Potential escalating costs in a leasehold property
Recent reports in the media have highlighted the problems that can arise when buying, or indeed selling, a leasehold property.
Leasehold properties can be attractive for a variety of reasons, not least because they are often a relatively affordable option in a property market which can be increasingly difficult to break into.
The purchase of a leasehold property is typically accompanied by two additional annual charges, Ground Rent and Service Charge. Ground Rent is an amount paid to the freeholder or to the superior leaseholder if the property is sub-let. The Service Charge covers the cost of the maintenance and upkeep of the site the leasehold property is a part of; it may also provide for a reserve fund for unforeseen expenses or for a large maintenance capital outlay.
The Lease will provide details of how the Ground Rent and Service Charge will be calculated and/or apportioned between the different leasehold properties. It is very important to scrutinise the terms of the Lease. Provisions such as allowing for a doubling of the payments every few years are a red flag, as are provisions allowing for high percentage increases. In the case of Arnold v Britton (2015) a clause that provided for annual increases of 10% compound interest to the Service Charge in a 99 year lease was upheld by the Supreme Court. This was despite the fact that it would result in payments of approximately £1 million per year by the end of the term of the Lease. The court said that the purpose of interpretation was to identify what the parties had agreed, not what the court thinks they should have agreed. The court’s function was not to relieve parties of the consequences of imprudence or poor advice.
A leasehold property’s freeholder, or their Management Company, is obliged to provide 3 years of accounts and to disclose any disputes with Tenants regarding the service charges as part of a purchase transaction. This information is very important in ensuring the property being purchased is being correctly and fairly managed.
As a seller, if you have unwittingly purchased a property with escalating service charges you could find yourself out of pocket not only due to the increases but also because your property becomes so unattractive that you cannot find a buyer.
For further information contact a member of our Commercial team at our Marlborough Office on 01672 518620.
