Service charge disputes can be very challenging for property managers and landlords to deal with. They can be lengthy, costly and stressful – something to be avoided if at all possible.
Here we’ll be covering the basics of service charges with a focus on how to approach them correctly to avoid any conflict with residents.
What Are Service Charges?
Service charges are payable by leaseholders on an annual basis to cover the landlord’s incurred costs for providing services and maintaining the common areas of the building.
When signing a lease, residents commit to paying a proportion of these running costs which will vary depending on the terms of the lease and the level of service or maintenance provided.
Service charges can be expensive and complicated, which mean they can be a real point of contention between landlords and their leaseholders.
What do Service Charges Cover?
Service charges are calculated based on several factors such as the size and quality of the building as well as the services provided under the lease, but a typical service charge may cover some or all of the following:
- General repairs, maintenance and cleaning of common areas
- Cleaning of communal windows
- External maintenance such as landscaping and painting
- Redecoration funds
- Lift maintenance and insurance
- Fire equipment maintenance
- Buildings/property owners’ insurance
- Bank and accountancy charges
What Is a Sinking or Reserve Fund?
This is a specific pot of money that is reserved for use in the event of a major repair or large-scale maintenance works becoming necessary. Each leaseholder contributes a set amount of money each year via the service charge.
Leaseholders are only obliged to contribute to a sinking or reserve fund if this is stated in the lease, however, having one in place can be of huge benefit to both landlords and residents in the event of a major 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. A sinking fund could ultimately save both parties having to find large sums of money at short notice.
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.
Some leaseholders take issue with sinking fund contributions because landlords are under no obligation to refund contributions if a leaseholder sells their property without any major works taking place during their time in the building.
Avoiding Conflict
The best way to avoid conflict and disputes is to approach the service charge process correctly and transparently.
For Resident Management Companies or similar, this may include having the service charge budget approved by the full committee (and residents if the block is small enough for this to be feasible). Self-managed blocks may also want to consider hiring the services of a professional management company to oversee their service charge demand process. While this creates an extra cost in the short term, the long term peace of mind and reduction in potential legal costs could be very tempting.
For all landlords and property managers, the key to avoiding issues is to ensure the proper preparation of the budget. This should include detailed consideration of the works proposed and how they will be carried out.
When it comes to actually providing the service charge demands to residents, the following process should always be followed:
- Issue the demand in absolute accordance with the lease
- Put it in writing, with the landlord’s address clearly stated (not the managing agent or any kind of ‘care of’ address)
- Include the Summary of Rights and Obligations for service charges
- Serve the demand within 18 months of the expense being incurred
Normal practice is to serve the demand 21 days before payment is due. You can then send reminder letters to slow payers 14 to 21 days after the payment was due- this should include details of next steps should they continue to withhold payment.
If a Service Charge is Challenged
Leaseholders have the right to challenge any demand that they believe is unreasonable or non-compliant with the lease. If a complaint is received, the leaseholder is entitled to a written summary of costs incurred in the last accounting year (April to April) or, if there’s not one, the last 12 months leading to the date of their request. This must be provided within 6 months of the end of the last accounting period, or within one month of the request (whichever is later).
Within 6 months of this being provided, the leaseholder can then go on to request that the accounts and receipts (and any other supporting documents) be sent to them for inspection.
You must comply with the above time frames to avoid landing yourself in hot water and, in most instances, the above is enough to satisfy the needs of the leaseholder so that payment can be made. If not, the matter may go to First-Tier Tribunal but, if you’ve kept things above board, this should result in payment being demanded of the leaseholder.
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