What are Service Charges?

Service charges are payable by the leaseholder to the landlord for the services provided, as determined by the lease. Service charges normally include costs for maintenance, repair and insurance of the building and communal areas (often including roofs, foundations, window frames, pipes and drains) plus the employment of staff and management of the property.

Service charges can be split into three sections:-

Reserve funds – which are for long term expenditure, for example roof replacement.

Cyclical expenses – which are for more regular expenses like external and communal area decoration.

Day to Day expenses – which are for the cleaning, insurance, salaries etc and other items which are payable each year.

Details of what is included to be paid with the service charges is set out in the lease and all contributions will be met by the leaseholders. The landlord arranges for the services to be provided and the leaseholder pays for them.

Service charge demands are payable as determined by the lease, which can be monthly, on quarter days, bi-annually or annually. Service charge demands must include a "summary of rights and obligations"  and the name and address of the landlord. If the service charge demand does not comply with either of these the Leaseholder has the right to refuse to pay until the service charge is requested correctly.

Service charges can vary each year dependent on the expenditure expected for that period, and are normally collected in advance based on an estimate of forthcoming costs. However, some older leases do collect service charges in arrears. When purchasing a leasehold flat is important to find out what the current and future service charges are and what the level of the reserve fund may be for any major works that could be planned, to enable you to budget accurately.

As most leases collect service charges in advance, the landlord would normally require the landlord to prepare an end of year statement, to provide to each leaseholders - which can lead to an additional demand for the landlord to recover the additional costs. Where the landlord has over estimated, the lease will determine whether the over payment is to be refunded, held as a credit for the following year or transferred to the reserve fund.

Service charges apportionment should be clarified in the lease, unfortunately this is not always done well, and leases often refer to the amount payable by each leaseholder to be fair and reasonable which could be determined to be, for example, the rateable value or the square footage of the property.

Where leases do state more specifically how the service charges should be apportioned it is often by using a fraction or percentage, for example, if there are 10 flats then each flat will pay one tenth or 10% of the total service charges expenditure. A variable percentage could also be used where there are properties with varying numbers of bedrooms, for example 10 flats, 5 with one bedroom and 5 with two bedrooms would be shown as 8% payable for those with 1 bedroom and 12% for those with two bedrooms.

Major works, where works costng the leasehoolder more than £250 requires a consultation procedure - Section 20. Click here to read Flat Living's articles on this subject.

Lease wordings can often be quite difficult to understand – if in doubt always check with your solicitor.

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