We've found a leasehold flat to buy: Should the inflation-linked £500 ground rent put us off?

My husband and I are house hunting and came across a great flat that we are really excited about, but there are a couple of concerns.

The flat, which is in a block of 18, is leasehold. The service charge is £2,400 a year and that includes bike storage, lift access, a communal roof terrace and buildings insurance.

That doesn't seem too bad, but could the costs escalate in the future?

Our biggest concern is the ground rent which is currently £500. There is a review period every 10 years at which point it will be increased in line with the Retail Price Index.

Could the fact that it is leasehold, with increasing ground rent and the fact it does not have any private outside space mean we may struggle to sell in the future?

Its asking price is £50,000 below what the previous owners paid for it in 2019 and that was when it was brand new. There are 119 years left on the lease.

Ed Magnus of This is Money replies: There is a lot of nervousness at the moment around buying leasehold.

This is translating into stunted price growth. Over the last five years, the average value of a flat has increased by 7 per cent, according to Zoopla. House values increased by 24 per cent during the same period.

People's desire for gardens during the pandemic contributed to this - but worries over leasehold, which is the tenure of the majority of flats, also played a big part.

At This is Money, we encounter reader after reader having issues with their leasehold home.

We have heard from someone who couldn't sell their leasehold flat because the freeholder was refusing to sign the paperwork, someone facing large costs to extend the lease, a person who felt their service charge was too high and wanted justice and someone with a ground rent that was set to double.

Most leaseholders, particularly those in purpose-built apartment blocks, will have a service charge to pay to the freeholder or management company.

This can include the costs of buildings insurance, cleaning, gardening, maintaining facilities such as lifts, bike lockers and communal areas, staffing a front desk if there is one, surveyors' fees, fire risk assessments and managing agents fees.

The average annual service charge bill for a flat in England and Wales hit £2,300 a year in 2024, an 11 per cent increase on the previous year, according to the estate agent Hamptons. This means the reader's service charge is just above the average.

Like our reader, many leaseholders also have to pay ground rent each year to the freeholder. This is a levy charged to reflect that leaseholders do not own the land their property is built on.

The Leasehold Reform (Ground Rent) Act banned ground rent being charged on new leases on homes purchased after 30 June 2022. However, it doesn't apply to existing leases, including those which are passed on from one owner to another when the property is sold.

Those with existing leases can now effectively reduce their ground rent to a peppercorn rent - essentially no ground rent at all - if they extend their lease through the formal route.

The average ground rent on existing leases ranges between £200 and £500 per annum, according to Tayntons Solicitors, so it sounds like our reader's ground rent is definitely on the high side.

Some leaseholders have found themselves trapped in homes with increasing ground rents - some which double every 10 years and others that increase in line with the Retail Price Index.

It's the ground rents that double every 10 years that are the biggest red flags and can make homes hard to sell or remortgage.

This is because costs can snowball from £500 to £1,000 to £2,000 to £4,000 to £8,000 over the next 50 years and so on.

Having ground rent that is linked to inflation should in theory be safer, but given the recent spike in inflation there is also reason to be concerned by this clause.

For expert advice, we spoke to Alero Orimoloye, advisor at Leasehold Advisory Service, Linz Darlington, managing director and founder of lease extension service Homehold, Gareth Belsham, director of Bloom Building Consultancy and Nigel Bishop, founder of buying agency Recoco Property Search.

Gareth Belsham replies: On the face of it, a service charge of £2,400 a year - £200 per month - sounds reasonable given the list of things you get for it.

But a key question to ask the landlord is whether the service charge also includes a provision for future maintenance costs of the building.

Some service charges include an element which goes into a 'rainy day' fund - a 'sinking fund' in the lingo - which the landlord sets aside to cover the cost of redecorating or refurbishing communal areas like landings, as well as repairs to the building's fabric.

You need to find out if the service charge includes this element. If it doesn't, you and the other leaseholders could get a nasty shock if ever the building needed expensive repairs like a new roof.

In theory, each of you could be liable for one eighteenth of the cost, and given that a new roof might cost hundreds of thousands, this could leave you with a big bill.

Nigel Bishop adds: Service charges can actually also go down but are much more likely to surge over the years, which could create a substantial financial burden for homeowners.

