Find out about service charges and ground rent on leasehold properties, including what they're used for and how you can object if you think they’re unfair.
Service charges and ground rent are paid by some leaseholders.
Although you’ve bought your leasehold property, the building it's in or the land it sits on belong to someone else, called the freeholder or landlord.
If you're trying to buy a leasehold property, you might even find that high service charges affect how much you can borrow for your mortgage.
Service charges cover the cost of any maintenance to the building, but the landlord only has to provide the services outlined in the lease.
Leasehold service charges may include:
Leasehold tenants usually cover all service costs and landlords don’t contribute anything towards them.
In most cases service charges need to be paid before the work has taken place. In rare circumstances the landlord may need to pay out before the fees are recovered from the leaseholders.
Charges aren't capped either - they can increase and decrease without any repercussions for the landlord.
However, if work is taking place that's valued above a certain threshold, the freeholder needs to inform you before it starts.
Fees must be reasonable though and can't be chosen on a whim. The landlord can’t just spend as much as they like and claim back extortionate charges from you, or expect to make money from service charges.
But they're able to spend as much as is necessary to protect the value of their property. If there are disagreements over fees, they can be referred on to the First Tier Tribunal.
Always check the tenant's lease or tenancy agreement. This will list the service charges you'll need to pay while you own the leasehold property.
Some leases allow landlords to collect money as service charges to use as reserve funds.
These funds provide a safety net in case of unforeseen circumstances. For example if there’s a flood at the property, the landlord can access the reserve funds to resolve the issue as quickly as possible.
Reserve funds can also help make sure all leaseholders contribute towards repairs. This type of lease might help prevent a big bill if there was an emergency.
Don't expect to get money you paid into the reserve fund back if it's not used. That is, unless the lease explicitly says it’ll be returned to you.
The freehold building containing your leasehold property needs buildings insurance. This covers the building's physical structure and the insurance premium will be included in your service charge.
As a leaseholder, you're entitled to see a copy of the insurance policy. You may need to make a formal request to the freeholder in writing.
Remember that you'll still need an individual contents insurance policy to cover your personal belongings.
If you live in a leasehold house you'll need to insure the building.
You might have to get the approval of the landlord before choosing a policy. They might give you a list of pre-approved insurers to choose from.
Ground rent is exactly what it sounds like - money leaseholders pay the freeholder to occupy the land a leasehold property is built upon.
Ground rent must only be paid if it's detailed in the lease. If it isn't, the landlord won't be able to recover any ground rent from you.
Just like any other type of rent, it'll be due on a certain date. Fail to pay and the landlord can take legal action against you.
A landlord can ask for unpaid ground rent as far back as six years. They can also ask for it all in one lump sum rather than instalments.
Make sure you understand what ground rent's due before buying a leasehold property.
Ground rent can increase if you agree to it being raised or it says so in the lease.
Everything you need to know about service charges and ground rent will be in your lease. If they're not in there, then you don’t need to pay them.
This also means that the landlord doesn't have to provide any service which isn't outlined by the lease, such as cleaning or maintenance.
If there are disputes which can't be settled by both parties, they can be referred on to a solicitor who specialises in lease law to resolve.
When you're buying a leasehold property, your mortgage lender may ask about service charges and ground rent.
This is because they may take them into account when calculating your affordability.
If ground rent or service charges are particularly high, you might find you can't borrow as much as you'd hoped.
You're within your rights to question and challenge fees that you're charged. The same goes if you don't believe that the services meet the necessary standard.
If a disagreement with the freeholder isn't settled, it can be referred on to the First-Tier Tribunal.
There are circumstances where you can’t apply to the First-Tier Tribunal to rectify the problem.
For instance, if you pay a fixed charge, you've agreed to pay the charge, or the issue is already being dealt with by the court.
If you don't agree with service charges or ground rent, you can't just stop paying them.
Failure to pay could result in the landlord forfeiting the lease and repossessing the property, which will cost you a lot more than the original charges.
If you feel like you and the other leaseholders would like to run the building without owning the freehold, you could apply for the 'right to manage'.
This will allow you to pick service providers and companies that are better value for money.
However, this means that you'll need to run the building and make joint decisions with other leaseholders. It can be quite a lot to take on.
It’ll take around six months to take over the right to manage. The freeholder will still be able to sit on the right to manage board.
You'll need to collectively pay for any fees the landlord has as a result of the leaseholders taking over the building management process.