Escalating ground rents: CMA takes further action against developers

Background

The development of new-build houses and selling these properties on a leasehold basis has been increasing over the last two decades. Under the lease, the landlord would retain the right to charge a ground rent – i.e. an annual payment – over the term of the lease (i.e. over 250 or 999 years). Although purchasing a leasehold is popular and is often the most affordable way of owning a property, many of the leases contained terms which sought to periodically increase the ground rent payable over the term of the lease. In extreme cases a provision could see to double the ground rent every 10-15 years.  Whilst this has generated a lucrative income stream for landlords, it has resulted in potential problems for some leaseholders, for example, in terms of affordability and difficulties associated with the lenders.

Some landlords have sought to charge excessive premiums to either vary the ground rent provision contained within the lease or to sell the property to the leaseholder. In addition, some developers have sold the freehold on to investors – at substantive profits – thereby potentially making lease negotiations more difficult.  

These issues have led to professional negligence claims against the solicitors who acted for the leaseholder in the original purchase alleging a failure to identify the ground rent provision and/or a failure to properly advise the leaseholder on the meaning and implications of its terms.  Liability is case specific. The terms of the ground rent clauses vary significantly, with some periodic increases being linked to the Retail Price Index (RPI) for example. Such a clause is arguably not onerous and generally acceptable to lenders. 

Previously, leaseholders could extend the lease by 50 years (for a residential house) or 90 years (for a residential flat) at a premium paid to the landlord. However, a number of reforms have been introduced in order to provide additional protections for leaseholders. As such, there are now more mitigation solutions available. 

Timeline of developments

June 2019: The Competition Markets Authority (CMA) launched an investigation into the leasehold sector. A number of developers signed up to the 'Public Pledge for Leaseholders'. Amongst other things, the signatories pledged to contact leaseholders and offer to amend a doubling ground rent clause to one linked to the RPI.

February 2020: The CMA confirmed it found "troubling evidence of potential mis-selling and unfair contract terms in the leasehold housing sector, and is set to launch enforcement action". This included a concern regarding "escalating ground rents"

September 2020: The CMA launched enforcement action against four major housing developers (including Countryside Properties and Taylor Wimpey) for possible unfair contract terms and also against two developers (Barratt Developments and Persimmon Homes) of possible miss-selling of leasehold properties. 

January 2021: The housing secretary announced that millions of leaseholders will be given the right to extend their lease by a maximum term of 990 years at zero ground rent.

March 2021: The CMA wrote to two developers (Countryside and Taylor Wimpey) requiring removal of ground rent clauses. Investigation into two further developers is ongoing. 

Developments Summary

As you can see, the last two years have seen great developments in the leasehold market, culminating in leasehold owners and future purchasers having a significantly elevated bargaining position as a result of the CMA's investigations. The CMA has confirmed that the letters it has written to developers outlines "specific concerns that their use of terms that double the ground rent every 10 or 15 years breaks consumer protection law" and that it is requiring that two developers remove the ground rent terms that it considers are unfair from all existing contracts to ensure that they no longer are in breach of the law. Countryside and Taylor Wimpey are also required to confirm that these terms will not appear in any future leasehold contracts. The letters have not been made publicly available and, therefore, we do not yet know what detailed legal reasoning the CMA have used to argue the terms contravene consumer protection law.

The developers have the chance to respond to the letters and the CMA has stated they can avoid court action by signing undertakings agreeing to the CMA's requirements for the removal of the terms from their leasehold contracts. 

Whilst the CMA does not have the power to enforce fines itself, the government website reiterates that it can enforce legislation through the courts. We do not know what the legislation will look like, but we will await further developments in this regard. 

The CMA will also continue to investigate the investment companies which bought freeholds from the developers and have continued to use the same contract terms.   

In the meantime, the CMA has provided both written and video guidance for consumers which is said to offer "advice on a number of issues, including what people can do when faced with fees and charges they consider are unjustified"

Commentary

The reforms allow leaseholders to extend their lease by 990 years and reduce ground rents to nil. These further developments will be welcomed by leaseholders. It will be particularly helpful where the landlord is still the developer as leaseholders will be able to argue the ground rent terms in the contract are unenforceable and that no premiums (or only an extremely modest sum) can be charged by the landlord for a Deed of Variation to replace or remove the existing terms.

Furthermore, it should also help with landlords' willingness to take a sensible approach to any commercial negotiations. Leaseholders are encouraged to raise the above arguments with their landlords in order to mitigate any losses.

The developments should reduce the number of claims made against conveyancing solicitors. Such claims are highly fact specific and were not guaranteed to succeed in the first place given the number of arguments available in terms of scope of duty. Solicitors faced with such claims should now be pressing leaseholders even further to explore the available mitigation solutions. 

If you have any questions on this article, please speak with Anna Murley or Scott Ashby