Watchdog investigating sales of leasehold homes over fears buyers have been ripped off

Competition and Markets Authority probes excessive fees, onerous contracts and rip-off property sales

The CMA plans to use consumer protection laws rather than use its powers to conduct a full ‘market study’ (PA)

The competition watchdog is to investigate sales of leasehold homes as concerns grow that thousands of buyers have been locked into paying extortionate charges that they did not understand when they bought their property.

The Competition and Markets Authority (CMA) is opening a probe into unfair terms, excessive fees and inadequate information given to some buyers of new properties.

Consumer groups have warned for more than two years that leasehold property buyers have been ripped off on a large scale, comparing the scandal to the mis-selling of payment protection insurance (PPI) and endowment mortgages which resulted in billions of pounds of compensation.

In the worst cases, leaseholders have been left trapped in unsellable and unmortgageable homes, prompting calls for an overhaul of the market.

In a letter to the Housing, Communities and Local Government committee (HCLG), CMA chief executive Andrea Coscelli said the watchdog acknowledges the problems around leasehold sales.

The CMA plans to use consumer protection laws rather than use its powers to conduct a full “market study”.

Eventually, this may lead to action being taken against firms who have ripped customers off.

Leaseholders are granted the right to live in their property for an agreed period – usually between 99 and 125 years.

Under the lease, the freeholder typically charges ground rent to the leaseholder. Charges can also be levied for making alterations to a property. A significant number of leaseholders say they have been hit with unjustifiable rises to the ground rent or unfair charges for making minor cosmetic changes such as changing a doorbell.

In the most extreme cases, fees have been so high properties become difficult to sell.

The HCLG committee is concerned that some leaseholds have been quickly sold on to third parties who then vastly increase the cost.

Committee chair Clive Betts said: “We heard extensive evidence from leaseholders regarding onerous ground rent terms, high and opaque service charges and one-off bills, unfair and excessive permission charges, and unreasonable costs to enfranchise or extend leases.

“Over the course of the inquiry we heard evidence suggesting that there are a significant number of cases where home buyers may have been deliberately misled about the terms they were signing up to.

“If the sale of leasehold house has taken place with the home buyer under the impression that they were buying it freehold, or ‘equivalent to freehold’ as many were told, then action needs to be taken.

“Equally, if a home buyer is told they will be able to buy the freehold in a couple of years, only to find out it has been sold on to another company, then this should be investigated.”

He continued: “Home buyers need to be protected and, where evidence of mis-selling is proved, it is right that the CMA take action.”

A CMA spokesperson said: “The select committee has raised serious concerns that many homeowners who buy long leasehold property don’t know exactly what they are signing up to, and may be trapped in contracts with unfair terms once they move in.

“We have committed to investigating whether these homeowners are being hit with expensive fees or unfair contract terms, as well as being given all the information they need before signing on the dotted line. We will set out the full terms of this work when it begins.”

More than 40 property developers and freeholders have signed up to a pledge launched by communities secretary James Brokenshire to prevent leaseholders being trapped in costly deals.

Mr Brokenshire said: “For too long, exploitative and unfair leasehold arrangements have placed excessive burdens on homeowners.

“These have no place in a modern housing market and since becoming communities secretary I have repeatedly made clear my ambition to end them.

“That’s why I asked the Competition and Markets Authority to look into the issue and I am pleased to see it is now taking action.”