What is a service charge?
One of our most frequently asked questions is: what is a service charge and why do I need to pay it? If you own a flat (or are thinking of buying one), you’ll have a service charge. Here’s why it exists and what it covers, starting with an overview of leasehold.
The leasehold ownership of a flat usually relates to everything within the four walls of the flat, including floorboards and plaster to walls and ceiling. It can include a garden (unless this is a communal garden for the building).
The structure and common parts of the building and the land it stands on are usually owned by the freeholder. The freeholder is normally responsible for the maintenance and repair of the building and common parts. The costs for this are paid for through the service charges and billed to the leaseholders.
When you buy a flat in an apartment block, a converted property or part of a commercial unit, you effectively rent from the freeholder for a number of years, decades or centuries. When the freeholder grants a lease, they become a “landlord”.
The freeholder or resident management company usually appoint a managing agent to manage their block. The service charge funds the running of your building. Each building is unique with very different requirements, but as an example, this could cover health & safety planning, gardening, buildings insurance, building repairs and maintenance, cleaning and any staff such as a concierge.
How much is the service charge?
This is not a set cost and it varies between buildings, the details will be in your lease and your service charge budget.
Your lease will tell you what can (and cannot) be charged by the “landlord” and the details of the service charge that an individual leaseholder pays.
Usually, your lease will provide you with the dates of the service charge period and how often your payments are due (usually the service charge period is a year).
Your service charge budget will give you a breakdown of all the expected costs over the next financial year.
How does the service charge budget work?
Each year, your managing agent will prepare a service charge budget to cover what we think will be spent over the next financial year. We do this by reviewing the previous year, and by planning what repairs and maintenance will be needed. The budget will be signed off by the freeholder or resident management company directors before being shared with leaseholders.
Your building has a “financial year”, similar to a business. Before the start of the financial year, a budget is set for the service charge and approved by the freeholder or resident management company. This is billed to the leaseholders, and the funds collected are kept in a separate bank account. At the end of the financial year, the end of year accounts are prepared.
Many suppliers invoice after work has been completed, or at set times throughout the year, so it can take 2-3 months to get the final invoices and ensure these are correct and paid.
Once we have all the invoices and costs, we will check the actual costs against the budget to get a final picture of what was spent. This is audited by an independent accountant, who prepares the year end accounts. This is why one service charge year can actually span much longer, taking into account the budgeting and the end of year accounts.
What’s included in the service charge?
The service charge pays for the maintenance and repair of the building and its common parts. Each building is so unique that the service charge could cover maintenance of the outside of the building, the roof, and the corridors for a small apartment block. Or for a larger complex, it could also cover lift maintenance, parking, CCTV and a concierge.
What happens if there is an unexpected cost?
Your budget should include a reserve fund and a good managing agent will work with leaseholders to keep this topped up in case of any major projects such as re-roofing or replacement of the lift. There’s a strict process when we use the reserve fund and you’ll get notice before we do anything.
Where is the money kept?
Each development has a separate bank account for the service charge fund and reserve fund, not shared with any other development, and completely separate from the managing agents’ own funds.
What if I need to pay more? Or I’ve overpaid?
This will be set out in your lease. Generally, the options are:
1. A surplus should be credited back to leaseholders.
2. A deficit (which means there isn’t enough money to cover the year) is usually billed to leaseholders.
We hope this guide has been useful, we understand that leasehold is not always straightforward, but our team have years of expertise and we are always happy to answer questions. Contact Joe Jobson if you have any questions or would like to talk to us about appointing Principle as a managing agent.