Ground Rent & Service Charges – What You Need to Know

In this blog, Francesca Knight of our Commercial Property Department discusses Ground rent and service charges.

If you currently own a leasehold property, or are interested in purchasing one, you may be familiar with ground rent and service charge payable under your lease.

Ground rent is a rent payable to the freeholder or landlord under the terms of your lease. These are often low payments which can be paid in one annual instalment, half-yearly or quarterly. Payments are to be made following a formal written demand from your freeholder or landlord.

If you have decided to extend your lease under the Leasehold Reform, Housing and Development Act 1993, the ground rent usually becomes what is known as a 'peppercorn rent'. This is a very low, nominal rent, i.e. 'a peppercorn'. This effectively means that ground rent is no longer payable to your freeholder or landlord.

Service charge is charged by freeholders and landlords to recover costs they incur in providing services to a building. This includes things such as repairs, general maintenance work and insurance. Details of what can be charged as service charge will be set out in the lease. Service charges can increase and decrease without any limit, but the landlord is only able to recover those costs which are reasonable. Again, service charge payments are to be made following a formal written demand from your freeholder or landlord.

Leaseholders have a right to request in writing a summary of the service charge account. The summary will contain information such as how the service charge payments have been spent.

If you are considering taking a new lease, it is important to watch out for variable ground rents and service charges, which are becoming increasingly common with new housing developments. As in the case of Arnold v Britton [2015] concerning holiday chalets, an annual initial service charge amount of £90 was payable under the lease, increasing by 10% compound interest each year. This meant that, by the end of the 99-year lease term, service charge payments would have increased to over £1 million. The issue escalated through the courts, where it was finally decided by the Supreme Court in favour of the landlord. The Supreme Court held that this was the clear meaning under the lease, and they were not prepared to re-write this, therefore meaning the expensive service charge payments would eventually be payable by leaseholders.