Service charges and other issues
A guide to service charges, administration charges, ground rent, recognised tenants associations and forfeiture.
By Nicholas Kissen, Senior Adviser
Ground rent is usually payable under the terms of a lease. It is commonly a nominal amount such as £50 to £100 pa. However, it is not unknown for the initial ground rent to be a more sizeable amount such as £500 per annum or more. What is also common is for the lease to provide that at intervals the annual ground rent increases to a fixed amount. For example, under a 99 year lease, the initial ground rent may be £100 pa going up after 33 years to £150 pa and after 66 years increasing to £200 pa and remaining at that level for the rest of the term.
More problematic are ground rent increases in accordance with a formula making it difficult to predict with certainty what future ground rent could be but leaving the door open to large increases. Ground rent may increase in accordance with a recognisable and published formula such as the retail prices index.
Of more concern is where the ground rent increases to a percentage of say open market value. Or doubling every 10 years or at more frequent intervals. The resulting annual ground rent may have an impact on the marketability and mortgagability of the lease.
A large ground rent or the potential for high increases during the term would most likely increase the premium payable for a lease extension or freehold purchase. The latter can arise whether you are buying the freehold of a leasehold house or of a block of flats with your fellow leaseholders.
In addition, the UK Finance Association in its Lenders Handbook requests their instructing solicitors to consider and if necessary report to them any likely increases of potential concern to them.
Moreover defaulting on ground rent that has reached a level unaffordable to the leaseholder may lead to court proceedings and a judgment affecting their credit rating and in the final resort forfeiture of the lease.
The threat of forfeiture raised with the leaseholder’s mortgage lender may lead them to pay up any rental arrears and adding the amount concerned to their security so leading to possible increased mortgage payments.
Forms LPE1 and LPE2 should alert a buyer to their exposure to ground rent liabilities.
And a conveyancing solicitor acting with the care and skill expected of them should report to their purchaser client and the lender any passages in the lease providing for ground rent increases.
Related Guidance and legislation