What is ground rent and service charge?
Whenever you buy a new property, it’s important to fully understand the charges you may be liable for beyond your mortgage repayments – for instance, ground rent and service charge fees. Read on, to discover all there is to know about ground rent and service charge payments.
What is ground rent?
If you’re looking to purchase a flat, you might have seen the term ‘ground rent’. We’ve uncovered whether you’re likely to have to pay it, what it covers, how it’s calculated, and what happens if you fall behind on payments.
Who pays ground rent?
Ground rent is an agreement whereby the leaseholder of a property pays a regular fee to the freeholder to occupy the land. This agreement should be formalised by the freeholder, as a written demand, and can be backdated as many as six years. If you’re unsure what the difference between a freehold and leasehold is, we’ve outlined each below:
- What is a freehold?
If you are the freeholder of a property, you have complete ownership of its structure, surrounding land, and the immediate airspace for an unlimited amount of time. Your name is on the title deeds.
- What is a leasehold?
Having a leasehold means you own the property you live in, but, importantly, you don’t have any claim to the land it’s built on; the land belongs to the freeholder. This type of agreement is usually reserved for flats or studio apartments that are built one above the other, making it difficult to purchase the land they’re build on, but can also apply to some houses.
A leasehold is also only valid for a set period at a time, after which the property reverts back to the freeholder. However, they’re usually extended long before running out, and typically last between 99-125 years at a time.
What does ground rent cover?
Ground rent is relatively uncomplicated to understand, and is essentially a payment owed to the owner of an area of land by a leaseholder living within the boundaries. This ground rent payment gives you the security of a long-term lease of the land, and protection against a freeholder suddenly deciding to do something different with their land.
How is ground rent calculated?
There isn’t a standardised ground rent value, and the amount you pay entirely depends upon the terms of your lease agreement – additionally, ground rent can only be increased if your signed lease allows it. However, the typical rate is usually valued at no more than £200 per year, and it’s often just a few pounds annually (this low amount is commonly referred to as peppercorn rent).
What happens if you don’t pay ground rent?
If you fail or refuse to pay ground rent, your freeholder may choose to open legal proceedings against you. This would usually mean bailiffs, but might lead to repossession and the forfeiture of your property. In the case of the latter, you will be required to cover your freeholder’s legal fees as well as any outstanding arrears.
Importantly, court action can only be taken if there is outstanding ground rent of £350 or more, and the bill is more than three years old. A freeholder will also usually give their leaseholder four weeks to settle payments, prior to a court hearing.
What is a service charge?
If you live in a shared building (such as a block of flats) or occupy land as a leaseholder, the chances are you’ll have to make service charge payments to your freeholder. We’ve outlined what they cover, and the rules and regulations involved.
What does service charge cover?
As highlighted, service charge payments are made by the leaseholder of a property, to the freeholder, to cover the costs of maintenance. We’ve offered examples of what your service charge costs might cover:
- Repairs, improvements, and cleaning of communal areas (such as lifts and staircases, corridors, and entrance halls).
- Building insurance.
- Upkeep of surrounding land.
- Security, caretaking, and building staff fees.
- Heating of the building.
Flat service charge rules
If you live in a flat, you’ll almost certainly incur service charge payments as part of your lease agreement. While there’s no formal cap or limit to how much a freeholder can charge, there are rules around when fees can be issued and what can be charged for. For instance, a freeholder must:
- Ensure all service charge fees are reasonable and cover required maintenance. A freeholder cannot simply spend lavishly and expect a leaseholder to foot the bill.
- Make sure that all work carried out is to a satisfactory standard.
- Evidence that service charge bills are for the direct maintenance of the building.
- Not profit from service charge payments.
- Outline within the original lease what they can and cannot issue service charge bills for.
Is it possible to dispute a service charge?
If you believe your freeholder has issued an unreasonable service charge, it is possible to challenge it. Your first step should always be to raise a dispute with your freeholder directly, to try and remedy the situation amicably. However, if this approach doesn’t prove fruitful, you can apply to a governmental tribunal. You cannot raise a concern, though, if:
- You’ve already agreed to pay the charge.
- The dispute is being dealt with by the courts or between you and your freeholder.
- You pay a fixed service charge rate. This amount will be outlined in your signed lease agreement.
Hopefully, we’ve offered helpful insight into the processes involved in the issuing of ground rent and service charge bills. For even more expert insight, head on over to our blog.