The stalling property market has led some frustrated sellers to set up online raffles to sell their homes, but David Schollenberger of Healys says they must make sure they don’t fall foul of the Gambling Commission.
There has been much media coverage recently about home-owning entrepreneurs who are tired of being unable to sell their houses and have decided to hold an online raffle and award the house as a prize. Some have gone a step further and decided to use it as a means to sell other people’s houses. The response to their websites has been huge. But some of these people have been contacted by the Gambling Commission investigating whether or not they are conducting an illegal lottery. Is this new method of finding buyers for houses legal? What are the rules under the Gambling Act 2005? Is there a way to structure such a contest to avoid regulation by the Gambling Commission? This article will explore this business model and describe the pitfalls and opportunities.
Law of lotteries and prize competitions
There is an important distinction in the UK between lotteries and prize competitions.
The Gambling Act 2005 defines a lottery as where:
- Participants are required to pay to take part
- Prizes are allocated to participants
- Prizes are allocated wholly by chance
Lotteries in the UK must be licensed with the Gambling Commission. They are available only for charities and may not be run for commercial gain. Operating a lottery without a licence is a criminal offence.
Prize competitions, by contrast, are not regulated by the Gambling Act 2005. They can therefore be organised for private benefit and profit, and an entry fee can be charged. In prize competitions, success depends on the exercise of skill, judgment or knowledge by the participants. The degree of skill must either deter 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. The degree of skill required cannot be so low that it does not prevent a significant proportion of people who participate from winning and does not deter a significant proportion of people from entering the competition, but nor can it be so hard that no one could reasonably win without guessing. The Gambling Commission does not give guidance by way of a percentage on what is a significant proportion of people. However, the Commission indicates that it will view it as a prize competition even if those who progress based on their skills in the skill competitions are subsequently entered into a draw to pick the final winner. So, a two-tier approach is possible. The first must be skill-based, and if there are several winners of the skill-based competition, the second tier can determine a winner by chance. Gambling Commission guidance also states that the operator of the prize competition must be able to substantiate if challenged that the competition either deterred a significant proportion of people from entering or prevented a significant proportion of people from receiving a prize. They suggest that you may choose to carry out research to test the types of questions with viewer or reader panels to establish that a significant proportion would be deterred from entering or would get the answer incorrect. The Commission will consider the following in determining whether or not a prize competition is compliant:
- Where a competition uses a multiple answer format, there should be sufficient plausible alternative answers
- Joke answers should not be used
- The correct answer should not obviously be close to the question
- There should be a number of questions asked (more than one)
- The format such as complex logic or mathematical puzzles that are demonstrably not simple to complete
- The cost of entry and/or the value of the prize (the knowledge needed to deter potential participants from entering a competition with a high value prize is likely to be greater than in the case where the value of the prize is low)
The Commission notes that where by its nature a competition can only involve one high-value prize, as with house sale competitions, the organisers will need to take particular care to justify their expectation that they are offering a genuine competition as initially there will be no opportunity to build up market data from previous competitions. The Commission particularly recommends that organisers of these competitions learn from the experience of previous similar competitions about the degree of difficulty and number of winners.
Besides the prize competition, the alternative is to structure the contest as a free draw. Under this scenario, there may be either no fees charged to participate in the draw or there must be both a free draw and paid route to enter the competition. If the latter, the free route and the paid route must both be equally prominent and accessible. The key points that must be adhered to are:
- The free entry option must be provided to enter by ordinary post (first or second class)
- If some other method is offered it can’t be more expensive or less convenient than entering via the paid route
- The system for allocating prizes must not distinguish between those using the paid or the free route
- The free entry option must be publicised so that it is likely to come to the attention of all those intending to participate. If the scheme is operating on a website details of the free entry must be given
The problem with the free draw business model is that the free route to entry dilutes the amount of funds that can be raised.
Terms and conditions
The bottom line
Using prize competitions and free draws to convey houses may prove to be very successful for both promoters and house sellers. Nonetheless, these types of large prize competitions are high on the radar of the Gambling Commission and need to be done properly. Getting it wrong will attract investigation and possible criminal penalties. Those embarking on this type of venture are urged to seek legal advice.