People don’t usually associate consumer law with buying residential property but it does apply to the terms of leaseholds.  The CMA has been investigating leaseholder terms since 2019 due to concerns about ground rent, service charges and permission fees.  Its latest update concerns ground rent.

The relevant consumer legislation includes the Unfair Terms in Consumer Contracts Regulations 1999, for contracts entered into before 1 October 2015, and the Consumer Rights Act 2015, for contracts entered into on or after 1 October 2015. The laws aim to protect consumers against unfair contract terms, and require contract terms to be fair and transparent.

Ground rent is a fixed annual fee that many leasehold homeowners must pay to their property's freeholder, essentially to use the land on which the property is located. This has traditionally only been a nominal amount (the “peppercorn” rent), and operated without difficulties.  However, over the past two decades, developers have realised they represent a new revenue stream, and ground rents have risen to £250 a year (sometimes more).  This does not sound like a lot compared with the cost of a property, but they are often subject to indexation clauses, which leads to them increasing significantly each year, leading to consumer detriment. 

The CMA has been working with various companies and has now secured undertakings from nine companies that bought freeholds from one leading housing developer.  A further four national developers have agreed to work with the companies who purchased their freeholds to remove so-called doubling terms. The move will affect more than 5,000 households throughout the UK, with many who paid a doubled rent receiving a refund.

The problematic terms cause ground rents to double in price every ten years. These terms can lead to people being trapped in homes they cannot sell or mortgage because the ground rents can become so high. For example, a rent that started as £250 could be £8000 after 50 years, which makes a property unattractive to purchase or offer a mortgage on.

The firms will also remove contract terms which were originally doubling clauses, but were converted so the ground rent increased in line with the Retail Price Index. The CMA believes that the original doubling clauses were unfair and should therefore have been fully removed – not replaced with another term that still increases the rent.  With the rate of inflation being so high at the moment, the rents would have increased much more significantly than was probably originally envisaged when they were linked to RPI.

The CMA says that all affected leaseholders will now see their ground rents remain at the original amount – that is the amount set when the property was first sold – and this will not increase over time. The nine freeholders have also agreed to refund residential leaseholders who had already paid out under doubled ground rent terms.

The government has been working on proposals to reform the leasehold system, but there is currently no timeline for changes to come into effect.  Among other things, the government would ban new-build houses from being leasehold, allow people to extend their leasehold terms to 990 years and in so doing, end ground rent.