Property firm Savills recently estimated that the UK housing market is at its weakest point since the global financial crisis of 2007/2008 and it is perhaps unsurprising, therefore, that in recent years sellers have increasingly resorted to listing their property in a lottery or raffle.
However, running a property lottery whilst simultaneously staying compliant with all the relevant rules and regulations is no easy feat. There are many examples in the news of illegal property lotteries that have been abandoned prematurely. Indeed, the volume of ticket payments processed from illegal property raffles via PayPal has led the company to ban the purchase of tickets for entry to house-prize draws in the UK through its service. As a brief aside, even in successfully organised property lotteries, there are potentially quite significant tax pitfalls to navigate. Accordingly, both homeowners and buyers should seek expert legal advice. Also, there is no guarantee that the lottery will cover the value of the house, as property developers discovered earlier this year.
What are the rules?
The UK lottery industry is regulated by the Gambling Commission, with the relevant laws set out in the Gambling Act 2005 (Gambling Act). In addition, compliance with both codes of practice governed by the Advertising Standards Authority (ASA) as well as the Consumer Protection from Unfair Trading Regulations 2008 is required.
In general, lotteries are only permitted to be operated for ‘good causes’ (such as registered charities). A lottery is where entrants have to pay to enter a scheme and the prizes to be won are awarded to participants purely based on chance. Homeowners could, in theory, apply for a Gambling Commission licence allowing them to run a lottery to win their house. However, the strict criteria will typically prevent most properties from being sold by a lottery.
As such, if a homeowner wishes to sell their property, they must run their scheme as either (i) a free prize draw (which seems undesirable, given the main prize!) or (ii) as a genuine competition. As there are strict legal differences between a lottery and a prize competition, it is imperative that the scheme is set up correctly, in order to prevent the risk of setting up an illegal lottery and incurring criminal liability under the Gambling Act.
What are the differences between a lottery and a prize competition?
Under section 14(2) of the Gambling Act, an arrangement is a lottery if: people are required to pay in order to participate; prizes are allocated to one or more members of a class; and the prizes are allocated by a process that relies wholly on chance.
Unlike the ‘chance’ element of a lottery, section 14(5) clarifies that a legitimate prize competition will contain a requirement “to exercise skill or judgment or to display knowledge”, where it can reasonably be expected that the requirement will either prevent a significant proportion of people who wish to participate from doing so; or prevent a significant proportion of people who participate from receiving a prize.
If either one of these barriers to entry or success can be shown, the arrangement will not be a lottery.
To be compliant, genuine prize competitions must therefore include a skill-based entry mechanism. Structuring the mechanism as a game brings with it the challenge of avoiding ‘gaming’, which is also a regulated activity enforced by the Gambling Commission. There is also a challenge in making the entry mechanism a question or series of questions: they need to be challenging enough to put off a significant proportion of people, but not so difficult that entrants simply guess the answers instead. There is also the practical issue that, to be commercially viable, organisers also need to sell a sufficient number of tickets.
In addition, section 8 of the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (CAP Code), which covers ‘Promotional marketing’, outlines a number of mandatory requirements for all prize draws and competitions – which will include any involving property.
For example, rule 8.17 states that all communications relating to such promotions must include “all applicable significant conditions or information where the omission of such information is likely to mislead”. Where the prize is a property, considerable amounts of information might need to be included, such as that relating to the status of the seller’s title, any outstanding mortgages or disputes, to name but a few.
Any drafting of competition or prize draw terms in such a complex area should always be checked with expert legal advisers to ensure enforceability.
What happens if the scheme is set up improperly?
If the scheme is not properly set up as a prize competition (or free prize draw), it is likely to be deemed an illegal lottery by the Gambling Commission. As a result, at worst it could invite fines or prison sentences for the organiser. HMRC can also levy a 12% lottery duty on the ticket sales of unlawful lotteries and charge organisers additional penalties. Moreover, the organiser may also face adverse media attention and formal censure in the form of a negative ASA ruling. For example, the ASA recently upheld a complaint that a raffle had been organised unfairly because the main prize had been amended from a castle to a substantially diminished cash sum, due to insufficient ticket sales. The organiser would also be exposed to potential claims from entrants for breach of contract.
It is clear that the patchwork of laws and rules in this area is complex, and the consequences for improper organisation can be severe. For further advice on this topic or regarding any prize promotion issues, contact Carlton Daniel.