Barratt Developments PLC (LON:BDEV), Persimmon PLC (LON:PSN) and Taylor Wimpey PLC (LON:TW.) could be forced to compensate customers by the UK competition watchdog after it found evidence of potential mis-selling of homes with leasehold contracts. 

The Competition & Markets Authority said on Friday it had written to the FTSE 100-listed trio and FTSE 250-listed Countryside Properties PLC (LON:CSP), asking for more details as part of a new ‘enforcement action’ as it believes the four companies may have broken consumer protection law.

Other residential developers have also been told to review their practices, following an investigation launched by the regulator earlier this year

Mis-selling may have arisen in various actions by the quartet of housebuilders, including failing to explain clearly exactly what ground rent is and whether it increases over time, misleading customers that properties on an estate would only be sold as leasehold homes and falsely telling clients that the cost of converting their leasehold to freehold ownership would only be small before later increasing the price by thousands of pounds with little to no warning.

The developers also used unfair sales tactics, the CMA said, such as giving people “unnecessarily short” deadlines to complete purchases, meaning they “could feel pressured and rushed into buying properties that they may not have purchased had they been given more time”.

Ground rents terms built into contracts were also unfair, the CMA said, they force homeowners to pay escalating ground rents, which in some cases double every 10 years and result in people struggling to sell their homes down the line.

The CMA said it will also look at the practice of increasing ground rent based on the retail price index, expressing concern about the fairness of this and that it is not always effectively explained to prospective homeowners.

Firms who bought freeholds from these developers and that have continued to use the same unfair leasehold contract terms are also being investigated.

“It is unacceptable for housing developers to mislead or take advantage of homebuyers. That’s why we’ve launched today’s enforcement action,” said Andrea Coscelli, the CMA’s chief executive in a statement.

“Everyone involved in selling leasehold homes should take note: if our investigation demonstrates that there has been mis-selling or unfair contract terms, these will not be tolerated.”

The CMA cannot levy fines under these circumstances but said it can enforce legislation through the courts and can obtain additional measures to improve consumer choice, drive better compliance with the law, or obtain redress for consumers.

Taylor Wimpey released a statement on Friday morning saying: “The board takes this very seriously and Taylor Wimpey will continue to fully cooperate with the CMA, provide the further information to be requested by the CMA in the coming weeks and work with them to better understand their position.”

A similar line came from Barratt that it “is committed to putting its customers first and will continue to cooperate with the CMA whilst it completes its investigation” and from Countryside that it is “committed to resolving this issue to the satisfaction of our customers and will continue to co-operate fully with the CMA’s ongoing investigation”.

Shares in the four companies fell 2-3% in early trading but quickly eased off to near-flat or positive territory within the first hour.

The CMA news is “unexpected”, said broker Liberum, “as we thought the industry had resolved this issue”.

Analysts at Peel Hunt said: “While probably not a massive surprise it had been very quiet on this front for a while.”

Noting that the practice of selling houses with ground rents effectively stopped three to five years ago, though some homeowners are still affected, the analysts added that “this will be unhelpful for sentiment and we would expect some fines and reparations in due course, although we would not expect the amounts to be material”. 

Liberum said it was lifting its target price for Barratt to 525p even though results fell short of market expectations, but there was encouraging news that a 32% rise in reservations in July and August boosted an already strong order book, to 6,577 units, which underpins 2021 volumes and prices. Any degree of price weakness that comes as UK unemployment rises will hit 2022’s financials, analysts said.

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