MPs have called for a Competition and Markets Authority (CMA) investigation into mis-selling in the leasehold sector in a scathing report that has implications for developers, solicitors and estate agents.
The Housing, Communities and Local Government Committee launched an inquiry into leasehold reform last year, assessing the adequacy of the Government’s work and what further interventions were needed.
MPs warn that the balance of power in existing leases, legislation and public policy is “too heavily weighted against leaseholders”.
Its report this morning calls for the CMA to investigate mis-selling in the leasehold sector within the next six months and, where appropriate, make recommendations for appropriate compensation, with the option of letting leaseholders purchase the freehold.
A spokesman for the committee said a mis-selling inquiry would focus on developers, but said agents and solicitors would also have to make changes so they are more transparent and so buyers are clear about the terms of a property’s lease.
MPs have also suggested the Government should require the use of a standardised key features document, to be provided at the start of the sales process by a developer or estate agent, which should outline the tenure of a property, the length of any lease, any ground rent or permission fees, and – where appropriate – a price at which the developer is willing to sell the freehold within six months.
The report said: “It is clear that many of the leaseholders we heard from were not aware of the differences between freehold and leasehold at the point of purchase, in particular the additional costs and obligations that come with a leasehold property.”
Another proposal is for the Government to prohibit the offering of financial incentives to persuade a customer to use a particular solicitor.
MPs said ground rents have in some cases increased to a level leaving properties unsellable and unmortgageable, while permission fees have been levied far beyond the reasonable cost of administration.
Both should be subject to legislation that establishes when they can be used and how they should be calculated, the report said.
The Government is urged in the report to revert to its original plan and require ground rents on newly-established leases to be set at a peppercorn value rather than the currently proposed £10.
Those with onerous ground rents in existing leases could also legally have them removed and limited to 0.1% of the present value of a property, up to a maximum of £250 per year, the report claims.
Clive Betts, chairman of the committee, said there is no reasonable case for a new-build house to be sold as leasehold and called for commonhold to be the primary model for flats.
“We found that the leasehold system often fails to provide an effective system for managing multi-occupancy residential properties, and believe that a commonhold model would be more appropriate in most circumstances.
“Buildings require effective management to ensure they are kept up to a sufficient standard of repair, but to spread responsibility for covering the costs. Yet in too many cases, leasehold has failed to do this, and acted primarily as means of providing a steady income for developers, freeholders or managing agents.
“In the worst cases, people have been left trapped in unsellable and unmortgageable homes, needing permission or having to pay high fees for even minor cosmetic changes. More common are opaque service charges and poor levels of maintenance, with no reasonable means for leaseholders to challenge or query how their buildings are managed. Financially, the buck always seems to stop with the leaseholders and there is little they can do about it.
“Over the course of this inquiry we have heard a number of claims that individuals have been mis-sold.
“Developers are adamant that they have not deliberately misled buyers with false promises or partial sales information. However, the pattern of near-identical stories demonstrates significant failings in the process.
“A mandatory document detailing standardised key features of the sale would help prevent such cases being repeated. The CMA should also investigate these claims and, where necessary, decide on appropriate compensation.”
Sebastian O’Kelly, director of campaign group the Leasehold Knowledge Partnership, described the report as a “demolition of the leasehold system”.
He said: “We have campaigned since January 2012 to see a parliamentary report turn such a clear-eye to this murky and exploitative corner of the housing market. The report is a huge vindication of our efforts.
“The report is devastating about how developers have taken their customers – and us, the wider taxpayers – for a ride by squirrelling in an investment asset in the homes of ordinary families.
“It is clear that MPs think that developer-recommended solicitors have been little more than stooges: dumping their supposed clients in onerous lease terms. Some of these – the doubling ground rents – have made these properties unsellable.”