What are Ground Rent Payments and Service Charge Payments?
When you buy a leasehold property, your lease will oblige you to pay ground rent and service charges to the landlord each year.
What is Ground Rent?
Ground rent is a yearly sum of rent paid to the landlord under the terms of the lease. This can be a “peppercorn” rent (no ground rent) or any other sum of money set by the lease. Ground rent can be a fixed amount for the whole of the term of the lease, or the lease may contain 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.
There have been many articles in the press recently about the issue of doubling ground rents. Some developers sold properties with leases that started at a reasonable ground rent such as £250 per year - but with a rent review clause which doubled the rent every ten years. It doesn’t take very long for the amount of ground rent payable to increase dramatically - in this example, the rent would be £8,000 per year after only 50 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. This is where the landlord takes action against the leaseholder to terminate the lease because of a breach of its terms.
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 if you have a leasehold house.
Your Conveyancing Solicitor will report to you and also to your mortgage lender if the provisions in your lease relating to ground rent are onerous.
For free initial advice get in touch with our Conveyancing Solicitors.
What are Service Charges?
In addition to ground rent, it’s normal for a lease to oblige the leaseholder to contribute service charges. These are additional payments to cover the leaseholder’s contribution to the costs of running the building. These costs would include any maintenance and repair of the structure of the building and any common parts, the cost of the buildings insurance, or maintenance of any communal grounds or private accessways.
The service charges might also include costs or fees for a appointing a managing agent or accountant. The lease should be clear on the proportion or percentage of the total costs that you must pay. The landlord is only permitted to recover costs from leaseholders if they are reasonable. If the leaseholders feel that the costs are unreasonable, then they can challenge them through the First Tier Tribunal or Leasehold Valuation Tribunal.
Typically you might make a fixed monthly or quarterly service charge payment to the landlord. This amount would be an estimate of the service charge costs for the year. At the end of the financial year, the landlord calculates the actual costs and asks the leaseholders to pay the difference between the estimated and actual costs for the year. This isn’t always the case - it might be that in a very small building or a maisonette, service charges are paid on an ad hoc basis.
In the UK it’s fairly common for the service charge payment demanded by the landlord to include a contribution to a reserve or sinking fund. This is a pot of money set aside by the landlord which accumulates to help cover additional costs or major works, such as roof repairs or external decoration. This means that the cost of expensive works can be spread over a number of years.
If a landlord intends to carry out work that would cost in excess of £250 per leaseholder, or enters into a qualifying contract, then they are obliged to consult with the leaseholders in advance by serving a Section 20 Notice.
Following the initial notice of intention, leaseholders have the opportunity to make observations or nominate possible contractors for the work. The landlord then sends a second notice containing copies of the various estimates for the work. Finally, the leaseholders will receive a notification that the contract has been awarded. The landlord will advise when payment is due from the leaseholders.
When you buy a leasehold property, you should satisfy yourself that the ground rent and service charges are likely to be within your budget. Your Conveyancing Solicitor will obtain a leasehold information pack from the seller’s Solicitors, which will contain details of the current ground rent and service charges and also further information from the landlord regarding the level of past charges and details of any proposed major works. It will also have details of whether there is an existing reserve fund and the amount held.
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