Leaseholders, their obligations and what happens when they can’t pay
It is estimated that there are approximately 5 million leasehold homes in the UK.
Many of the leaseholders occupying these homes will be obligated to pay service charges and ground rent to the freeholder.
However, it is not uncommon for leaseholders to fall into arrears for service charges or ground rent, and on occasion, both.
What can a freeholder do to recover these arrears? How long do they have to do so? Are Court proceedings needed?
This guide will address these issues.
What is a service charge on a property?
Service charges are fees payable to the freeholder from the leaseholder for the services that the freeholder is obliged to provide under the terms of the lease.
The amount payable for a service charge can vary depending on the lease and the works required for the upkeep of the property.
They are usually split between the leaseholders of the block or property.
What is ground rent?
Ground rent is a payment payable to the freeholder from the leaseholder, that they are contractually obliged to pay.
It is essentially the charge that the leaseholder has to pay to rent out the land from the freeholder.
Typically, the ground rent is not of tremendous value and frequently falls below the £200 mark per annum.
Related Article: Why are increased ground rents such an issue for leaseholders?
How often are ground rent and service charge payments due?
The lease will state when both of these payments are due, however they are typically annually, although service charges can be requested more than once throughout the year if the lease permits.
What does service charge go towards in property?
As stated above, service charges can vary depending on the required works for the upkeep and maintenance of the property/block, and therefore if the property/block is old and requires major works, service charges can be substantial.
This is certainly something to consider when contemplating purchasing leasehold property and budgeting accordingly.
It is not uncommon for leaseholders to pay over and above the required service charge level to create a reserve fund (a rainy-day fund) to help protect and fund against unforeseen major future works, such as a roof replacement or structural work.
If major works costing each leaseholder more than £250 each are required, a formal S.20 consultation process from the freeholder is required. This will be addressed in the upcoming June Q&A.
What does ground rent go towards?
Ground rent essentially pays for whatever the freeholder chooses.
As a freeholder, it is essentially your ‘annual profit’ for owning the freehold of the building.
NOTE: Ground Rent is set to be abolished in new leasehold homes going forward. Find out more here.
What can I do if my leaseholder is in arrears?
If your leaseholder is in arrears, it is important to open early lines of communication to try and obtain payment, even if it be through a payment plan.
If lines of communication have broken down, severe arrears exist, or your leaseholder is simply ignoring you, we recommend that you seek specialist legal advice on recovering service charges and ground rent.
If the parties have made genuine attempts to mediate and resolve the dispute through settlement correspondence but have not been able to agree, then Court proceedings may be necessary.
What can a freeholder do to recover arrears?
The Landlord and Tenant Act 1985 stipulates that service charges are only recoverable by a freeholder if:
- The costs have been reasonably incurred; and
- The works are to a reasonable standard.
What if the leaseholder disputes arrears? What are the legal implications?
If the leaseholder disputes the service charges incurred/demanded, they can make an application to the First Tier Tribunal (Property Chamber) for a determination of service charges owing. This can incur significant costs for both parties.
Service charge and ground rent demands require specific information in them to ensure they are valid and that the sums become owing.
This is why we recommend that you take legal advice. The lease will stipulate if legal fees incurred in this process are recoverable.
When can service charges be recovered?
Service charges can only be recovered if they were incurred within 18 months or demanding them from the leaseholder.
Prompt action is therefore required by the freeholder to ensure full recovery.
Freeholders have 6 years to recover ground rent after it become due.
Specialist Property Litigation Solicitors
If you feel that you would benefit from advice on service charge or ground rent recovery, please don’t hesitate to get in touch with our Property Litigation Team.
We will be able to advise you on the appropriate way of proceeding, as well as represent you throughout negotiations and Court proceedings if necessary.
Stay up to date
Will Bartley, authors a monthly Q&A where he provides advice on a wide variety of Property Litigation related topics.
To keep up to date with Property Litigation news, updates and Q&As; you can sign up to our email newsletter here.