CMA Rules on Leasehold Contracts

23 June 2021 | General

Aviva has committed to remove certain terms from its leasehold contracts which cause ground rents to double, and Persimmon will now offer leasehold house owners the opportunity to buy the freehold of their home at a discounted price, according to the Competition and Markets Authority (CMA)

The move comes after the CMA launched enforcement action against 4 housing developers in September 2020. In connection with this action, the CMA said it has also been investigating several investment firms that bought a large number of freeholds from 2 of these developers and continued to use these same ground rent terms.

The commitments signed by Aviva and Persimmon – known formally as ‘undertakings’ – mean they have now agreed to the following:

Aviva will remove from leasehold contracts certain clauses which were doubling the ground rents payable by leaseholders. It will also remove terms which were originally doubling clauses and have been converted into RPI-based ground rent terms. Doubling clauses that cause ground rents to double every 10 to 15 years mean people can often struggle to sell or mortgage their homes. They can also affect leaseholders’ property rights. Where Aviva is the current freeholder, those leaseholders’ ground rents will revert to the original amount – i.e. when the property was first sold – and this will not increase over time.

Aviva has also agreed to repay homeowners who were affected by these doubling ground rent clauses. This means that, where ground rents had increased, people will be refunded the excess money they had paid over this time.

Persimmon will offer leasehold house owners the option to buy the freehold of their property at a discount, better reflecting what they expected when they originally bought their house. It will also make repayments to certain homeowners who have already purchased their freeholds. This addresses concerns raised by consumers with the CMA, and local Trading Standards, that they were led to believe they could buy their freehold at a certain price, only to find out later that this price had increased by thousands of pounds with no warning. It also means those individuals who have already bought their freehold will receive a refund, meaning they don’t miss out.

Persimmon has also agreed to extend the timeframe that prospective buyers are given to exchange contracts after reserving a property, and to provide people with more upfront information about the annual costs of buying a home. This addresses concerns that the ‘reservation period’ – i.e. the period of time during which a potential buyer must take a number of steps to progress the purchase – is too short and can pressure the buyer into making a decision, and that more information is needed up-front for consumers to make purchasing decisions.

Andrea Coscelli, chief executive of the CMA, said: “This is a real win for thousands of leaseholders – for too long people have found themselves trapped in homes they can struggle to sell or been faced with unexpectedly high prices to buy their freehold. Now, they can breathe a sigh of relief knowing things are set to change for the better.”

They added: “It’s good that Aviva and Persimmon have responded positively to this investigation, enabling these issues to be fixed for leaseholders. But our work isn’t done. We now expect other housing developers and investors to follow the lead of Aviva and Persimmon. If not, they can expect to face legal action.”

Jonathan Frankel, leasehold enfranchisement specialist from Cavendish Legal Group, said was a welcome announcement but lacked detail.

He added: “The decision by Aviva and Persimmon should ensure other housebuilders follow suit, but the question is how long will homeowners have to wait before they see these words turned into action. As specialists in the area of leasehold enfranchisement, we would like to see just how, and particularly when, these two huge players will change their procedures to allow leaseholders to buy the freehold – and crucially, at what discount?”

He added: “Leaseholders feeling trapped by escalating ground rents and unsellable homes, deserve clarity and a timeframe for this, along with a clear commitment from the Government on when they will be implementing the changes announced in January.  This may be the start of a journey to a fairer system for leaseholders, but I suspect there is still a long road ahead and it’s vital for leaseholders to get the right advice now.”

This post has originally been featured in Property Wire.