Calculating service charges

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It’s that time of year again, when not only the government is getting to grips with its budget but many households are too, including leaseholders who are likely to be paying out for service charges too.   Almost inevitably someone will query the charges, so here’s a quick reminder of what they cover.

Service charges are payments by the leaseholder to the landlord (freeholder) for all the services the landlord provides.

These will include maintenance and repairs, insurance of the building and, in some cases, provision of central heating, lifts, porterage, estate staff, lighting and cleaning of common areas etc.

Usually the charges will also include the costs of management, either by the landlord or by a professional managing agent or property manager. Service charges will vary from year to year.  They can go up and down without any limit, other than that they are reasonable.

Leaseholders have powerful rights to challenge service charges that they feel are unreasonable at the First-tier Tribunal (Property Chamber).

Details of what can (and cannot) be charged by the landlord, and the proportion of the charge to be paid by the individual leaseholder, will all be set out in the lease. The landlord arranges provision of the services. The leaseholder pays for them. Most modern leases allow for the landlord to collect service charges in advance, repaying any surplus or collecting any shortfall at the end of the year.

Every leaseholder in your block, particularly new arrivals, should make themselves aware of what the current and future charges are likely to be.  It’s also worth finding out if there is a reserve fund for the ‘unexpected’ and what plans there are for major works, so you don’t get big bills that you have not budgeted for. Service charges are often put into three categories:

  • Reserve funds: for long term expenditure, for example roof replacement.
  • Cyclical expenses: for more regular expenses like external and communal area decoration.
  • Annual charges for day to day expenses:  for example,  cleaning, gardening, insurance, salaries etc.,  and other items which are payable each year.

Don’t forget that, because leasehold is a tenancy, there is also ground rent to pay.  It may be nominal but investor freeholders look for a good return and ground rent of several hundred pounds, or more, per flat is not uncommon and must also be budgeted for. Check the Leasehold Advisory Service website and advice guides for a fuller explanation of service charges.