According to a recent news report, leaseholders are now paying an average of £600 more each year in service charges than they did five years ago. In some cases, these charges have risen more than 400% which has made it difficult for residents to pay and almost impossible to sell their homes.
This increasing service charge for leaseholder properties seems to be putting a lot of strain on the finances of property holders. So, it is worth exploring what these service charges are, what they cover and what leaseholders can do if they think they are too high.
What Are Leasehold Service Charges?
The leasehold system in England and Wales has existed since the Middle Ages, but the current scheme started in the 1920s. Under the present system, leaseholders acquire the right to live in a property for a fixed time. This is in contrast to freeholders who purchase the land beneath their property.
Leaseholders are then required to pay service charges to freeholders or managing agents for things like building maintenance and insurance. The charges listed in the lease change each year based on costs and are usually paid in advance. However, older leases might allow payment after the costs are incurred.
England has more than 4.7 million leasehold homes, making up 19% of all homes. This number has been growing quickly, with about 100,000 new leasehold properties added each year in the last five years. London has the most leasehold homes, at 1.3 million, followed by the North West with 910,000, making up 36% and 27% of the housing in those areas, respectively.
How Are Service Charges Calculated?
Put simply, the leaseholder service charge is based on what the freeholder (or the landlord) thinks they will need to spend in the coming year. That is to say, they estimate service charges based on expected costs for the next year. At the end of the year, the landlord must show a breakdown of the actual costs.
If expenses are higher than expected, leaseholders are charged the difference, known as a balancing charge. The extra payment is credited toward the next year’s charge if costs are lower. For improvement projects (not repairs), landlords must consider the financial hit on leaseholders and look for cheaper options.
What Are the Problems with the Leasehold System?
Many believe freeholders and their agents are taking advantage of the present leasehold system and charging unfair fees. That is why there is a growing voice, even in political circles, for leaseholds to be abolished entirely.
However, freeholders defend themselves, saying they are forced to raise service charges because of the rising costs of energy, insurance and materials. They claim that these factors are not in their hands and that the present financial trend is a by-product of the larger cost-of-living crisis.
In 2017, the government planned to end leaseholds for new buildings, and recent changes to the Leasehold and Freehold Reform Act introduced rules for clearer cost breakdowns. But the changes still need additional laws, which have not yet been proposed.
The government is now working on a Bill to create a “commonhold” system, where residents own the land under their buildings. This is expected to happen by the end of the current Parliament, but some campaigners worry the government’s plans don’t help those already trapped in the leasehold system.
What to Do About “Unfair” Service Charges?
A landlord can only charge service charges on leaseholder properties if the costs are reasonable and the work for which the service charge is being levied is done properly. If a leaseholder thinks the charge is unfair, they can challenge it at a tribunal. In England, this would be the First Tier Tribunal (Property Chamber) and in Wales it is the Leasehold Valuation Tribunal.
A service charge demand must include the landlord’s name, address and a summary of the leaseholder’s rights, including the right to challenge the charge. If the demand does not meet those rules, the leaseholder can legally refuse to pay until it is properly requested.
How to Challenge Service Charges
If service charges seem too high, the work was not done correctly, you are unsure how the money is being spent or you are being charged for things not in your lease, you can challenge them.
You can ask the landlord to show you their accounts, receipts and other documents within six months of getting a cost summary. It is illegal for a landlord to deny the request.
If your lease allows the landlord to take action for unpaid charges, they must follow the legal process and get a court order. This will only happen if you admit you owe the money or a court confirms it.
The sharp rise in leasehold service charges is becoming a major financial strain for many homeowners with some facing charges that are impossible to pay. As the number of leasehold homes grows, so too does the concern over unfair fees and a lack of transparency in the system.
Although there are ways to challenge excessive charges, the process can be complicated and costly. With ongoing legal reforms, it is hoped that future changes will better protect leaseholders, but there remains uncertainty for those currently trapped in the system.
Recent Legislative Developments
- Leasehold and Freehold Reform Act 2024: This Act introduces significant changes to the leasehold system, including:
- Extended Lease Terms: Standard lease extensions have been increased to 990 years for both houses and flats, providing leaseholders with greater security and reducing the frequency of renegotiations.
- Simplified Freehold Acquisition: The process for leaseholders to purchase their freehold has been streamlined, making it more accessible and cost-effective.
- Enhanced Transparency: The Act mandates clearer disclosure of service charge costs, enabling leaseholders to better understand and challenge fees.
These reforms aim to balance the relationship between leaseholders and freeholders, offering more control and protection to homeowners. gov.uk
Leasehold Reform (Ground Rent) Act 2022
This legislation effectively eliminates ground rents for most new residential leasehold properties in England and Wales, reducing the financial burden on future leaseholders. commonslibrary.parliament.uk
HM Revenue & Customs (HMRC) Tax Implications Guidance
HMRC provides detailed information on the tax treatment of leasehold properties, including the implications of service charges and ground rents. It’s essential for leaseholders to understand these aspects to ensure compliance and optimize their tax positions. taxadvisermagazine.com
Service Charges in Leasehold Properties
Service charges are payments made by leaseholders to cover the costs of maintaining and managing communal areas and services as specified in the lease agreement. This can include expenses related to repairs, cleaning, insurance, and other shared amenities. gov.uk
Rights and Protections for Leaseholders
Consultation Requirements: Landlords are obligated to consult leaseholders before undertaking significant works or services that will result in substantial costs. Specifically, if the contribution for any single leaseholder exceeds £250 for planned work or £100 per year for ongoing services, a formal consultation process, known as a ‘Section 20’ consultation, must be followed. Failure to adhere to these requirements can limit the amount a landlord can recover from leaseholders. gov.uk
Dispute Resolution: Leaseholders have the right to challenge unreasonable service charges through the First-tier Tribunal (Property Chamber) in England or the Leasehold Valuation Tribunal in Wales. This provides a formal avenue to contest charges that are deemed excessive or unjustified. gov.uk
Best Practices for Leaseholders
Documentation and Transparency: It’s advisable for leaseholders to request detailed breakdowns of service charge expenditures and to keep thorough records of all communications and transactions related to service charges. This practice enhances transparency and provides a solid foundation should any disputes arise.
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