Service Charges (The Full Guide)

Budgeting for your first home is never easy, and service charges don’t make this any easier.

Service charges can quickly become very expensive for certain properties. And once you’ve bought a property, you are required to pay the service charges every year.

Many first time buyers concentrate solely on the house price and overlook the service charges. We’ve put together a simple guide below to arm you with the key questions to ask the estate agent.

What Are Service Charges?

Service charges are regular costs paid by each leaseholder in a building.  These costs are separate to ground rent (which also needs to paid each year).

What Costs Are Included In Service Charges?

Some of the uses from the service charge include:

• Maintenance of communal areas (such as the stairs and hallways, provision of lighting for these areas)
• Gardening
• Window cleaning
• Security (such as the main door of the building and alarm systems)
• Maintenance of the roof
• Insurance (covering events like fire and flood)
• Porters/concierge salaries
• Contributions into a sinking fund

The full details on what the landlord can charge you for will be in your lease document.

Remember – the landlord does not need to provide any service/upkeep that is not listed in the lease document, and likewise you as the leaseholder do not have to pay for anything that is not set out in the lease.

Sometimes a landlord (the freeholder) will make payment for these services before recovering them from the leaseholders. Other times the leaseholders will be required to pay in advance for the expenses. The rules for when the costs need to be paid will be explained in the lease. In general the landlord does not make any financial contribution to the service charge costs.

When Do I Pay The Service Charge?

The frequency of payments can vary depending on the lease. For some properties leaseholders pay the full year’s cost at one time. Other properties have service charges that need to be paid every 6 months or 3 months. Some lease agreements even require service charges to be paid by leaseholders in advance instead of waiting for the bill.

For some elements of the service charge, an accurate figure may not be known at the time. This means that an estimate may be used as an initial charge, with adjustments happening later after the actual cost is finalised.

It’s important that as a leaseholder you follow up on the landlord for what the actual bill turned out to be – it is not normally on the top of their list to communicate any refunds back to you!

Whilst it may sound beneficial for leaseholders to pay charges only after they have been incurred instead of in advance, it’s worth noting that this may cause further complications later on.

If a landlord is not able to ask for charges to be paid in advance and decides that major work is required, they may decide to proceed on with the work before they receive the money from the leaseholders. If the landlord does not have enough funds to cover the cost of the work, they may need to borrow money to fund this cost until they receive the service charges from the leaseholders.

The lease document may allow the landlord to recover monies owed (potentially including the interest charged on the money that had to be borrowed). Because of this, it may actually prove to be more costly for a leaseholder if charges are not paid at the time the funds are needed.

Will all flats pay the same service charge?

The method for calculating service charge can be different depending on the details of the lease. Some of the more common methods are below

Area Method of Service Charge

This method works out the total area of your flat and compares it to the total area of the building to calculate a percentage. This percentage is then applied to the service charge and billed to you.

Rateable Value Method of Service Charge

In this method the value of your flat is worked out (this is a technical term called ‘rateable value’) along with the value of the building. Again the percentage is worked out from these two numbers and applied to the service charge bill.

This can produce a different result compared to the area method, as some flats in the building may be worth more but are not necessarily larger (for example if one flat had a desirable view over a park compared to another flat that has a view covering a main road there may be a difference in value between the two).

This method is less common in new leases today.

Fair Proportion Method of Service Charge

Sometimes the lease will be less clear on matters and will instead demand a ‘fair’ or ‘reasonable’ proportion of the service charge to be paid. In this instance, the service charge may be a different value for different apartments in the building.

For example, a mixed use development (think retail/shops on the ground floor with flats on the upper floors) may have different service charges between residential units and commercial units. This might not be based on size of the properties (some leases may require higher service charges from shops compared to residential properties in the building).

Management Charges in the Service Charge

This is the biggest gripe for leaseholders.

Putting it into basics, the usual position for lease agreements is for the landlord to manage the maintenance and upkeep of a building (which is paid for by the service charge).

