After a damning investigation by the Competition and Markets Authority (CMA), two of the most controversial companies involved in the unfair leaseholds scandal have agreed to amend their practices. Housebuilder Persimmon will allow leaseholders to buy their own leases at a substantial discount, while insurance company Aviva will remove the ‘doubling clauses’ from its leases and repay some of the vastly overinflated ground rents it has been charging.
What is the background to the leasehold scandal?
The ‘leasehold trap’ scandal has been rattling on for years, and relates specifically to new-build houses.
Leasehold is an archaic but widespread model of UK home ownership where a homeowner only buys the right to live in their property for a set period of time (often a very long one such as 199 years) rather than actually owning the property outright. Someone else owns the freehold of the property and has the right to charge a set amount of ‘ground rent’ and to levy commission in the form of ‘administration fees’ on home alterations, sub-letting and other things, depending on the terms of the specific lease. It’s not really an ideal system for any sort of property, but it can work reasonably well for blocks of flats where the freeholder is responsible for maintaining the communal areas and the fabric of the building. This only makes sense for larger blocks where there are multiple leaseholders involved, and there’s really no sensible justification for individual houses to be built leasehold.
However, the last decade or so has seen several major housebuilders – including Persimmon, Taylor Wimpey, Bellway, Countryside and Barratt – selling more and more new-build houses on a leasehold basis. While it seems these may often have been sold as being ‘virtually freehold’, the truth is that they really weren’t. New homeowners who didn’t read the small print carefully enough were alarmed to find themselves suddenly being charged all kinds of odd fees if they wanted to alter their own homes, as well as being saddled with initially modest ground rents that then increased at alarming rates over the ensuing years, frequently doubling every ten years. Worse still, when these homeowners eventually decided enough was enough and tried to buy their own freeholds at the rates originally proposed by the developers, they discovered that the freeholds had been sold on to third-party investment companies who now wanted to charge vastly inflated sums. Leases originally valued at £2,000 jumped to £20,000 or more.
As the scale of the problem became apparent, new buyers started to get wise to it, and those already locked into exploitative leases found they couldn’t sell their homes or re-mortgage.
When did the CMA start taking an interest?
Amid mounting pressure and the setting up of campaign groups like the National Leasehold Campaign, a government consultation in 2017 revealed that an estimated 100,000 households were affected by so-called ‘fleecehold’ on their new-build homes. Embarrassingly, many had bought through the UK government’s Help to Buy scheme, and some also claimed that the terms of the lease had not been made clear to them when they bought.
Since then, the government has announced (twice) that it is banning leasehold for new-builds, though the legislation has not yet materialised. In fact, increased negative media coverage has already caused most developers to quietly phase out the practice, and by the end of 2019 only 1% of new-build houses were leasehold, compared to 17% in early 2017.
These developments were all great news, but they didn’t help the many thousands of people already stuck in the trap. To try and remedy this, the Competition and Markets Authority (CMA) was brought in, beginning its investigation in 2019.
The watchdog launched enforcement action against several housebuilders last year, citing serious concerns about mis-selling and unfair contract terms, and threatening developers with court action if they didn’t co-operate. The challenge since has been to try and negotiate a fairer deal for leaseholders without getting tied up in expensive court battles with the construction giants.
What have Persimmon and Aviva agreed?
On 23 June, Persimmon announced that it would allow leaseholders to buy their freeholds at a substantial discount that better reflected what they expected when they initially bought their homes. It is now capping freehold prices at £2,000, and those who bought their freeholds at inflated prices will be refunded. The housebuilder has also agreed to change some of its sharper selling practices, presenting better up-front information about costs and extending reservation periods to take the pressure off and help people make better buying decisions.
Insurance company Aviva was one of the third-party companies who bought up a large number of freeholds, many of which were set to increase at an alarming rate – doubling every ten or fifteen years. Aviva has now agreed to remove all these unfair ‘doubling’ clauses and only to charge the ground rent that was originally agreed, with a pledge to refund any overpayments.
What happens next?
The CMA has made it clear that it expects other developers and investment companies to follow suit, and some have already made gestures in the right direction. Taylor Wimpey has introduced a scheme where leaseholders can ‘convert’ their ground rent – linking it to RPI and doing away with the doubling clauses – though this latest action from Aviva goes one better than that. In March, both Taylor Wimpey and Countryside were told by the CMA to remove unfair clauses from their contracts. Meanwhile, Barratt announced in late 2020 that it was abolishing ground rents and introducing standard 999-year leases on all new-build flats.
Amid these encouraging developments, some housebuilders have raised concerns of their own. They claim that the leasehold model makes new developments more financially viable and warn that the ban and the limits on ground rent inflation will result in fewer homes being built at a time when the country very much needs them.
While it seems likely that agreements will eventually be brokered and leaseholders trapped by these unfair contracts will find some sort of resolution, the whole episode remains an uncomfortable reminder of the flaws in the leasehold property ownership system. Successive governments have worked hard to introduce checks and balances that give a fairer deal to leaseholders, but despite this it still remains open to exploitation by less scrupulous operators. However, there are strong signs that this is going to change. A bill that will abolish ground rent on new leases has recently made it to the House of Lords, and in the longer term there are ambitious plans for reform, based on a full review by the Law Commission.