An At-a-Glance Guide to Service Charges

Darren Bagnall, of Flat Living Insurance, provides an at-a-glance guide to service charges.

For those who haven’t owned a leasehold property or come across the term; service charges are payable by leaseholders on an annual basis to cover the landlord’s incurred costs for providing services and maintaining the common areas of the building. When signing a lease, residents commit to paying a proportion of these running costs which will vary depending on the terms of the lease and the level of service or maintenance provided.

Service charges can be complicated (as well as a point of contention between landlords and their leaseholders) so we thought a one-stop guide to the basics may be useful:

What do service charges cover?

Your service charges will be calculated based on several factors such as the size and quality of the building as well as the services provided under your lease, but a typical service charge may cover some or all of the following:

• General repairs, maintenance and cleaning of common areas
• Cleaning of communal windows
• External maintenance such as grass-cutting and gardening
• Redecoration funds
• Lift maintenance and insurance (even if you live on the ground floor)
• Fire equipment maintenance
• Buildings/property owners’ insurance (although this may be paid separately)
• Bank and accountancy charges

What should I look for in my lease?

Details of what is and isn’t included in your service charge must be detailed in your lease. As these can be complicated documents, make sure you read and fully understand yours before signing. If you’re in any doubt, ask a professional to check it over for you to flag any potential issues or pitfalls.

The lease will give details of:

• Which services must be paid for and when
• How service charges are apportioned between residents
• The way in which they are calculated
• How the landlord will collect the charges
• Whether or not there is a sinking/reserve fund in place

The lease is also likely to contain a ‘sweeping clause’ which is designed to cover any services not specified in the lease. If the lease doesn’t have one of these, residents are only legally obliged to pay for the services listed.

How much should my service charge be?

Your service charge costs will likely vary year on year (while also rising with inflation) but they must always comply with your lease. Landlords are also entitled to add a ‘reasonable’ management fee but they should never make a profit.

How do I challenge my service charge?

If your lease doesn’t provide enough clarity to be sure if you’re being charged appropriately, or if you disagree with a charge, you have every right to request more information. In fact, you’re entitled to ask your landlord to provide a written summary of costs incurred in the last accounting year (April to April) or, if there’s not one, the last 12 months leading to the date of your request.

This must be provided to you within 6 months of the end of the last accounting period, or within one month of the request (whichever is later). Within 6 months of this being received, you can then go on to request that the accounts and receipts (and any other supporting documents) be sent to you for inspection.

If leaseholders are unhappy with the cost of their service charge or believe they are getting little in return, they are entitled to write to their landlord/freeholder to try to negotiate a lower charge or request an improved service. If this doesn’t resolve the issue, the next step is to go to a First-Tier Tribunal (FTT), which has the power to decide whether the landlord is charging a reasonable rate for the service delivered.

It is not advisable for residents to withhold their service charge as, if it is not paid, they could end up in court or (in extreme cases) be threatened with eviction. It’s worth knowing that you can still follow the routes above to challenge a charge even if you have already paid it (as long as you haven’t specifically admitted or agreed that the charges are payable).

What is a sinking/reserve fund?

This is a specific pot of money that is reserved for use in the event of a major repair or large-scale maintenance works becoming necessary. Each leaseholder contributes a set amount of money each year via their service charge.

Leaseholders are only obliged to contribute to a sinking or reserve fund if this is stated in the lease, however, having one in place can be of huge benefit to both landlords and residents in the event of a major repair. As buildings age, more maintenance will inevitably be needed- for example, in ten years’ time a new roof, downpipes or heating system may be required. A sinking fund should ultimately save either party having to find large sums of money at short notice.

If you don’t already have a sinking fund for your building and want to set one up, a formal agreement must be established between the landlord and all the other leaseholders.

Some leaseholders take issue with sinking fund contributions because landlords are under no obligation to refund contributions if a leaseholder sells their property without any major works taking place during their time in the building.

The legal framework

Landlords are obliged to provide tenants with detailed information along with their service charge demand, including:

• Annual accounts setting out details of service charges incurred
• A summary of tenant’s rights and obligations in relation to service charges
• A copy of the policy of the insurance for the building

Leaseholders are under no obligation to pay the charges until this information has been provided.

Landlords must also consult with tenants if particularly expensive work is needed and the landlord wishes to:

• Carry out works costing more than £250 per tenant per year
• Supply any communal service (such as gardening/cleaning) which will cost more than £100 per tenant per year

If the landlord doesn’t meet his obligations in these circumstances, the leaseholder will not have to pay more than either £250 or £100 respectively (unless the First-Tier Tribunal rules in favour of the landlord).For more information, please contact a member of the Flat Living Insurance team on 0333 577 2044.