Things to know before buying leasehold - part 5

We continue to receive a huge number of enquiries from buyers and new owners about leasehold properties. Sadly it seems few people are available to help with the purchase process, and fewer still are willing to have a conversation about potential concerns, pitfalls and problems associated with leasehold ownership. We have therefore prepared a 7-part series to give some more information and insight for those that own, or are considering acquiring, a leasehold property.

Service charge, rentcharge and Insurance Rent

Most people already know that when they purchase a property, it comes with certain bills - gas, water, electricity, broadband, council tax, even a TV licence. Unfortunately many buyers are still often in the dark about additional costs that factor in for properties that benefit from shared areas, and so in this article we explore those costs to help you understand your liabilities and plan ahead.

Service charges

The most common cost in our industry is the variable Service Charge for flats or apartments. This is the typical cost you will see for an average leasehold flat, and a key point is that it is variable - meaning it will change. Most people realise that the costs of providing electricity, broadband or council services are likely to increase, and it follows that the costs covered in your service charge have the potential to go up as well.

But what exactly is it?

Service Charges are payments permitted by the terms of your lease, and collected by the freeholder or manager of the building. Your service charge bill comprises the sum of all the costs for communal services, which can include things like cleaning corridors, gardening in the grounds, window cleaning, electricity for lights and heaters, lift servicing and repairs, managing agent fees, fire safety servicing and risk assessments, and more. The exact list will depend on what services are available in your building and what your specific lease allows.

You may appreciate though that a lot of these costs can change, for example electricity costs go up in the same way as in your home, or cleaning and gardening costs may rise as power or fuel costs increase, or when minimum wage goes up each year. By the same logic, service charges can decrease, although of course it is more common that they steadily go up.

Estate rentcharge

Often when people buy a house they expect it to be independent and unencumbered. Sometimes this may not be the case, which tends to be when your house is part of an estate which is not adopted by the council. Because the council don't maintain the road and grounds, it is necessary for a Residents Management Company to do so - and this RMC will collect funds from all the homes owners to pay for essential works.

This can include routine work like gardening and grounds maintenance, up to occasional but potentially large repairs like resurfacing roads or repairing collapsed drains. Similar to the service charge, this cost can be variable to allow for the changing costs of providing each service.

Insurance Rent

Insurance costs have been on the rise in recent years, especially for apartment buildings - Covid, Brexit, Grenfell Tower, war, international supply chain disruption and general increases in the cost of living have all had a knock-on effect. It has become increasingly common for freeholders and managers to implement a specific clause in the lease which allows them to collect an Insurance Rent.

This typically applies to leasehold flats where they have a variable service charge. In the past the insurance cost has been a small part of the annual service charge, like any other service. More recently, it has become a much bigger proportion and can be unpredictable, especially if your particular building faces other insurance challenges outside the simple cost element.

This can lead to cash flow issues when the insurance premium falls due each year. Many leases therefore provide for an Insurance Rent, which is a rent like any other and payable on demand, but specifically based upon the actual cost of an insurance policy. This gives two benefits to the manager (and indirectly to the leaseholders):

1. They do not have to budget ahead for insurance and so avoid the worry of insurance costs being higher than expected, and detracting from other allowances and services in the budget.

2. They avoid cash flow problems by ensuring that the quoted premium is paid directly by leaseholders when it falls due.

Both these benefits tend to mean that the manager does not have to cut or suspend other services, since they should have sufficient funds to cover essential costs.

How much does it all cost?

The big question. Unfortunately, impossible for us to answer here. The best thing to do is read the paperwork you receive before purchasing a property. This will tell you the costs for the current year, and also give you a good idea of the trajectory by looking at the last few years as well. You'll be able to spot quite easily if the insurance has seen a large rise (worth asking if there have been some big insurance claims recently), if there is a Reserve Fund / Sinking Fund in place and whether it has a good balance, and whether the charges fluctuate much each year.

Where to find the answers

It may surprise some people, but most of the above information is rarely hidden - you just need to know where to look.

First and foremost, ask the estate agent. If they haven't included the current figures in the property listing, they should at least be able to ask the vendor for you.

After that, be sure to check the LPE1/FME1 form when your solicitor sends you the property information and searches. This is the form that accompanies the Fixtures and Fittings form, and tells you all you need to know about the shared and communal facilities - including current costs and giving an indication of future costs.

You can also find the details about your commitment to pay these costs in the lease or transfer agreement. These contracts bind you to various obligations and responsibilities, and are essential reading before committing to any property purchase.

As always, our team is happy to help if you have any questions about the purchase process, or if you're struggling to find out cost information prior to a purchase - get in touch today if you need a little help understanding the costs involved.