Repeal of property sales law will pose risks for housebuilders, says expert

The Property Misdescriptions Act 1991 (PMA) makes it an offence to make false or misleading statements in the course of a property development or estate agency business when offering properties for sale.  Following a consultation process the Government has announced that the PMA will be repealed next year. The Consumer Protection from Unfair Trading Regulations will be relied on to protect property buyers.

This plan would replace a purpose-built piece of legislation that deals with the needs of one market with a catch-all law that is not designed for the regulation of property sales. Most importantly it would expose those building and selling houses to new risks.

The manner in which the repeal of the PMA has been presented suggests that it will reduce the enforcement burden on Trading Standards and creates the false impression that it primarily impacts on estate agents. Unhelpfully it underplays the impact on the housing industry, but make no mistake: housebuilders will be affected, and their interests will not be served by the change.

The Consumer Regulations are potentially more powerful than the PMA and could place additional burdens on housebuilders. For instance, the regulations include the prohibition of misleading omissions, while omissions are not currently regulated by the PMA.

This means that once the change takes effect house-builders will be concerned not just with what they do say about a property, but also what they don't say. They must ensure that any relevant facts or matters are actively brought to the attention of potential buyers. This is an additional regulatory burden on those companies.

The very fact of a change in the law will place a burden on housebuilders at a time when they are facing significant economic challenges. Companies will have to become familiar with a whole new legal regime, and this costs time and money.

The use of the Consumer Regulations will lead to significantly greater uncertainty resulting in more complex and time consuming cases in court. For instance, the Consumer Regulations provide that a breach occurs where a misleading act or omission causes the "average consumer" to take a "transactional decision" which he might not otherwise have taken.

The purchase of a house is, for most consumers, the biggest single transaction they would undertake during their lives. Therefore, it is very difficult to predict with certainty what kinds of misleading statements might cause a buyer to change his or her transactional decision. House-builders and courts will need to grapple with what factors could influence an "average consumer" to take a transactional decision. This brings with it uncertainty and cost.

In the light of the decision to repeal the PMA, property developers will need to spend time and money to consider the impact of the Regulations on their businesses, adapt their sales practices and re-train their staff. This will impose an administrative burden on these businesses at a time when house-builders are under pressure from lower transaction volumes during these recessionary times. 

The PMA is not perfect, but it is at least designed specifically to regulate property marketing and sales to consumers. It is also supported by well-established body of case law which lawyers can use to advise their clients with precision and a high degree of certainty. 

In contrast, the Consumer Regulations are relatively new law and provide general consumer protection which also extends to real estate. They are principle-based and with regard to property matters may cover a broader range of situations than the PMA.

There is another legal change planned: an amendment to the Estate Agents Act of 1979 designed to improve competition in the estate agents industry by taking private sale portals, such as rightmove.com, out of the scope of regulation under the Act.

All of these changes bring uncertainty to buyers and sellers at a difficult time for the property market. They increase uncertainty and introduce needless costs, and they expose housebuilders to new risks.

It does appear almost certain that the changes will take effect, though, so housebuilders need to be realistic about that and start preparing now for a change that is likely to take effect at the end of 2013 or the start of 2014.

Housebuilders and property developers should use the coming year to review the Consumer Regulations and assess the impact of them on their developments and trade practices. The OFT has published new guidance on property sales which will provide some assistance, and the more that those companies understand ahead of the change the lower the risk to them will be.

Dev Desai is a property law expert at Pinsent Masons, the law firm behind Out-Law.com