But for some landlords – that feels like too much work. Many landlords will instead outsource the day to day management of the building/repairs/etc to a private management company. In return, the management company charge a fee for the year to do this work. This fee is included within the service charge amount.

The fees can turn out to be very large, annoying many leaseholders. For some leaseholders this convinces them to purchase a share of freehold property.

What if the service charges are too high?

The law governing service charges questions whether the charges are ‘reasonable’, but unfortunately there is little detail on what reasonable is.

If you want to challenge a landlord on the level of service charges once you have bought the property, this can be done through a tribunal process.

The easiest way to avoid getting into this kind of dispute as a first time buyer is to do the following steps when moving through the home buying process:

1. Look at all the charges that are listed in the lease document (your solicitor can help to clarify any points).
2. Calculate the total costs that will need to be paid on a yearly basis (some find it useful to divide this by 12 to get a monthly cost).
3. Decide if you will be happy paying this amount each year indefinitely. Remember that these costs will increase over time due to inflation (some people add on an additional 20% to prepare themselves for future rises).
4. If you are not happy in paying the charges, consider whether it is the right property for you. You will be getting these bills regularly, and any resentment you have to them will only build over time. If you later decide to refuse paying the service charge this can have significant legal consequences (the freeholder may decide to pursue you through court).

What is a Service Charge Sinking Fund?

A sinking fund is an ‘emergency’ source of money built up by the building’s owners to pay for expensive, one off projects.

Many buildings require ongoing maintenance work, and flats are no different. When they are originally built, the quality of the new build homes should be high (most of them come with a 10 year guarantee). However there are always going to be some snags and issues as time progresses, hopefully only small ones.

The service charge is usually intended to cover day-to-day work on buildings, such as cleaning, gardening and basic repairs.

But there are times every once in a while where the cost of a repair will be much higher than the usual amount of funds collected each year. These can include: roof problems, major damage to the building structure, subsidence and replacing lifts.

The ‘big repairs’ mentioned above can cost a lot and usually need to paid soon after the building problem has been found. To ensure there is enough money available for these repairs, many leases require leaseholders to contribute to a sinking fund every year. This fund will build up until repairs are needed.

Some freeholders decide to carry out routine maintenance work on buildings (e.g. every 5 years). This allows funds to build up over the previous 5 years to then be used for capital projects.

If an emergency repair is required and the sinking fund does currently not have enough funds, the freeholder may ask all residents in the building to pay an additional amount to cover this one-off repair. Unfortunately this has happened recently for many leaseholders in apartment blocks with dangerous cladding.

From the leaseholders’ point of view, fixing critical issues is in everyone’s best interest – not doing it would affect the value of all flats in the building and may make it very difficult for any to be sold later on.

What happens if I don’t contribute to the sinking fund?

If leaseholders (aka residents) don’t pay into a sinking fund they will likely be acting against the terms of the lease that they signed, which can have legal consequences. The extent of these consequences will be different for every lease.

Aside from this, the financial result of leaseholders not paying will be a lower amount of reserves available for a rainy day. This means that with every passing year that sinking funds are not growing, it will become more and more likely that a large issue will crop up that requires more funds than those available.

Leaseholders may face higher costs later on if the freeholder completes critical work that the sinking fund did not cover (although they do need to follow a proper process for major works and usually have to consult with tenants).

So in short, an underfunded sinking fund can build up future problems for residents in a building.

Service Charge Summary

The key way to avoid the stresses of these charges is to plan for these in advance. The additional charges are rarely advertised on a rightmove or zoopla listing.

So when you are seriously considering buying your target property, make sure you ask the following questions to the estate agent/owner:

1. How much are the Service charges?
2. What does the service charge include?
3. Is there a ‘sinking fund’ or ‘reserve fund’ to be paid into?
4. Is there any major work scheduled for the building?
5. Are there any ‘administration charges’?
6. Is the seller in any arrears on any charges?

By asking these questions now, you can uncover any major issues and save a lot of lost time and money further down the line.

It’s always important to get legal advice on any charges that could come with buying a property.