The service charge is what funds the running of your building. Each building is unique with very different requirements, but as an example, this could cover health & safety planning, gardening, buildings insurance, building repairs and maintenance, cleaning and any staff such as a concierge.
Why do I have to pay a service charge?
The easiest way to explain this is through a quick overview of the principles of leasehold.
When buying a leasehold property, a leaseholder effectively rents from the freeholder for a number of years, decades or centuries. When the freeholder grants a lease, they become a “landlord”. The freeholder or resident management company usually appoint a managing agent to manage their block. And that’s where we come in!
The leasehold ownership of a flat usually relates to everything within the four walls of the flat, including floorboards and plaster to walls and ceiling. It can include a garden, unless this is a communal garden for the building.
The structure and common parts of the building and the land it stands on are usually owned by the freeholder. The freeholder is, normally, responsible for the maintenance and repair of the building. If so, the costs for doing this are paid for through the service charges and billed to the leaseholders.
How much do I have to pay?
All the information will be in your lease and your service charge budget.
Your lease will tell you; a. What can (and cannot) be charged by the “landlord” and b. the amount of the service charge that an individual leaseholder pays. Usually, your lease will provide you with the dates of the service charge period and how often your payments are due. It’s common for the service charge period to be a year, however it is crucial to check your lease for the format of your service charge. If you need help understanding your lease, let us know as we can help.
Your service charge budget will give you a breakdown of all the expected costs over the next financial year, and we are also happy to talk you through this at any time.
Who decides the service charge budget?
Each year, your managing agent will prepare a service charge budget to cover what we think will be spent over the next financial year. We do this by reviewing the previous year, and by planning what repairs and maintenance will be needed. The budget will be signed off by the freeholder or resident management company directors before being shared with leaseholders.
And what exactly does this cover?
The service charge pays for the maintenance and repair of the building and its common parts. Each building is so unique that the service charge could cover maintenance of the outside of the building, the roof, and the corridors for a small apartment block. Or for a larger complex, it could also cover lift maintenance, parking, CCTV and a concierge.
What happens if there is an unexpected cost?
Within your budget, there should be a reserve fund and we will strongly recommend keeping this topped up in case of any major projects such as re-roofing or replacement of the lift. There’s a strict process when we use the reserve fund and you’ll get notice before we do anything.
Where is the money kept?
Each development has a separate bank account for the service charge fund and reserve fund, not shared with any other development, and completely separate from the managing agents’ own funds.
And what happens at the end of the service charge year?
It can take a number of months before we know what has been spent and the financial year is marked as “closed”.
This is because many suppliers invoice after work has been completed, or at set times throughout the year. So it can take 2-3 months to get the final invoices for the financial year, and ensure these are correct and paid.
Once we have all the invoiced and costs, we will check the actual costs against the budget to get a final picture of what was spent. This is audited by an independent accountant, who prepares the year end accounts. We aim to send the year end accounts to residents six months after the end of the year. So if your service charge budget year started in January 2018, we would be aiming to send you the final accounts by June 2019.
What if I need to pay more? Or I’ve overpaid?
This will be set out in your lease, so please check this and let us know if you need help with this. Generally, the options are:
- A surplus (which means there is money left over) could be credited back to leaseholders
- A surplus might also go into the reserve funds
- A surplus could be rolled over to the next year’s budget
- A deficit (which means there isn’t enough money to cover the year) is usually billed to leaseholders
A quick guide to fees
We hope this guide has been useful, we understand that leasehold is not always straightforward, but our team have years of expertise and we are always happy to answer questions. On a final note, here is a very quick guide to the different fees you might pay on top of a service charge:
Ground rent is a fee that a leaseholder pays to the freeholder, and it exactly what it says; a rental charge for the ground your property is on.
Service charge is a fee we collect which pays for maintaining your block, for example, cleaning, repairs, insurance.
Estate charge is a fee we collect to maintain your grounds, for example, gardening, litter picking.
Management fee is what we charge, annually, to manage your property.