March 2, 2020

Initial reflections on Leasehold Housing Update Report from the Competition & Markets Authority

Posted in Real Estate

The report analyses carefully the arguments for ground rents and sums up its conclusion very clearly with the phrase “The CMA is concerned that ground rent has little justification”

The report also is clear about service charges, namely that it must represent value for money and, more especially, “A service charge should be compensatory rather than a means of making a profit, although the terms of leases and the practice of landlords often appear to allow or enable a profit to be made through this mechanism.”

The conclusion being that a service charge which is profit making is in all likelihood an unfair term. The consequence of an unfair term is that it is unenforceable but in the absence of agreement by the freeholder not to enforce the provision, the leaseholders will have to go to court to have the term declared as such.

In time we may find that the reports marks a change in language away from “onerous” and to “unfair”. As the report points out, that is the language of consumer law and from which the CMA’s powers to take action spring.

The report sets out what constitutes an unfair term It is a term in a consumer contract which, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer. This test has wider application than just ground rents and service charges; those closely involved in what is commonly referred to as the cladding scandal may find that the use of this test to the apportionment of responsibility between freeholders and leaseholders has traction.

It is understandable, but regrettable for owners of freeholds with service charges, that the CMA is remaining focused on addressing and putting right the problems with then leasehold market. A sign that it recognises the need for urgent action. In fairness to the CMA the solutions that come forward for addressing service charge problems for leaseholders will be easily carried over to protect freeholders too.

The CMA is being vague about what enforcement action it is bringing but pragmatically seeking to agree undertaking from those it is enforcing against rather than proceeding to court which will slow down change. It might look to an improved version of the industry pledge to convert into an undertaking. Amongst others I produced an improved version and will be sending this to the CMA which could form the basis of an undertaking to bring quick and cost effective remedies to many leaseholders.

Lastly the Government seems to be committed to an all embracing reform of the property market but hopefully this report and the CMA will persuade it of the urgency to act and to deal with those issues that can be addressed swiftly and then to follow up with a more major Act making other changes and consolidating into the Act the short term changes it has made. As the old saying goes “Justice delayed is justice denied”. Those quick and beneficial changes could include:

  • Extending the right of pre-emption of flat owners to house owners
  • Capping ground rents under new leases
  • Applying the service charge regime to freehold homes with estate service charges
  • Excluding leases with a term in excess of 21 years from the assured tenancy definition

The next step in reforming the housing market will be the publication of the Law Commissions report on Commonhold but leaseholders can rest assured from this report from the CMA that it is fully aware of what is wrong in the housing market and it intends to stand by consumers and to see them treated fairly.

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