Yahoo Finance London leaseholders hit by doubling service charges
Flat owners struggling with mortgage repayments face service costs “significantly greater” than the rest of England.
Leaseholders in London face soaring service charges which are “significantly greater than in the rest of England,” according to recent Office of National Statistics (ONS) data.
People in London pay on average £2,207 annually, a significant jump from £1,740 in 2021.
Meanwhile, owner-occupier leaseholders in England are paying an average £1,668 in service charges, according to the report.
The new data comes amid soaring costs of living and the highest mortgage rates in recent memory making it more expensive to borrow money. Inflation continues to keep prices high including groceries, clothes and households items. As a result the cost of owning or living in houses and flats is also going up and putting additional strain on homeowners in the capital.
One explanation for the difference according to leasehold campaigner and co-founder of campaign group Commonhold Now, Harry Socffin is that ONS service charge data includes small blocks, such as maisonettes and Victorian converted houses with little to no common parts and shared services, and developments where the leaseholders control their service charges by way of a freehold-owning or resident management company.
Speaking to Yahoo Finance UK, Scoffin said: “London has more new developments and flat owners have minimal say over their block.”
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What are service charges?
Service charges are costs leaseholders pay the freeholder to cover the provisions of services to a building, and sometimes amenities and areas around the building.
The lease contract should include a clause which outlines what the charge covers and when it will be payable.
These services include:
Building insurance
Management costs
Caretakers or concierges
Lighting, heating and cleaning of shared areas repairs including lifts
Maintenance and work on shared areas or the building structure
Gyms
Access to leisure amenities
There are 4.98 million leasehold dwellings in England, which represents 20% of the English housing stock, according to the Department for Housing, Communities and Local Government (DLUHC). Some 3.5 million (70%) properties were flats; the other 1.5 million (30%) were houses.
The findings established that leaseholders are frequently first-time buyers when they purchase their current home – this is particularly the case for owner-occupier leaseholders in London. Leaseholders in the capital will more likely have a mortgage (62%) on their lease than own it outright. By contrast, leaseholders in the rest of England were less likely to own with a mortgage (44%) and more likely to own it outright (56%).
Read more: Interest rates: When will UK’s mortgage misery end?
Last year, the ONS found “no significant difference” between service charges in the capital and the rest of England.
London's rate of property development could be behind the bump. The BBC reported that London has built the most homes, with 307,000 since 2011 which is equivalent to two extra cities the size of Sunderland or one Bristol.
Andrew Bulmer, from the Association of Residential Managing Agents told Yahoo Finance UK that the rise in the capital could be "because London has taller buildings and taller buildings fall into the building safety regime."
"There is no profit in service charge as they are recharges related to the maintenance of the building, labour material and insurance," he added. "Management agents certainly don't want to send out huge costs to leaseholders."
The ONS data released in July was based on a survey taken in 2021-22 and will not have accounted for the inflation crisis that has gripped the British economy.
'We are paying £3k a year in service charges'
These price differences are having a significant impact on new homeowners.
“I bought my flat in Romford in February 2022 as a first time buyer," first time buyer, Nicola Hawkins, 35, told Yahoo Finance UK. "The estate agent told me the service charge was £600 per year. When I got my docs from the solicitor, it was in fact more like £1700."
Despite the fact the building was converted in 2018, the roof was not insured properly by the developer and there were several leaks and ongoing problems which weren't disclosed by the freeholder or seller, she added.
"These costs have now landed with me and my estimated service charge for 2023 is over £3,000, which I have paid, and are very likely to be higher.”
Nicola isn't alone in this. The ONS also found that leaseholders are frequently first-time buyers particularly owner-occupier leaseholders in London.
Nearly half (49%) of all owner-occupier leaseholders are still living in the home they purchased as a first-time buyer, the ONS added.
George Green, 30, a leaseholder from Bolton, has also encountered this problem.
"I used to live in a converted cotton mill but kept hold of the flat as I would have been selling at a huge loss (with service charges going the way they were/are)," he said.
"I'm now a landlord... almost by accident. My service charge at the mill April 2021-March 2022 was £135 per month. Now, it's more than double at £275.71 per month and my flat is unsaleable."
Cost of living crisis
Liam Spender, a leasehold flat owner in London, took his landlord to the First-tier Tribunal this year because it failed to credit the Energy Bill Relief Scheme subsidies for electricity.
"That pushed up the bill by £80,000, something like £200 each," he said. "They still haven’t given the money back, despite admitting they had to pay and entering a Consent Order."
"Managing agents and landlords are completely unregulated. Service charges can be whatever the landlord or managing agent wants them to be.
"Often they refuse to disclose any detail of their calculations. Leaseholders have no effective means of redress."
"In the current cost of living crisis, building owners should be honest with leaseholders that they are only funding essential work which has been sourced at the best price, whilst delaying any maintenance that is not necessary to help spread the cost," Residential Freehold Association (RFA), a UK lobby group for freeholders, told Yahoo Finance UK.
Ground rent
Leaseholders also face an annual charge paid by the leaseholder to their freeholder, known as ground rent.
This has been at the centre of a crisis first investigated by consumer group Which? in 2018.
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The government abolished ground rent in June 2022 and if ground rent is demanded as part of a new lease, it can only be charged at "one peppercorn" which means the rate will be set to zero.
Leaseholders like Spender, who campaigned for ground rent to be removed with leasehold campaign group Leasehold Knowledge, said that while he welcomed the government's reform, "we should remain vigilant against attempts by freeholder interests to try and vary the drafting so as to permit ground rents by another name."
Freehold or leasehold
Whether you buy a freehold or a leasehold property, there may be limits on what you can do to own your home, said Which?.
Leaseholders have long complained of rising and opaque service charges, poor block maintenance, high costs for lease extensions, doubling or unaffordable ground rents, and difficulties gaining control of their homes through freehold purchase or ‘Right to Manage’.
The UK government has been working on a programme of leasehold reform since 2017, including changes to an alternative system called "commonhold," equivalents of which go by names such as "condominium," "cooperative" and "strata title" in the US, Europe, Asia and Australia.
Read more: How to improve your credit score before buying a house
"Commonhold has significant drawbacks for more complex, larger buildings given the technical skills required for insurance, maintenance and repair often require significant time and resource commitments," said the RFA.
"Commonhold Now is regularly being contacted by leaseholders about high and unexplainable service charge hikes," added Scoffin. "The ONS data shows that service charges are a considerable outgoing for England’s leaseholders.
"We know that the data was taken before inflation hit our economy and mortgages spiralled, which have put many leaseholders underwater."
Reports earlier this year suggested that housing secretary Michael Gove had been overruled by Number 10 in abolishing leasehold and replacing it with commonhold.
Commonhold Now: The fight to change Britain's leasehold system
