The cost of living - service charges, ground rents and sinking funds explained

If you own a flat or, in some instances, a leasehold house you will have to set aside a sum of money each month or quarter to pay to your landlord to cover service charges.

Ground Rent can also be due for some properties, usually payable either annually or bi-annually.

If you extend your lease, Ground Rent is normally reduced to a nominal “peppercorn”. Please refer to the June 2015 issue of PBB for more information on extending your lease.

The amount of service charge you pay will be determined by the wording of your lease. It will always be a proportion of the total amount the landlord spends in complying with its obligations in the lease: to provide lighting to communal hallways, to keep lifts in repair, to insure the building in which the flat is located, and to employ cleaners, gardeners and accountants to audit their accounts.

The amount you must contribute can be:

1. A fixed percentage;
2. The total amount spent divided by the number of flats in the building;
3. A calculation based on the floor area of the flat;
4. A calculation comparing “rateable value”.

Some landlords ask for contributions to a sinking, or reserve fund, from flat owners.

A sinking or reserve fund is similar to a “rainy day” bank account. All flat owners contribute a sum that is set aside and used to fund major repairs.

This means that if major repairs to the building are needed, the flat owners’ contributions have built up over time and will cover them.

Some landlords do not manage a sinking/reserve fund. Mostly commonly this happens where the landlord is the local authority.

If major repairs are needed, in some leases improvements can also be charged to flat owners, then “one off” major repair service charges can be levied using section 20 notices.

Flat owners can be given payment options including staged payments or for the amounts to be repaid once they sell their flat with interest added over a period of time.

Legislation protects flat owners against unnecessarily high major repair costs and also unwarranted “improvements”, the most recent case being Waaler v Hounslow.

Here, Hounslow Council asked for £61,000 from a flat owner to contribute towards a new roof and new windows to the block of flats. The Upper Tier Tribunal decided that the Local Authority had to consider two things:

1. the availability of an alternative and less expensive remedy; and
2. the views and the financial means of the tenants who will be required to pay for the works.

The Tribunal found that the landlord had failed to explore alternative, and less expensive, solutions before deciding to replace the window units. There was also no evidence that the landlord had considered the financial impact on the tenants of replacing the window units and cladding.