22/11/2023
Author : Mary-Anne Bowring
When self-managing small blocks of flats, one of the key responsibilities of the community is the collection and banking of service charges. Service charges have to be collected to fund ongoing maintenance, repairs, and management of the property. However, understanding the rules and regulations surrounding service charge collection can sometimes be complex. In this article, we will delve into the guidelines and best practices for collecting and banking service charges for those who self-manage their small blocks of flats.
The first step in the process is to establish what service charge you want to collect bearing in mind the principles of fair and reasonable. What you want to collect should always be transparent, distrust may set in for those paying the service charge. Typically, this means preparing a budget that outlines the estimated costs for maintaining and managing the property. The costs included in the service charge budget should be costs permitted and overtly named as types of service charge expenditure under the lease. The budget should be based on a thorough assessment of past expenses and anticipated future costs. Once the budget is finalised, the service charge is calculated by dividing the total expenses among the individual owners based on their respective share of the property.
Clear and open communication is vital in self-managed communities. Owners should be provided with detailed information regarding the service charge, including the breakdown of expenses and the payment schedule. It is essential to communicate the due dates, payment methods, and any penalties for late payments to ensure compliance and avoid misunderstandings. It is a legal requirement where there are five or more flats in a property for the landlord to produce service charge accounts under the Landlord and Tenant Act 1985 Section 21B. These services charge accounts must be sent or presented to every leaseholder or tenant within six months of the end of each accounting year. The service charge accounts should include details of the costs incurred, the amounts paid by the tenants, and any amounts still outstanding. In addition, the landlord must make the service charge accounts available for inspection, which means any relevant supporting documents, such as invoices and receipts.
Self-managed small blocks of flats have the flexibility to choose the most suitable collection method for service charges. Common service charge collection methods include direct debit, standing order, cheque, or Internet bank transfer. The biggest challenge is that unless you appoint a professional Managing Agent, it is unlikely a self-managed small block of flats may be a direct debit originator. Moreover, the problem with asking leaseholders to. set up standing orders is that service charge budgets only last for one year until a new budget is set, and many leaseholders don't remember to change their standing orders, or expect overt reminders to do so and will get upset if they get debt chase letters when it is their responsibility.
The requirement for landlords to provide annual statements of account to tenants is set out in Section 42 of the Landlord and Tenant Act 1985.
Service charges should be paid into a designated bank account for the community. The service charge bank account should be separate from any personal or individual monies to ensure transparency and proper management of funds. When establishing a bank account, it is advisable to have multiple signatories to enhance financial control and prevent misuse of funds. Regular bank reconciliations should be conducted to verify that the account balance aligns with the collected service charges.
Under UK law, specifically the Landlord and Tenant Act 1985, landlords must hold service charges in a designated trust bank account. This is a safeguarding requirement. The duty to hold service charges in a designated trust bank account is outlined in Section 42 of the Landlord and Tenant Act 1985. The purpose of holding service charges in a designated trust bank account is to prevent the commingling of funds and to ensure transparency and accountability in their use. By keeping the funds separate, it becomes easier to track and audit the income and expenditure associated with the service charges. Failure to comply with the duty to hold service charges in a designated trust bank account can have serious consequences. Tenants may have the right to take legal action against the landlord, and the landlord may also face penalties or sanctions.
Self-managed small blocks of flats must adhere to legal and regulatory requirements related to service charge collection in the same way larger blocks of flats should. In this sense, small is not beautiful as because of managing agents' minimum fees the costs of professional help fall unequally to small blocks of flats that self-manage. When self-managing the service charge, you need to understand politics, building common purpose, accounting, and specifically those regarding service charge accounts, building pathology, and health and safety law. Not understanding all this can lead to non-compliance, which can lead to legal complications and disputes. The Association of Residential Managing Agents (ARMA) recommended consulting with property management experts to ensure compliance with all relevant regulations.
6. Reserve Funds and Service Charges: How to set or calculate the Reserve Fund
While service charges cover the day-to-day expenses such as cleaning, gardening, the fire risk assessment, small repairs, and the costs of an accountant not preparing the service charge accounts, it is equally important to allocate a portion of the funds to a reserve fund (if the lease allows). A reserve fund is intended for major repairs, replacements, and unexpected expenses. As part of the overall service charge, the reserve fund ensures the long-term financial stability of the property. What level of reserve fund to collect should be determined based on a comprehensive assessment of future maintenance needs and by legal requirements. Ordinarily, this is achieved by a Capex (short of capital expenditure) plan prepared by a Chartered Surveyor or Chartered Engineer. Such Surveyor will consider the envelope of the building roof, walls, gutters, downpipes, windows, and the internal communal areas and any plant such as lifts, pumps, water boosters, etc. In addition, a review of the last fire risk assessment and general risk assessment should be made to look for upgrades and essential works to improve the fire safety of the building.
In summary, low-cost service charge block management solutions
ServiceChargesSorted.co.uk is a comprehensive online platform designed to assist leaseholders in navigating the complexities of leasehold property ownership. Whether you are a first-time leaseholder or an experienced homeowner, our platform offers a range of resources, guidance, and support to help you understand your rights, resolve disputes, and make informed decisions regarding your leasehold property.
Alternatives to a managing agent are rare. This is because the duty of a managing agent is vast and minimum fees usually apply, often circa 2,500 per annum or as much as 5,000 per annum in London. This is disproportionally unfair for small blocks of flats. However, there is a new way; the Ringley Group, one of the UK's top 5 managing agents has put together ServiceChargeSorted.co.uk which is all the routine tasks that a managing agent provides such as the share of the. Service charge budget to each owner account, sending out demands, polite reminders, final notices arranging debt chase action, banking the money, paying the bills, and preparing the service charge accounts. So yes, there is a low-cost alternative to a managing agent for small blocks of flats it is ServiceChargeSorted.co.uk where in law you take the role of the property manager to set the budget (using our online tools), you decide the strategy and we carry out all the financial and legal administration.
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