There's no legal limit to how much service charges can increase. It depends on various factors such as inflation and subsequent price increases of service providers but also the age of the building.

The older the building, the more likely the need for repairs of communal spaces which in turn drives up service charges going forward.

It's therefore important to carry out research about the building, learn about reoccurring maintenance problems and determine when the service charge has last been updated.

Linz Darlington adds: I appreciate £2,400 doesn't sound unreasonable for the upkeep of a modern block and its communal space.

However, this could increase significantly. Unlike a house, you're unlikely to have control over what work gets done, which contractors do it, or how much it will cost.

Alero Orimoloye replies: With 119 years remaining, a lease extension isn't immediately necessary.

However, if you do extend, a statutory extension reduces ground rent to nil and adds 90 years, though the landlord can charge a premium as well as their legal fees.

Fortunately, proposed legal reforms are expected to make extensions cheaper and remove the need to pay the landlord's costs.

Nigel Bishop adds: Typically, mortgage lenders favour properties that have at least 125 years left on their lease.

Even if you did buy the property now, you might want to consider extending the lease after a few years which can be an expensive undertaking.

The lease extension premium very much depends on the level of ground rent, how much is left on the lease and how much the property might be worth after the lease extension.

As a general guideline, a lease extension would likely cost a minimum of £6,000 in addition to professional fees of £2,000 to £4,000.

That being said, the forthcoming changes in the law will allow leaseholders to buy the freehold which can be a solution but can also create administrative challenges for homeowners long-term.

Gareth Belsham adds: The 119 year lease sounds like an age, but in reality it's not that long in lease terms.

When a lease gets down to 80 years, leasehold properties can become more difficult to sell or mortgage. While this flat is still several decades away from that, the clock is ticking.

Alero Orimoloye replies: A ground rent of £500, increasing with RPI every 10 years, may reduce the property's value and make it harder to sell, unless future legislation offers a fair way to buy it out.

The £50,000 drop in value may reflect this impact. You can't change the rent terms unless you extend the lease.

Inflation has been rampant since the flat was leased and if it was reviewed today, I'd expect it to go up to around £700.

It's likely to rise again in four years.You have a right to extend your lease by 90 years and this also removes the ground rent – but the cost will be significant because the ground rent is so high.

Linz Darlington replies: Based on what you've said, a very rough estimate of the cost would be between £21,000 and £29,000, which includes the professional fees of both yourself and your freeholder.

You're right to be concerned about future value – a better bet would be a flat in a smaller building with a share of freehold.

Nigel Bishop replies: It is almost impossible to answer at this stage as, besides the lease and ground rent, other factors will have to be taken into account.

Whether you will attract serious buyers when you put the property up for sale will depend on the wider economy at the time, the availability of mortgage products, the level of interest rates, general buyer interest but also the location of the property and your asking price.

Alero Orimoloye replies: Local estate agents can best advise on how the lack of outdoor space may affect the property's value.

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Roof terrace access may add value, but since it's owned by the landlord, please be aware that they could build upwards in future.

This may affect your quiet enjoyment and increase service charges, especially if the building extension exceeds 18 metres due to added legal requirements.

Gareth Belsham replies: I'm sorry to say that several of the issues you've identified here raise serious red flags for me.

Much as you both love the flat, buying the leasehold could expose you and your husband to several big risks.

Perhaps the biggest red flag of all is the length of the lease. This may be one of the reasons that the asking price of the flat is £50,000 less than what the first owner paid for it six years ago.

Granted, the first owner may have paid a new-build premium, and flats in many areas lost value during the pandemic, but I suspect the relative shortness of the lease is a factor in the low valuation.

If that's an issue now, it will be far worse when you come to sell. For this reason alone, I would advise you not to buy the flat. Or if you do go ahead, make sure you do so with your eyes wide open to the risks.

Sorry if you had your heart set on it, but take solace from the fact that this is a buyer's market.

In many areas, the number of homes for sale outnumbers the number of buyers, so there should be plenty of less risky options - with longer leases - to choose from.

Mortgage rates have risen substantially over recent years, meaning that those remortgaging or buying a home face higher costs.

That makes it even more important to search out the best possible rate for you and get good mortgage advice.

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