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What are Service Charges and Ground Rent?

Filed by Brett Alegre-Wood on Saturday 13th May, 2006 in Buying Property, Cash Flow Considerations, Investment Strategy
Brett Alegre-Wood
Chairman, YPC Group

This has been a question that we regularly get from clients.

What is Ground Rent?

So let's answer the simple one first - Ground Rent is not for mowing and tending to the garden. Ground Rent effectively is the rent you pay for the ground your property sits on. As a Leaseholder you rent a portion of ground from the freeholder. This is normally around £100 to £250 per year. It is normally due once per year as a lump sum but will depend on the individual freeholder or the management company they assign to manage it on their behalf.

What is a Service Charge?

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The costs of providing the various services and maintaining the common parts are paid for by each owner by means of the service charge. Under terms of your deeds, you have committed to pay a certain proportion of the running costs of the estate.

The service charge is an estimate prepared each year of the running costs of the estate. You are then charged.

What does the Service charge cover exactly?

Landscape Maintenance - grass-cutting, gardens, watering and sweeping.
Cleaning of communal areas
Windows Cleaning - communal areas internal and external.
Lift Maintenance
Fire Equipment Maintenance
General Repairs and Maintenance
Buildings/Property Owners Insurance - in the case of apartments, full buildings insurance and property owner's liability insurance. In the case of freehold houses, this will just be property owner's liability (Public Liability).
Engineering Insurance - This is insurance on lifts and other heavy machinery that covers special risks and any statutory inspections.
Bank Charges and Audit fees
Management fee
Redecoration fund
Sinking fund - This is a vitally important part of the service charge. As the building gets older it will begin to cost more and more in maintenance. Imagine that the roof of the property begins to fall to bits and needs a full re-tile. This might cost say £30,000. If you have 12 apartments in the block you would need to pay £2500 in 1 hit. Having a sinking fund and paying in say £250 over 10 years would mean that you don't need to contribute anything when the roof actually goes.

The next most important thing is how you allow for the fact that service charges and ground rent are only normally paid once or twice a year. I will discuss this in my next blog.

Live with passion,

Brett Wood

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