When looking to buy property, many people, especially those stepping onto the property ladder for the first time, worry about the ongoing costs that are associated with leasehold properties.
They are concerned that the leasehold charges can be expensive and may not seem to benefit them directly.
This concern is valid to some extent - there are indeed a variety of types of leasehold property charges, and they can add up.
However, it is also worth remembering that while freehold properties might be more expensive upfront, their maintenance costs can add up as well. Hence, the cost of owning a leasehold property might not be as daunting as it initially seems.
In this article, we explore what you might have to pay as a leaseholder, including ground rent, service charges, and potentially charge administration fees.
Ground rent
When you buy a leasehold property, you buy the right to occupy it for the remaining term of the lease. In return for this right, you pay a ground rent, usually every year.
There may be a clause in the lease that allows the freeholder to increase the ground rent over time. Some ground rents rise quickly - doubling every few years. Generally, in older leases, the freeholder has the right to a periodic rent review, which raises the ground rent to the current market rent. In newer leases, the amount of ground rent payable may be based on a formula where rents increase automatically over time.
From 30 June 2022, freeholders have not been allowed to charge more than a peppercorn for ground rent when a new lease is granted (in other words, for new build or newly converted properties) or when an existing lease is renewed. The law applies to retirement properties in schemes such as sheltered housing as well, although freeholders of those had until April 2023 to comply.
Note that if you buy a leasehold property after 30 June 2022, you'll still have to pay ground rent to the landlord, just as the previous owner did. The changes in law only apply to new leases, not transferred ones. However, if you wait for two years after buying, then extend your lease term, ground rent will be charged at an effective nil rate.
Service charges
What is a service charge?
The lease administrator is the person or business that is responsible for managing the freehold on a day to day basis. It might be your landlord, a managing agent or a management company.
The leasehold service charges you pay are your contribution to the overall expenses of the general upkeep of the building and communal areas. For example, they may including cleaning, gardening, making repairs and low value improvements (such as improving signage).
Depending on the complexity of the building or estate where you live, service charges may include costs for heating and lighting common areas, for buildings insurance, for any concierge or security service, and for the upkeep of facilities such as a gym.
They also may include management company charges - for the work the lease administrator has done in arranging for all of the above and for tasks such as assessments of fire risk or tenancy audits.
You'll be responsible for paying a fixed percentage of the total costs (regardless of whether you benefit from them directly) based on the size of your property compared to neighbours', or a 'reasonable proportion' calculated in some other way.
How are service charges collected?
Service charge costs can be invoiced annually, six-monthly or quarterly. More recent leases provide for the service charge to be payable in advance of the landlord incurring the costs to which it relates, based on an estimate for the coming year.
If charges are collected in advance, then the lease usually states that the landlord or their agent will produce and provide an end of year statement of account of what has actually been spent. Such an account might be audited by an accountant.
If in the year the leaseholder has spent more estimated, the lease will normally allow the shortfall to be recovered from the leaseholders with a one-off balancing charge payment.
If less has been spent than estimated, the overpayment might be credited against the leaseholder’s subsequent payment or paid into the reserve fund.
Under section 20B of the Landlord and Tenant Act 1985, a landlord or their agent cannot recover service charge costs that were paid or which became payable more than 18 months before the demand, unless the leaseholder was given a section 20 notice that they would be payable in due course.
When you buy a property
When you buy a leasehold property, ensure that all service charges to date have been paid at the time of your purchase and check whether any charges have ever been disputed. Check whether the lease administrator is likely to issue a new invoice for charges relating to before you were an owner, and ask whether there are likely to be any increases in the next few years.
Reserve fund or sinking fund
As a leasehold owner, it is not uncommon to have to contribute to a reserve or sinking fund.
Sinking funds are used for major works, such as repainting the entire building or replacing window frames, or unexpected repairs. While the amounts can be significant, they ensure that the building remains in good condition and retains its value over time.
Unless the sale and purchase agreement specifically states so, on selling the property, the owner will not receive any of this money back from the buyer.
Administrative fees
Administrative fees, or administration charges, are one-off payments related to specific 'services' the lease administrator carries out in respect of your property at your request. These other costs tend to be for services that relate to ensuring that the freeholder's interest remains protected.
Let's take a look at some of them.
Preparing and accepting a deed of covenant
A deed of covenant legally binds one party to certain promises (the covenants) such as to pay service charges or not to do certain things such as build an extension.
Covenants are often in the lease, but sometimes it is advantageous to the freeholder to separate them. In particular, if the property is rented out, through a deed of covenant the tenant can be required to sign up to the same promises as the leaseholder.
