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We often hear people ask “What is a service charge?” and “What am I getting in return for paying it?” so we’ve put together a brief guide here.

A service charge, (sometimes known in a variant form as an estate rent charge) is where each household on a development, or within an apartment in a block, contribute a financial sum each year to pay for the upkeep of an area or a service that communally benefits the contributing units. This may typically be the insurance of an apartment building, cleaning and lighting the communal hallways, and tending to gardening in external areas; or the upkeep of an un-adopted services such as drainage or an access road.  Service charges can also fund luxury facilities for residents such as communal leisure facilities.

The way in which a service charge is organised and details of what can and can’t be charged by the landlord and the proportion of the charge to be paid by the individual leaseholder will set out in the tenant’s lease or tenancy agreement.  The landlord (or sometimes a management company that is party to the lease) provides the services, while the leaseholders pay for them.

The landlord will generally not be paying for the services but sometimes has to pay for the services before they can recover their costs through these service charges. Originally, the costs of services were included in rental payments, but as costs and inflation increased, landlords wanted to make sure they recovered all their costs every year. Some old leases still provide services at a fixed rate, regardless of costs to the landlord. However, most service charges are based on the actual or estimated cost of the services and upkeep and thus vary from year to year. These are known as variable service charges.

“What is a service charge?” is completely unconnected to the ground rent and is not related to the contractual rental payment for the occupation of part of an area of land and anything occupying that space, but instead is used on the upkeep of the land and services provided by the ground rent.

What are lease and transfer documents? What do they do? What does demise mean? We aim to break down and answer these questions in this section.

Demise is a word which generally encompasses the conveyance or transfer of one or more properties by freehold sale or lease.  So whether you own a freehold or leasehold property or land, it is demised to you.

What are lease and transfer documents? Although there are some significant differences, a lease, title or transfer are all essentially documents in similar formats that set out the benefits of and obligations associated with a property.  Where properties contribute towards service charges, these documents form a contract that legally obligates the leaseholder or homeowner to pay the service charge and explains what maintenance and services will be provided in return.  They contain covenants which may require the occupier to do, or not do, certain things.  An example of a positive covenant would be for the occupier to clean the windows once a month.  An example of a negative covenant could be that the occupier could not play loud music late at night.  It is important to know what you can and can’t do in your property to prevent breaching these covenants as there may possibly be a legal recourse associated with the breach.

Leases are used where the property in question is sold leasehold.  This means that property is constructed on land that is owned by another party and the holder of the lease can occupy that land for a set period of time.  Apartments are almost always sold leasehold because they are built on top of one another and as such more than one property occupies the same piece of land.  In broad terms, it is not possible for more than one party to own to land so it must have one owner that then leases the spaces that each apartment occupies to each leaseholder (apartment owner).  It is also possible to have leasehold houses although most are sold freehold.

Freehold property owners, own the land on which their property is built as well as the property itself.  A freehold title in theory goes down to the centre of the earth and up into the sky until reaching outer space, although certain rights are always reserved such as an allowance for an aircraft to fly through your bit of sky or water to pass underground etc…  A freehold property is sold using a transfer document.  This document can contain the same types of covenant and requirements to pay towards a service charge as leases, although sometimes the service charge is known as an estate rent charge.

A title is a bundle of rights in a piece of property in which a party may own either a legal interest or equitable interest. The rights in the bundle may be separated and held by different parties.  As such, a transfer, a lease and also the freehold interest of land on which other properties are demised, are all also known as title interests or documents.

We hope this gives you an idea of what are lease and transfer documents, if you need any further information please contact us.

The documentation under which your property is demised will contain covenants that either require the occupier to do, or require the occupier not do, certain things, and may also require permission to be granted before a certain action or alteration can be made.  These covenants are generally put in place for good reason, either to ensure that everyone living in the greater private community benefits from quiet enjoyment of their home or to ensure standards of maintenance and health and safety are uniformly maintained across the whole development for the benefit of all.

Generally speaking most leases and transfers include covenants that prohibit anti-social behaviour, alterations to the structure of a communal building such as an apartment block that might put others at risk, or activities such as short-term letting that place a higher demand on maintenance resources.  Keeping pets in apartments and sub-letting are typical examples of an activity that may need permission before going ahead as the manner in which the activity is undertaken determines whether permission is withheld.  For example sub-letting through a reputable agency that credit checks the sub tenant would generally be acceptable but sub-letting to un-vetted persons with no agreement would generally be refused.

Within your own home, most cosmetic alterations are usually fine to go ahead with, without any need for permission and without breaching the covenants of your lease or transfer.  Decorating and even changing kitchens and bathrooms is usually ok but do check the covenants before going ahead.  One common example that people are often unaware of is the installation of tiled or wooden flooring in apartments which may be prohibited under the lease because the noise created when walking on hard flooring would affect someone else’s quiet enjoyment of their home.

If you are in any doubt about whether or not you are permitted to do something or require consent, license, or permit, just contact us and ask, we’ll be pleased to help.

When the development was built, it was necessary for certain maintenance, services and/or facilities to be funded by the leaseholders or homeowners at the development that have use of those benefits through a service charge.  This may be because a number of residents benefit from shared areas or services or because the local authority was not able to adopt certain areas of the development that require constant maintenance.

Because each home is required to contribute towards the service charge, the documentation under which each property is demised (the Lease, Transfer or Title Deeds) contains a legal requirement for the leaseholder or homeowner to pay their share.  Your conveyancer should make you aware of all details surrounding the legal structure of the documentation under which your property is demised and any service charge or other mandatory obligations contained therein.

Further questions? Contact us.

