24 Apr Your at a Glance Guide to Service Charges
Your ‘At a Glance Guide’ to Service Charges
Owners of leasehold property living in residential blocks have to pay an annual service charge to their landlord to cover the cost of providing services and maintaining the common parts of the building they occupy. Lease terms set down the relevant services and how the costs are appointed, which will vary according to the size and complexity of the overall property.
The actual proportion of management fee to service charge is normally small, and the majority of the payment will cover the costs of maintaining the building based on a plan agreed with freeholders and/or directors of the residential management company.
WHAT DOES THE SERVICE CHARGE COVER?
Service charges differ from lease to lease, depending on the size and quality of the building in question. A typical service charge might cover any or all of the following:
- General repairs and maintenance
- Cleaning of communal areas and windows
- External maintenance such as grass-cutting and gardening
- Re-decoration fund
- Lift maintenance and insurance (even if you live on the ground floor)
- Fire equipment maintenance
- Health and safety or Fire risk assessments
- Buildings/property owners insurance
- Bank and accountancy charges
Details of what is in included in the service charge are included in the lease. This will give details of:
- What 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; and
- Whether or not there is a reserve fund in place.
The lease will probably also contain a ‘sweeping clause’. This 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 that are listed.
HOW MUCH IS THE RIGHT AMOUNT?
The amount leaseholders pay in service charges can vary from year to year and will undoubtedly rise with inflation. If the lease doesn’t provide enough information about service charges for residents to determine whether or not they are paying a fair rate, they are entitled to a breakdown of costs to check whether they are acceptable, whether through their freeholder or their managing agent.
WHAT IS A RESERVE FUND?
Leaseholders only have to contribute to a reserve fund if this is stated in the lease. However, having one in place can be of positive benefit as it should ultimately save either you having to find large sums of money at short notice for major items of 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. The benefit of a reserve fund is that each resident contributes a set amount of money each year to this fund via their service charge, which then covers the cost of major repairs when they are needed. If leaseholders sell their home before the money has been spent on repairs, there is no obligation to refund the monies, but a buyer is reassured that a fund is available to cover larger scale planned maintenance.
If leaseholders are unhappy with the cost of their service charge or believe they are getting little in return, they are entitled to put their concerns in writing and try to negotiate a lower charge or improved service. If this does not produce results, the next step is to go to a First-tier Tribunal (FTT), which comprises of three members including a legally qualified chairperson, and has the power to decide whether or not the services charged are a reasonable rate for the service delivered. It is not advisable for residents to withhold their service charge because if it is not paid they could end up in court or – in extreme cases – be threatened with eviction.
THE LEGAL FRAMEWORK
Under the Commonhold and Leasehold Reform Act 2002, leaseholders should be provided with detailed information including:
- Annual accounts setting out details of service charges incurred
- A summary of their rights and obligations in relation to service charges
- A copy of the policy of the insurance for the building
Under the Act, leaseholders must also be consulted if expensive work is needed such as carrying out building works costing more than £250 per leaseholder per year or supplying any communal service (such as gardening/cleaning) which will cost more than £100 per tenant per year
WHO CAN I ASK FOR ADVICE
Watsons have an experienced team of Property Managers specialising in Block & Estate Management as well as Property Management. If you have questions about this feature, then please call us on 01603 226500 for further advice and support.