18/08/2022
Author : Kate Robinson
To ensure their properties are kept in good shape and to extend their life, landlords often referred to as the freeholder or competent landlords have to provide various services, these are funded by collecting service charges. Service charges are levied on the leaseholders sometimes also called tenants (tenant in this context means a tenant who holds a long leasehold interest under a lease) and fund the service charges thereby enabling landlords to recoup the cost of providing the services required to run a block of flats or a private housing estate: services such as cleaning, gardening, insurance, etc…. Service charges are the lifeline of an apartment block. Yet, poor management of service charges is at the core of most leaseholder-landlord disputes. It is also one of the biggest pain points regarding block management in the UK. When service charges are not efficiently managed, it can cause untold problems to your property as cash flow gets choked, and there is little money available for critical repairs and maintenance. When the problem persists, the property loses its charm and value.
If you are not sure what constitutes services, look in your lease, there is ordinarily a schedule of what expenditure is permitted service charges and will also provide how service charges are calculated (either a percentage of total costs or a ‘fair and reasonable proportion. It works this way. Leaseholders pay for services such as.
It is the responsibility of the leaseholder to pay service charges on time, whether they sublet their property or not. Some leases have clauses so that the landlord only has to provide services if service charges are paid, most require the landlord to provide the services regardless.
In the UK, service charges are not capped. The landlord is allowed to change the service charge as per the mechanisms set down in the lease. anytime without repercussions. However, service charges must be kept at a reasonable and realistic level – not doing so could land the landlord in the Tribunal subject to an ‘unreasonableness claim’. Also, the landlord must inform the leaseholder if scheduled service work is valued above the prescribed Section 20 consultation limit.
Most leases provide that service charges are calculated on the actual or estimated cost of services with accounts prepared at the year-end to levy a balancing charge, credit if less spent, and collection if more spent. If you are a leaseholder and concerned about whether you are being overcharged or charged for things you shouldn’t be paying for, check the lease. Your lease will have details of the services you are required to pay for.
Service Charge Structure
In most cases, service charge periods are for a year. However, in some instances, the lease might require leaseholders to make payments every six months or every quarter. Payment is asked for in advance based on the service charge budget.
Service Charge Limits
Service charges are not fixed, and they do not have a limit. Landlords are within their rights to recover reasonable costs. Also, leaseholders can complain to the Tribunal if they feel the service charges are unfair and unreasonable.
Reserve Or Sinking Funds
A well-drafted lease will specify the collection of money from leaseholders in advance to create a sinking or reserve fund. This arrangement makes it easy for monies to be collected gradually for big expensive jobs such as cyclical redecorations or re-roofing. Reserve funds also earn interest, so it helps add more money to the kitty.
Recovering Service Charges
Service charges are collected by way of Service Charge demands. Under or over-collections are adjusted once the accounts are prepared. The accounting part must be certified or audited by a qualified accountant, independent of the managing agent, although larger managing agents to keep costs down prepare the accounts to be certified. Accountants with years of experience in the property management industry are hired for this purpose.
Consultation
The law related states clearly that leaseholders must be consulted and informed before work above a specified value is carried out. Leaseholders must also be consulted while entering into a long-term agreement for providing services.
The landlord is the decision-maker in spending the leaseholder’s money to carry out services. When we say ‘landlord’ the landlord may be the developer for a time, until a development is sold, or could be the resident's management company that is written into the lease, making the leaseholders or their elected directors responsible for the management of the building. The law protects service charge payers and puts obligations onto the provider. Those who pay service charges must be formally consulted before the landlord begins any qualifying works over a specific value. The expenses incurred must be reasonable. If the leaseholder believes there is a disparity in the charges, the same can be challenged at the Tribunal.
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