The amount collected under the service charge allows for all anticipated expenditure required to provide the maintenance and services necessary at the development alongside contributions towards cost of any planned major works in the future.  The exact amount payable depends on a number of factors including the maintenance and services provided to the development and the number of contributing properties.   As an example: a small number of apartments sharing luxury facilities will always pay more than a large number of properties paying for minimal areas to maintain.  No two developments are the same and as such it may be possible that people at neighbouring developments pay more or less than you, however there is usually a good reason why if this is the case.

At the beginning of each financial year, an estimate of service charge expenditure is produced and this details all services and maintenance anticipated and the likely cost, it also details your share and how much that will be.  At the end of the financial year the actual amount of money spent is compared against the estimate and the amounts are balanced.  If less is spent then you will receive a credit, if more is spent then it may be necessary to collect additional funds.

Service charges are estimated shortly before the beginning of the forthcoming financial period and invoiced in good time ahead of the coming year so you always know in advance how much needs to be paid.  Most service charges are variable and therefore alter from year to year dependent on the needs of the development.

Further questions? Contact us.

The leaseholder or homeowner of the property on the first day of the service charge financial year is legally responsible for paying the service charge for that year in full.  However if ownership changes part way through the financial year, this should be discussed with the conveyancers involved as it is usual practice for the buyer to pay a fair and proportionate amount of the service charge for remainder of the given year, so if your buying or selling discuss the service charge with your legal representatives.

In practice, if you are selling and paying your service charge by monthly instalments, then these can continue as usual and be ceased after payment of the last month of ownership is complete.  As an example if the service charge year runs 1st January to 31st December and a sale completes on the 15th June, it would be usual for the seller to pay the service charge from 1st of January to until the end of June, and for the buyer to pay from 1st July to 31st December.

Any arrears of ground rent or service charges are likely to delay the sale until the arrears have been paid in full.  It is also worth noting that a minority of leases and title documentation include clauses that require additional payments to be made when a sale completes.  This is most commonly seen as a percentage of the sale price being paid into the development contingency fund.  Whether buying or selling, if you think you have such a clause in the demise to your property then you should take legal advice as soon as possible to clarify any unforeseen payments that may be required.

Further questions? Contact us.

“What is ground rent?” is a question we get asked a lot, so we thought it’d be useful to put together a quick guide for you to explain exactly what it is.

The leasehold system in England and Wales dates back to William the Conqueror who claimed that all land was now under his ownership.  Estates were granted to wealthy land owning Lords who were then able to charge the people living on that land to be there – an early lease.  This framework has existed and evolved since medieval times until today and as such the owner of the freehold title of land still has the right to charge ground rent to those who occupy it.

Apartments can never be sold with an absolute freehold title as by nature they are built on top of each other and therefore occupy the same area of land.  As such it is necessary for the freeholder of the land to attach a ground rent to each apartment to permit it to be there.  Sometimes the rent is described as a peppercorn, which is in legal parlance a ground rent of such nominal value that it will never be collected.  However sometimes the ground rent is a monetary amount as specified within the lease or transfer documentation for each property, and sometimes this amount can be reviewed and altered at set specified periods.  A ground rent can also be known as a chief rent and this term is sometimes used with leasehold houses.

If you are being asked to pay a monetary rent then you are legally obliged to pay this amount in full.  Ground rent is a contractual rental payment for the occupation of part of an area of land and anything occupying that space.  If you fail to pay your rent than the freeholder of the land could reclaim your property as their own for breaching the contractual agreement.

“What is ground rent?” is completely unconnected to the service charge and is not related to the provision of maintenance or services, however sometimes the managing agent (Realty) is asked to collect the ground rent on behalf of the freeholder.

Further questions? Contact us.

A Management Company is a party to certain leases or transfer documents.  The company’s role is to be responsible for the management of the service charge and the delivery of management and maintenance services at the development.  A typical lease will have two or three parties (bi-partite or tripartite).  A bi-partite lease will name the freeholder and the leaseholder whereas a tripartite lease will name the freeholder, the Management Company, and the leaseholder.  Where leases include a Management Company, it is common for this company to be controlled by the leaseholders.  As with any company, it is registered at companies house and much have Directors and a Secretary.  It is also possible for a Management Company to written into the documentation under which freehold houses are sold.  The exact obligations and extent of power of the company is specified in the respective the leases or transfer documentation and may vary from development to development.

Where a Management Company is involved, the leaseholders or homeowners therefore control the service charge and how services are delivered to the development.  However they then may choose to discharge this responsibility to a professional Managing Agent such as Realty.  It is important to note the difference between a Management Company and a Managing Agent.  Realty are a Managing Agent; we are business that provides professional management services to more than one client.  We are not normally party to the documentation under which your home is demised, however this is technically possible and occurs in certain instances.

Further questions? Contact us.

As with any company, a Management Company Director helps control the company and has the power to make decisions.  Directors are also burdened with the statutory and fiduciary duties of running that company.  In the main, the Directors’ role is to ensure that the development is managed and maintained to an appropriate standard, cost effectively, and in line with the requirements of the documentation under which each property is demised.

Most Directors of Management Companies choose to discharge their duties to a professional managing agent such as Realty.  This mitigates liability and ensures that all services are delivered with demonstrable value for money, to high standards, and in complete compliance with title documentation, legislation and best practice.  The Director’s obligations are reduced dramatically to high level decision making, as the managing agent performs all of the day-to-day functions, however complete control always remains with the Directors.

Even where a managing agent is involved, Directors should meet regularly to discuss and agree how the development should be run, any planned projects, agree budgets and review the managing agents’ reports.  Realty can also act as Company Secretary for the Management Company and perform all associated duties free of charge to further reduce the burden on the Directors.

Further questions? Contact us.