If you own a leasehold property, you will be liable to pay various additional fees to the freeholder. This includes ground rent and service charges.

Ground rent and service charges can often form the basis of disputes between leaseholders and freeholders, therefore it is important to understanding how these charges work and how they are dealt with.

What is Ground rent?

Ground rent is a regular payment made to the freeholder of the leasehold property as a condition of the lease. In simple terms, ground rent is a fee charged on leasehold properties for the land the home is on. It does not include any additional services that the freeholder might provide – these are covered under service charges.

How much is Ground Rent?

In the UK, there are no guidelines which determine the exact cost of ground rent for a leaseholder. The specific terms of a ground rent are defined in the leasehold agreement. Typically, ground rent is a fixed annual payment between £200-£500 per year. Ground rent can also be calculated as a percentage of the overall property value.

Many ground rents include provisions for periodic rent reviews, where the amount increases on certain anniversary years, for example, every 10 or 25 years.

Has ground rent been abolished?

In response to growing concerns surrounding ground rent in the UK, the government introduced new laws surrounding certain leasehold practices. As of 30 June 2022, The Leasehold Reform (Ground Rent) Act 2022 has banned ground rents for anyone buying new homes on long leases.

Where the Leasehold Reform Act 2022 applies, the ground rent is often referred to as a “peppercorn” rent. Historically, freeholders would ask for a peppercorn just to enforce the terms of the lease and make it legally binding. Nowadays, the peppercorn rent applies to a very low or nominal amount of ground rent.

This reform does not apply to existing leaseholders. They will continue to face ground rent charges while they own their property on a leasehold basis. This will remain the case unless the leaseholder purchases the freehold, or a share of the freehold, of the property.

What is a service charge?

A service charge is a fee that is payable to the freeholder by the leaseholder of the property. They relate to the services that the freeholder is obliged to provide under the terms of the lease.

The way in which service charge is organised is set out in the lease or tenancy agreement. The charge normally covers the cost of services such as:

• General maintenance and repairs
• Management costs
• Building insurance
• Caretakers or concierges
• Work on shared areas or general building structure

How much are service charges?

The cost of service charges will vary depending on the property and the terms of the lease. A breakdown of the service charges will be provided in a statement, detailing the expected annual or bi-annual costs.

Typically, service charges for flats will be in the region of £1,000 to £2,000 per year, but they can often exceed this for new-build flats and flats in London.

Who pays for a service charge?

The terms of the lease should explain how the service charge is handled. The service charge can be paid for by the freeholder themselves, or the cost is shared between the leaseholders.

At the beginning of each financial year, the freeholder or management company will produce an estimate of the likely service charge expenditure and how much it will be. At the end of the year, the freeholder should provide a statement of the actual costs. The actual costs will then be balanced against the estimate and the leaseholder will either be credited or asked to pay the shortfall.

If a freeholder plans to carry out works that will cost each leaseholder more than £250 (£100 per year for work and services lasting more than 12 months), the freeholder must take it to consultation. This means providing leaseholders with notices which allow them to make observations on the proposals.

What happens if Ground Rent or service charges are not paid?

Under the terms of a lease, you will be required to pay service charges, with non-payments being considered a breach of the terms. It is possible to challenge the service charges included in a lease if the leaseholder believes a charge is unreasonable or the standard of work is poor. We recommend seeking legal advice before withholding any service charge payments.

Ground rent must be formally demanded by the freeholder in writing. Leaseholders are not liable to pay ground rent unless the freeholder has asked for it in the prescribed notice of demand form. Freeholders cannot legally recover ground rent unless they have asked for it first.

If you do not pay the ground rent which is due on a leasehold property, the freeholder may be entitled to take legal action against you. A freeholder can look to recover up to six years of outstanding ground rent arrears. Legal action could include applying for a county court judgement, asking your mortgage company to pay the arrears and add these to the outstanding amount on your mortgage, and finally, bringing forfeiture action to regain possession of the property.

How we can help

Our experienced Property Litigation team can provide clear guidance to both freeholders and leaseholders on their current situation and what actions can be taken with regards to ground rent and service charges.

Alternatively, if you require advice on buying or selling a leasehold or what obligations there are under the terms of your lease, our residential and commercial property teams are experienced with these matters and would be happy to assist you.