Your at-a-glance guide to Service Charges

Leaseholders living in residential blocks are under an obligation 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, writes Lesley Davies. Residents commit to pay a proportion of these running costs, which will vary depending on your lease terms and the level of service and maintenance provided.

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
  • Redecoration fund
  • Lift maintenance and insurance (even if you live on the ground floor)
  • Fire equipment maintenace
  • Buildings/property owners insurance – although this may be paid separately
  • 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 sinking 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. Landlords are entitled to add a reasonable management fee to the charge but should not make a profit. 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. Landlords are legally obliged to allow residents to inspect and take copies of accounts, receipts and other relevant documents. If this information isn’t forthcoming or leaseholders feel they have been unfairly treated, they should take professional advice from a chartered surveyor who specialises in residential leasehold property, or from a housing lawyer.

WHAT IS A SINKING FUND?

Leaseholders only have to contribute to a sinking or reserve fund if this is stated in the lease. However, having one in place can be of positive benefit to both landlords and residents as it should ultimately save either party 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 sinking 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. However, as Shelter points out on its website (www.shelter.org.uk) if leaseholders sell their home before the money has been spent on repairs, the landlord is under no obligation to refund the monies. If you don’t already have a sinking fund for your building and want to set one up, a formal agreement must be established between the landlord and all the other leaseholders.

CHALLENGING CHARGES

If leaseholders are unhappy with the cost of their service charge or believe they are getting little in return, they are entitled to write to their landlord/freeholder 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 three members including a legally qualified chairperson and has the power to decide whether or not the services the landlord is charging is 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, landlords are obliged to provide tenants with detailed information including:

  • Annual accounts setting out details of service charges incurred
  • A summary of tenant’s rights and obligations in relation to service charges
  • A copy of the policy of the insurance for the building

In some circumstances the tenant may withhold payment until the landlord complies with these requirements. (source: The Service Charge Company)

Under the Act, Landlords must also consult with tenants if expensive work is needed and the landlord wishes to:

  • Carry out building works costing more than £250 per tenant per year; or
  • Supplying any communal service (such as gardening/cleaning) which will cost more than £100 per tenant per year

If the landlord doesn’t meet his obligations under the Act, the tenant will not have to pay more than either £250 or £100, unless the FTT rules that he has to.