Introduction

Buying a flat is exciting – but it also means buying into a share of the costs of running the building. That’s where the service charge accounts come in. They tell you whether the block is financially healthy or whether you might face nasty surprises. At first glance, these accounts can look a bit dry and technical. But hidden inside are clues about cashflow, arrears, reserves, and future risks. In this blog, we’ll explain how to read service charge accounts like a pro, and what red flags to watch out for before you sign on the dotted line.

What are service charge accounts and why do they matter when buying a flat?

Service charge accounts are the annual financial statements showing how much money was collected from leaseholders, what was spent on the building, and what’s left over (or owed) at the end of the year. They’re vital for buyers because they reveal whether the building is being managed responsibly and whether future bills might jump. We use the word “owed” because service charge accounts are drawn up on a not for profit basis, which means if there is an overspend it should be collected by way of a balancing charge: a demand which equalises the fund.

What do ‘service charge debtors’ mean on the balance sheet?

If you see ‘service charge debtors’, it usually means some leaseholders haven’t paid their service charges. This is a red flag – because unpaid charges can lead to cash shortages. In practice, that means the paying leaseholders may have to cover the gap while legal action is taken against the non-payers. If arrears are high, ask questions about how they’re being managed. Or if other leaseholders are not covering the gap, then services have to be cut which could mean no cleaning, or the insurance having to be put on instalments which then means interest on a credit arrangement becomes payable, or worse still, the building ends up uninsured.

A prudent buyer would look at the debtors figure year on year to see if it is getting worse, and ask for a breakdown of the ‘age’ of the debt. This would indicate if there is one long-standing non-payer who is ruining cashflow for all. If there is, this probably means that other funds will have to be invested in legal action to go and recover the debts.

What do ‘other debtors’ mean on the balance sheet?

If you see ‘other debtors’, this is worse, as in a pure service charge accounting world there should never be any ‘other debtors’. Other debtors, meaning any other debtors that are not service charge payers, means that either a contractor has been overpaid, and now owes money back, or perhaps money has been paid inadvertently to a wrong payee.

Why should buyers check creditors and balancing charges?

Creditors represent the bills the building still owes to contractors, insurers, or utility companies. A high creditors figure can be a red flag, showing that bills remain unpaid — sometimes not because of disputes but simply because there isn’t enough money in the bank. This points to potential cashflow problems and could mean services are at risk, or contractors may be unwilling to work with the block in future.

Closely linked to this is the issue of balancing charges. These year-end adjustments show whether past budgets were accurate. If expenses have been underestimated, leaseholders may face unexpected demands to cover overspends; if consistently overestimated, it might point to poor planning or overcharging. The real question for a buyer is whether balancing charges were actually collected and whether surpluses were properly credited. If not, you could end up being asked to contribute towards past shortfalls for periods before you even owned the property.

Together, the creditors figure and the balancing charge history reveal both how well the building’s finances are being managed now and whether you’re likely to face hidden liabilities in the future.

Why are cash reserves and budgeting history so important?

Cash is king – even for service charge accounts. Without enough money in the bank, a building may struggle to cover urgent repairs or even standard services. Service charge accounts should show two separate types of cash: funds for day-to-day expenditure and reserve funds for major cyclical works. A healthy reserve fund is vital for big-ticket items like roof repairs, window redecorations, or lift replacements. If reserves look too low compared to the building’s actual condition, it’s a warning sign of hefty bills ahead.

To put this into context, it also pays to examine the income and expenditure history. Previous accounts reveal whether the building’s budgets have been realistic or consistently mismanaged. Regular underestimates can lead to annual balancing charges, placing sudden extra costs on leaseholders. Conversely, ongoing surpluses with no clear explanation may hint at poor planning or overcharging.

Taken together, the cash and reserve fund position, alongside the history of budgeting accuracy, provide a clear picture of whether the block is being run responsibly or whether you might face hidden financial shocks in the future.