Ok boomer. Secondly, (and, in fairness, as the CMA accepts), solicitors don’t usually get instructed to do anything other than the mechanics of the conveyance. These are major issues that the CMA has identified, but they need major reforms to company law and the role of solicitors (which would hugely increase conveyancing costs).

 

Finally, I confess that I am struggling to keep on top of all the reform proposals and their progress (or lack thereof). The Law Commission is still working on reform proposals for enfranchisement, right to manage and commonhold. The CLG Select Committee has published a report which, as yet, does not seem to have prompted the government into action. We have had government policy announcements on reforms to limit new leasehold houses, restrict ground rents and reform rentcharges (in simple, but inaccurate terms, freehold service charges). The Welsh Government is doing its own work in these areas. The main high street banks have changed their lending terms so as to try to inhibit new (high) ground rents in new leases. It’s all a bit disperate at the moment. The case for reform is overwhelming. But what matters is the detail, nature and specifics of the reform. On that, we all just need the government to publish some draft legislation.

 

 

J is a barrister. He considers housing law to be the single greatest kind of law known to humankind and finds it very odd that so few people share this view.

3 Comments

  1. MR OLIVER HARWOOD

    As a Chartered Surveyor i may be instructed to advise on the sale or purchase of a property, but if it has onerous leasehold terms I will advise my client accordingly. I am astonished you presumably allow solicitors and licenced conveyancers to avoid what i see is a clear duty to do the same and in my view clear professional negligence on their part if they did not say loud and strong that (for example) “if you sign this agreement your rent will double exponentially”. The house builders have acted appallingly but so in my view has the legal profession, which has been paid fees but failed to protect their clients.
    Otherwise I think you make sound points, thank you.

    Reply
    • Giles Peaker

      As you are a chartered surveyor, I am astonished that you consider you have the professional competence to advise on lease terms, to be honest. I would have thought you would put yourself at real risk of a negligence claim.

      I don’t know where you got the idea that we consider conveyancing solicitors are not under an obligation to advise according to the extent of their instructions and retainer. But they are limited by the extent of their instructions (and what people are willing to pay for). The mere mention of ‘licensed conveyancers’ illustrates the problem… (Personally, I am deeply unhappy with the developers having their ‘recommended panel solicitors’, who they appear to have forcefully recommended. If developers effectively discouraged people from making their own choice of solicitor, that is a issue with the developers and also, potentially, with their ‘recommended’ solicitors. But that needs investigation and evidence.)

      A chartered surveyor having a stab at advising on lease terms, on the other hand, is definitely not a good idea.

      Reply
    • J

      There are a few points in here. The reality of the conveyancing market is that clients (encouraged by successive governments and the general deregulatory thrust) generally want to pay as little as possible for what they see as nothing more than paperwork. Frankly, if you pay £99 for your conveyancing, you’ll get a service that reflects that fee and, more importantly, you’ll get terms and conditions that protect the conveyancer against any liability for anything. That’s not too surprising – you know from your own profession that there are a range of “levels” of survey that one can purchase and that it’s only the top one (I forget the name now – is it RICS Homebuy?) that actually transfers any meaningful risk to the surveyor.

      Now, given my way, I’d ban all these cheap options. But that’s because I believe people need protecting from themselves. I realise that others hold equally valid views.

      Your second point was about advising on the sale or purchase of a property. Sure. I’d always want my surveyor to comment on things within their competence (and insurance) – value, structural condition, etc. But I’m not sure I’d expect my surveyor to comment on lease terms. I might be *grateful* if he pointed something out, but I can’t see that I should be expecting him to do so.

      The ultimate villains are the large house builders who decided to popularise leasehold houses and who got greedy with ground rents.

      Reply

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