Ground Rents and Service Charges are not at the forefront of the prospective homebuyer's mind when hunting for a new property for investment. However, many prospective buyers discover later in the property buying process that the nature of their ownership agreement as a leaseholder means that they are liable for paying regular fees.
In India, two main types of property ownership are leasehold and freehold. Before investing in real estate, you need to understand the distinction between the two as there are different responsibilities, rights and financial implications depending on the kind of ownership you choose. For better clarity, freeholders have legal ownership of the building and land it stands on, whereas leaseholders usually own a flat or apartment within the building itself. Each party has its own set of responsibilities; for instance, leaseholders are expected to pay ground rent and service charges to the freeholder of their property. In return, freeholders offer maintenance services across the communal areas of the building and offer additional amenities occasionally.
Leaseholders are autonomous property owners with standard ownership rights and mortgages to some extent. But they are still required to make frequent payments to their freeholders concerning maintenance and cover ground rent fees. Read the article below to learn about service charges and ground rent in detail.
What is a Service Charge?
A service charge is a bill that involves the costs of any maintenance or repairs to the property, involving insurance, drainage and management charges. As a property buyer, you will pay a service charge quarterly or monthly, depending entirely on your agreement with the freeholder.
If you own the real estate, each detail about your service charge must be included in the lease. On the contrary, if you rent your property, it is likely that the service charge will be involved in your rent, but you can even check this in your tenancy. From one year to the next, the amount of service charge can vary depending on the actual cost of the services to your landlord. Keep in mind that you must always treat your service charges as a priority debt, as not paying them can have serious consequences.
Because these charges vary every year, it can be challenging to budget for any changes to the service charges. If you are not sure if you should be paying service charges, you must check your lease or contact your management company or landlord.
Non-Payment of Service Charges
As stated above, non-payment of service charges can have adverse effects. Therefore, if you have fallen into arrears or cannot pay your service charges, it is advisable to contact your landlord or management company to discuss your possible options for repaying the arrears. If, in any case, you don't take steps to deal with the arrears, you could either lose your home, or the freeholder can take court action against you.
What is a Ground Rent?
Ground rent is a payment made by the leaseholder to the freeholder of the real estate. For your information, leaseholders own the property inside the building, like living space and fixtures. However, leaseholders don't own the building nor the land on which the property is located. So, ground rent typically acts as a leasing fee for the land that leaseholders reside on.
As ground rent is annually paid, certain conditions related to the same are stated in the lease agreement. Other common plans for paying ground rent involve bi-annual or quarterly payments. But this is applicable only if the property landlord has provided the leaseholder with a written and formal document. In a nutshell, information on paying ground rent must be included in your lease.
Non-Payment of Ground Rent
If you are not in a condition to pay ground rent, the freeholder of the property can apply to the court for repossession of the real estate. This kind of action is called "forfeiture".
The freeholder can start taking court action against you only if:
1. You are three or more years in arrears with your ground rent.
2. You owe a pre-determined amount of ground rent, administration charges and service charges.
It is important to note that if your ground rent is more than the pre-determined limit, the freeholder does not have to follow the process stated above. In that case, they can apply for possession of your real estate in the same manner as if you were a private tenant with some rent arrears.
Always keep in mind that ground rent is payable only on demand. This means that even if it is involved in the lease, you don't have to pay it until your landlord sends you a bill. In general, you are given 4 weeks to repay the arrears. If you can pay what you exactly owe, any legal action will stop, and your lease will continue like before.
Also, if the freeholder has not asked you to pay any ground rent for a few years, they can't ask you to pay more than 6 years' worth of backdated ground rent payments. They will also need to follow the correct procedure to ask you to pay for it.
We hope this guide has given you a deep understanding of what exactly Service charge and Ground rent are! Along with the effects of their non-payment. If you still have any doubts relating to the topic, you can ask us by commenting below. We will be happy to provide you with the correct information.
Also read: 10 Hidden Expenses of Home Ownership Every Homebuyer Need to Know