Ground Rent VS Service Charge For Leasehold Property

When you buy or own a leasehold property, the terms ground rent and service charge are often grouped together like they’re one and the same. However, the reality is that they’re separate entitles that are regulated by different rules – and it’s important to know the difference between them.

Leasehold Property

For years, many people have been deterred from buying leasehold properties because of the additional and ongoing costs associated with them. The Leasehold and Freehold Reform 2024 Act came into effect to make it easier and less costly to buy leasehold buildings.

The Reform Act made the standard lease duration longer, as well as ensured it was cheaper to extend leases. It also reduced ground rent to a so-called peppercorn (zero) and aimed to make service charges more transparent. Ground rent was scrapped for most new leasehold property in England and Wales in 2022.

However, leasehold property still come with greater financial commitments compared to freehold property. There are an estimated 3.8million properties that still have ground rent, and approximately 65% of homeowners paid a service charge in 2023/2024. The average annual ground rent was £304 and yearly service charge was £1720 in 2023/2024, according to the English Housing Survey.

Why Are Ground Rent & Service Charges Confusing To Leaseholders?

These fees can be confusing to leaseholders and potential buyers of leasehold property because they are often shown together.

It’s important to understand that they are separate fees – misunderstandings can cause complications with householders budgeting for and selling the property and can increase the risk of disputes.

What Is The Difference Between Ground Rent & Service Charge?

Ground Rent

Ground rent is an annual fee that the leaseholder must pay for the land the property sits on.

As a guide, the main features of ground rent include:

• The fee is set out in the lease
• The fee is for occupying the land the property is on
• It is a fixed payment each year
• No service is attached to the fee
• The leaseholder has a legal duty to pay
• If the lease was issued after June 2022, the ground rent should be a peppercorn (zero)
• A high ground rent can impact mortgages as lenders have strict criteria and can consider ground rent a financial risk

Service Charge

A service charge is the amount the leaseholder pays the landlord or management agency to cover the costs of repairs and maintenance of the property and shared areas.

As a guide, the main features of a service charge include:

• The fee is set by the freeholder or management agency
• The amount varies depending on the costs
• The amount should cover for regular maintenance of the building and communal areas, insurance, management costs and any extras such as cleaning or security
• There can be an extra contribution to a so-called sinking fund, that covers bigger costs such as roof repairs or repairs to a communal lift
• High charges can put buyers off
• Leaseholders can challenge a service charge if it is deemed too high or unjust, through the First-tier Tribunal (Property Chamber)

Will Ground Rent Be Scrapped?

Yes, ground rent should soon be scrapped.

It has been a peppercorn or zero ground rent on new leases since June 2022, and the government has proposed a cap of £250 per year for older leases with a view to reducing this to a peppercorn after 40 years.

However, it is not expected to become law before 2028.

Helping You With Your Leasehold Property

Our experienced property solicitors are here to advise and guide you through the process of buying and owning leasehold property to ensure you fully understand the obligations of your lease and to make sure the lease is fair and the fees reasonable.

It’s important to know what the ground rent (if any) and service charges are on your property, so can budget for your ongoing costs and there are no unexpected fees during your lease period.

To speak to us about your existing lease or potential purchase of a leasehold property, you can contact us at our Chorlton office on 0161 860 7123 or email chorlton@hlfberry.com or at our Failsworth office on 0161 681 4005 or email failsworth@hlfberry.com and we will be happy to help.