Service Charges: What do they cover and what should you expect?
A service charge is a charge that leaseholders pay to the landlord/freeholder or sometimes a management company to cover the cost of services provided under the lease. The charge is often payable yearly, twice yearly or sometimes quarterly. Here, Beyond Conveyancing’s Steph Nield breaks down what you can expect from your service charge.
What does it cover?
The landlord’s power to recover the service charge from you is set out in the lease. They can only therefore recover costs if the lease contains provision for this. The works covered will depend on the property and the estate that it is contained within, but examples of the services included are:
- Maintenance and repair of the exterior of the building, roof, foundations, guttering and communal drains
- Lift maintenance
- Maintenance of entry doors and gate systems
- Central heating or lighting of communal areas
- Window cleaning
- Insurance of the building (not including contents)
- Management fees
- Upkeep of the communal areas e.g., gardening and cleaning
- Luxury facilities such as on-site swimming pools and gyms
The costs are variable each year dependant on the costs incurred in providing the services where you live. The lease will usually specify how your share is calculated e.g., by square footage, number of bedrooms or simply as a percentage of the overall cost, sometimes the lease simply states that each leaseholder must pay a ‘fair’ or ‘just’ proportion of the service charge.
Most modern leases allow for the service charge to be collected in advance. This means the landlord will provide an estimate of the costs to be incurred in the coming year and the service charge will be calculated to cover this. The landlord will then provide a statement following the end of that year confirming the actual costs and the service charge will be amended accordingly.
This means if the estimate did not cover all of the actual costs, the leaseholder will be asked to provide further funds. If, however, they have spent less than anticipated, the overpayment will be credited to the leaseholders account for the next year.
There is no limit on the amount the service charge can be, but the landlord can only request reasonable costs to be paid and should not be making a profit on these. You have a right to challenge any unreasonable charges in the tribunal.
You are entitled to ask for a summary of the last accounting year showing how the charge is calculated and what the funds were spent on including any paperwork to support this such as invoices.
During the conveyancing process, your Beyond conveyancer will obtain copies of previous years’ service charge accounts (usually the previous 3 years) and anticipated future charges. This will give you a good idea of the likely costs going forward and enables you to budget your property outgoings prior to committing to the purchase.
Service charge demand
The landlord will issue a demand for the service charge to be paid and this must contain their name and address (unless the service charge is paid to a management company listed in the lease) and include a summary of leaseholder’s rights and obligations. If the demand does not comply with these requirements, then you have a right not to pay the service charge until a proper demand is received.
However, this does not apply if you pay the service charge directly to a management company. The demand in these circumstances must still be in writing but doesn’t need to contain your landlord’s name and address.
Sometimes a service charge will include a contribution towards a fund known as a ‘reserve or sinking fund’. This is intended to build up a fund to pay for future large-scale works affecting a group or block of properties such as decorating the exterior of the whole building or replacing the lifts. The idea is that this avoids leaseholders being met with huge bills when works are carried out. It also ensures that all leaseholders contribute towards the cost of the works rather than all costs falling on current owners during the time necessary works are due. However, a reserve fund won’t always cover the full cost of major works and in this case, you would be asked to cover a share of the shortfall, along with all other leaseholders.
When you sell your property, you won’t usually be able to claim back any contributions you have made to the reserve fund
Major works and consultation
If your landlord proposes to carry out works that are going to cost you more than £250 or to enter into a long-term contract which will cost you more than £100 per accounting year, they are required to consult with you under a process set out in Section 20 of the Landlord and Tenant Act 1985 – this is known as a Section 20 consultation.
As part of the conveyancing process, your Beyond conveyancer will request copies of any such notices so that you are aware of any upcoming works when you purchase a property. This will allow you to budget effectively as the service charge is likely to increase to cover these costs.
Apportionments on Sale
If you have paid the service charge beyond the date of completion agreed then the charge will be apportioned, which means the buyer will pay you back from the date of completion onwards. Your Beyond conveyancer will calculate what is due and collect this amount, along with the sale proceeds. These funds will be paid to you with the purchase price on the day of completion.
If you own a freehold property and are contributing towards maintenance costs, this is known as an estate rentcharge and more information on these is available here: Rentcharges: What are they and what does their future look like?
By Steph Nield