Upon purchasing a leasehold property, the lease will oblige you - the leaseholder - to pay ground rent and service charges each year.
Prior to completing your purchase, it is imperative that your solicitor ensures all service charge and ground rent arrears have been paid, that you will not be responsible for debts incurred on the property prior to your ownership, and asks questions regarding whether the rates are likely to increase in the coming year. In addition, your surveyor should request information from the seller or managing agent regarding the level of past charges, details of any proposed major works, and request details as to whether there is an existing reserve fund and the current amount held.
Yet, many leaseholders still remain unaware of the differences between service charges and ground rent, and often refer to them as one in the same. However, to be clear, ground rent and service charges are not the same thing!
So, what are Service Charges?
Service charges are a leaseholder's financial obligation and contribution to the costs of running, maintaining and improving the building or estate.
Such costs would include but are not limited to: any maintenance and repair of the structure of the building and any common parts, the cost of the buildings insurance, any fees or legal costs payable by the management company (incl. accountancy fees), and/or maintenance of any communal areas, gardens or private accessways.
In addition, it is common for the annual service charge payment demanded by the management company to include a contribution to a reserve (or sinking) fund. This "pot" of funds facilitates the management company to budget and set aside funds over a number of years which accumulate over time to help fund major, more expensive projects such as roof repairs and/or external decoration.
The proportion or percentage of the total costs to which each leaseholder is obligated to pay should be clearly outlined in the terms of the lease.
However, the amount at which the service charges are set is based upon what the managing agent will anticipate for the forthcoming year. This is typically calculated using the previous years' expenditure as a guide, taking into account the current rate of inflation and/or any exceptional circumstances relating to that particular property development.
Managing agents are only permitted to recover outstanding service charge debt from leaseholders if they are set at a reasonable amount. If the leaseholders feel that the costs are unreasonable, then they can request an explanation from the managing agent. As a last resort, if the leaseholder finds the justification is unsatisfactory, the matter can be taken to the First Tier Tribunal.
At Regency, leaseholders are typically provided with an option to pay thier annual service charge payment in either one large payment or via 12 x fixed monthly standing order payments, or - in extreme circumstances - payment plans may be offered. However, it should be noted that leaseholders may be obligated to pay service charges sooner in the event of an emergency.
What is Ground Rent? In contrast, ground rent is an entirely seperate entity and is a yearly sum paid to the freeholder under the terms of the lease for - essentially - renting the land that the leasehold property sits on. The ground rent payments can be collected either through the management company on behalf of the Freeholder, or directly via the Freeholder or Freeholder's Agents. Ground rent can be set to a fixed amount for the whole of the term of the lease, or the lease may contain a provision for the rent to be reviewed during the term. This can be either by a set amount on each review date, or in accordance with a formula set out in the lease. Some developers have been caught selling properties with leases that start at a reasonable ground rent level such as £200 per year - but with a lease clause which means that the rent will double every 10 years; in this example, the annual ground rent would rise to £6,400 per year within just 50 years! The inclusions of these clauses have decimated the value of properties and has cost an innumerable amount of leaseholders thousands of pounds for years to come. 💷 A quick Google search would show you the huge amount of leasehold scandals that have occurred throughout the UK over recent years. It’s therefore possible for the ground rent to increase to such a level that it’s unaffordable and could lead to forfeiture of the lease, and ultimately the freeholder could take action against the leaseholder to terminate the lease because of a breach of its terms. Subsequently, ground rent provisions such as these are likely to have an adverse effect on the marketability or mortgageability of the property. They’re also likely to greatly increase the cost of a lease extension or the cost of purchasing the freehold. However, ground rent can also have a “peppercorn” rate (no ground rent); which can be obtained via a statutory lease extension. [If you would like to extend your lease with us, please complete the online form on our Contact Us page for more information.] So there you have it! As you can see from our article, ground rent and service charges are very different and all leaseholders should know the difference between the two before thinking about purchasing a leasehold property. Finally, if you have any further questions or queries, or would like to learn more about our lease extension service, please do not hesitate to contact us. 📲
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