This question is asked a lot; from first time buyers to people who have owned many properties before but never within a managed development. Service charge will vary drastically from development to development and for each development and type of property the legal Transfers should be checked. However, there are some factors which are universal.
What Does it Cover?
The service charge will cover maintenance, repair and renewal of communal items and areas, as well as include any administrative and insurance costs in relation to managing the service charge accounts. These costs will be set out in a budget at the start of each year for Leaseholder and/or Freehold House Owners. This budget will show the anticipated costs for the year and will be split into day-to-day costs and Reserve funds. The day-to-day costs will include any contracts in place from soft services to asset contracts as well insurances and administration costs, as applicable. While the reserve fund costs are set amounts, which will be collected over the years for larger works such as redecoration of a block of flats, replacement of a lift or in terms of Estate Tree surgery works or replacing private areas of road. A bespoke budget will be put together based on details within the Transfers (Lease or TP1) of items which required management and expert knowledge of the person setting the budget.
Unfortunately, even the most comprehensive budget cannot predict the future and they can be items of expenditure which were not expected through the year. This is why Service Charge Accounts are produced. At the end of each year/period a set of Service Charge Accounts will be produced showing actual expenditure for the development for that previous period. During the Account production process all costs which were incurred in the period are accounted for and any costs which were set in the budget for reserve funds will be transferred to Reserve. This will create a set of Accounts with either a surplus or a deficit based on the budget provided at the start of the year. The statement of Account is a snapshot of the bank balance at the end of the year and will also take into account any accruals or debt on the accounts. There is a set Service Charge cycle as dictated in the majority of Transfers which follow the same process. However, for each developer you need to check the legal requirement to ensure the cycle is set correctly. Especially in terms of billing date and financial years. Below is a general cycle:
2 Months Prior to Budget Start Date
The budget will be reviewed and prepared at this point and send to the client for approval.
1 Month Prior to Budget Start Date
The budget will be sent out to Leaseholders or Freehold House owners along with a Service Charge demand for a period set out in the Transfer (annually in advance, quarterly in advance, six monthly in advance. NB there are other options, but these are the most common).
Budget Start Date
Payment will be due on this date or within 30 days of the invoice issued (whichever is the latter).
End of Q1 and End of Q2
Review all expenditure to date based on budget v actual to ensure running in line with budget.
End of Q3
Review all expenditure to date based on budget v actual to ensure running in line with budget. Start to prepare the budget for the following year using information gathered from current year as well as potential known additional expenditure for the development.
Year End
Start process of producing account. During the following months the Year End Accounts will be produced, reviewed, sent to external accountants for certification (or equivalent based on term of the transfers) and approved by the client.
6 Months Following Year End
The Accounts should be issued within 6 months of the Year End as a legal requirement. If they is a reason these cannot be produced and there is an anticipated additional expenditure (deficit on the account) a notice to advise Leaseholders of this must be issues (Section 21B notice). This does not legally need to be done for Freehold Houses, however it would be seen as best practice to follow this process whatever the tenure of the properties within the Estate. When issuing the Accounts a credit or debit note will be included depending on the balance sheet along with reasoning for the difference from the budgeted amounts.