Accepting a notice of assignment or notice of charge
It is usually a term of the lease that the lease administrator is told of a change in ownership (in legal terminology, assignment means transfer) and of any mortgage (in legal terminology, a charge) or remortgage so that they can carry out their duty to provide information to the leaseholder, and invoice for charges.
Accepting a notice should be cost between £50 and £200.
Issuing a certificate of compliance
This document acts as evidence that the conditions in the lease relating to the transfer of ownership of the leasehold have been complied with.
It is necessary to provide it to the Land Registry if the freeholder had previously placed a restriction on the leasehold title that is to be removed.
Transferring membership of the management company
Some management companies are partially owned by the leaseholders. If so, there may be a fee for transferring shares or membership in the company to the new leaseholder.
Giving consent
Some leases contain clauses that restrict what the leaseholder may do in or with the property, unless the landlord's consent is obtained from the lease administrator.
The First tier tribunal has ruled that a reasonable (fair) price for a consent should be between £45 and £165.
Preparing and accepting a deed of variation
A deed of variation changes the information on the lease (such as your name). Less frequently, it is used to change the terms of the lease (with the freeholder's agreement).
Providing answers to leasehold property enquiries
When you sell, the buyer and their mortgage lender will need information about the property and the lease that the lease administrator provides. It can take time to answer all the questions, but most conveyancers use the standardised LPE1 and LPE2 forms to request the information and most lease administrators are comfortable to answer them.
Giving licence to assign
Some leases require that permission is given to sell the property, allowing the administrator to vet the new owner against certain criteria. For example, the purchase of a retirement property is often restricted to someone over a certain age.
Transfer fee
There may be a fee to transfer the lease to someone else. This can also be known as an exit fee. It is usually a fixed percentage of the sale price.
Where to find a list of the charges you'll have to pay
Your lease sets out what fees and charges you'll have to pay. If there is a leasehold pack, you are likely to find a summary there. You can ask for these before you make an offer.
Lease terms and the leasehold pack aren't light bedtime reading. Its important that you understand the terms that you're agreeing to when you buy. You conveyancer should bring your attention to the most important.
How to dispute unreasonable fees
What is an unreasonable fee?
There is no definition of what is 'reasonable' is often subjective. Generally, 'reasonable' will depend on the amount of work required, the complexity of the situation and the knowledge and the experience of the person carrying it out. Routine tasks should not attract high charges.
Make sure that unreasonable charges are not hidden by being swept up under other fair charges.
You may be able to appoint a surveyor to assess fees and management practices.
Your landlord may also be required to consult you on certain long term agreements.
Complaining to governing bodies
Members of the Royal Institution of Chartered Surveyors (RICS) and the Association of Residential Managing Agents (ARMA) are bound by codes of practice.
If you think your lease administrator has charged unfairly, you to complain to their governing body to resolve the service charge issue.
Protection under law
Otherwise, the Commonhold and Leasehold Reform Act 2002 states that lease administrators cannot charge unreasonable administration fees for the grant of consent or the provision of information.
The issue is always enforcing the law. You might ask your conveyancing solicitor to point out case law to the management company, but of course, engaging any professional advisor incurs extra costs.
Since disputes often cause delays, you might choose to pay the fee first, then seek compensation afterwards. There are risks associated with this, as payment could indicate acceptance as fair.
We have a longer article on challenging charges.
Disputes are not heard in a traditional court, but rather at the First-tier Tribunal (Property Chamber). There is a standardised process to follow.
The first step is to download and complete the form Leasehold 1.
There is an initial application fee to pay of £100 when you submit the form, and an additional fee of £200 if the case goes to Tribunal.
You can ask the Tribunal to rule that the lease administrator pays your fees if you win, but the Tribunal has no obligation to agree to your request.
Likewise, the lease administrator may be able to claim their fees back from you if you lose. Some leases contain clauses that allow the lease administrator to recover legal fees from leaseholders.
Lease extensions and the impact on charges
If you're considering a lease extension, that is increasing the remaining amount of time before your lease expires, you should be aware that this might change the service charges that you pay.
Generally, extended and new leases come with different terms and charges, so it's important to seek professional advice before committing to an extension.
Conclusion
While there are various charges associated with owning a leasehold property, with proper advice and understanding, you can navigate these charges effectively and make the most of your investment.
Whether you're looking at a leasehold flat or the entire property, knowing what to expect can help you prepare for the regular payments and help you secure a good deal on your new home.