Owning a leasehold property in the UK, or even buying one, comes with a number of financial responsibilities and considerations you must be aware of before you commit to anything.

Ground rent and service charge apportionments are two of the most important and common terms that you should know and understand as a leaseholder in the UK.

This blog will go through what each of these terms is, the legal considerations behind them, and how apportionments work in a leasehold property setting.

What is Ground Rent?

Ground rent is a recurring payment made by a leaseholder to the freeholder or landlord. It is usually a fixed sum payable at regular intervals (annual, half-yearly, or quarterly), and differs from a mortgage payment as the leaseholder never actually owns the land itself.

Key Points About Ground Rent:

Properties leased prior to 30 June 2022 usually come with a fixed or rising ground rent payable to the freeholder/landlord. Unless otherwise stated in your lease agreement, you are obligated to pay the full amount of ground rent set out by your lease. If you stop paying ground rent, you could get into arrears and face legal action by the freeholder or landlord.

For all new leases signed after 30 June 2022, the Leasehold Reform (Ground Rent) Act 2022 cements a landlord’s ground rent to just a peppercorn. A peppercorn is a legal term for a very small or “token” payment. This reform was introduced to protect future leaseholders from high ground rent.

If you currently own a property that was leased before the 2022 cut off date, the reformed legislation will not automatically apply to you. You are still responsible for the ground rent specified in your original lease, so it is important to be aware of your lease details, and how much ground rent you should be paying.

The service charge is another charge you might have to pay as a leaseholder. The difference is that, instead of paying for the land, the service charge covers the cost of repairs and maintenance of the building structure and communal areas, such as lifts, gardens, security systems and more.

What is a Service Charge?

Annual service charges fluctuate from year to year as they are set by the actual cost of those services, not a fixed amount. Service charges can be split between leaseholders in a building in proportion to their unit size or some other proportion.

Service charges are regulated under Sections 18-30 of the Landlord and Tenant Act 1985, which include rules about reasonableness of costs, letting leaseholders see a breakdown of charges and supporting evidence, and the right to receipts.

For certain works that cost over a set amount, landlords must provide leaseholders with a Section 20 consultation period where they must agree to the work being carried out. This prevents unscrupulous landlords from forcing work onto leaseholders that they are legally responsible for covering.

What Are Apportionments?

Apportionment simply means dividing things, in this case financial charges, into shares. These are typically done when a property changes hands.

Ground Rent Apportionment:

Upon completion of a leasehold property sale, the seller is responsible for ground rent up until the date of completion, and the buyer assumes responsibility for the payments from that date on. This is important to document as failure to do so will result in potential disputes.

Service Charge Apportionment:

As the service charge is typically an annual figure, if a property is sold part-way through the year then the buyer and seller’s service charge is apportioned according to the date of completion and proportionate to the cost of the service charge.

For example, if the annual service charge is £1,200 and the buyer completes halfway through the year then the seller would be responsible for £600 and the buyer for £600. If the service charge is only an estimate, the buyer and seller may have to pay a retention until the final year’s service charge is issued.

Disputes and Legal Considerations

Ground rent and service charge disputes are a common occurrence and a big source of frustration for leaseholders. The lease can often be unclear and landlords may not always provide the information that leaseholders need.

• First Tier Tribunal (Property Chamber) : If you are a leaseholder facing a service charge or apportionment dispute, you may apply to the First Tier Tribunal (Property Chamber) for adjudication of the matter. There is a set process to follow, and you must pay a fee in  order to apply.
  
• Recent Rulings: Courts in the UK have ruled that landlords can re-apportion service charges and ground rent in accordance with the lease terms.  In Aviva Investors Ground Rent GP Ltd v Williams case, the court agreed that the landlord could keep the money as it was explicitly stated in the lease terms that the parties will re-apportion each item on the service charge account as per the lease agreement.

Practical Tips for Leaseholder

• Know your lease: Review your lease and understand the terms regarding ground rent and service charges. If you’re unsure, seek legal advice.

• Keep records: Maintain a record of all payments made, receipts, and any correspondence with your landlord or freeholder.

• Seek advice: If you’re unsure about anything related to your leasehold property, seek advice from a solicitor or a leasehold advisory service.

• Keep up to date with reforms: The Leasehold and Freehold Reform Act 2024 is the latest in a series of ongoing reforms by the government that aim to make leasehold ownership more transparent and fair.

Conclusion

Understanding ground rent and service charge apportionments is essential for leaseholders in the UK. Misunderstanding these terms, or being unaware of them altogether, can result in disputes with your landlord or freeholder, incorrect budgeting, or breaching the terms of your lease. It is important that you fully understand what your lease says, what your rights are, and what you can do in the event of a dispute.

 With the 2022 and 2024 reforms, new leaseholders benefit from reduced ground rent obligations, while existing leaseholders must carefully manage their responsibilities. Staying informed about lease agreements, legal frameworks, and apportionment rules is key to navigating leasehold property ownership successfully.

Disclaimer: This blog does not constitute legal advice. Readers are advised to seek professional legal counsel if in doubt.