Introduction

One of the golden rules of leasehold law is simple: service charges are not for profit. They exist to cover the costs of running and maintaining the building – no more, no less. If more is spent than budgeted, then a balancing charge has to be collected, section 27 of the landlord and tenant act says so, and similarly if less is spent than budgeted a credit has to be applied. This way service charges are not for profit as the balancing charge equalises the fund. That said, reserve funds, where permitted by the lease can be retained and show on the balance sheet of the service charge accounts.

But what happens if, for years, balancing charges haven’t been applied at the end of the service charge year? Many resident management company (ManCo) directors of find themselves facing this question, often only when a problem comes up. In this blog, we’ll explain what ‘not for profit’ really means, why balancing charges matter, and what directors should do if accounts haven’t been reconciled properly in the past.

What does 'service charges are not for profit' mean?

It means the money collected through service charges must match the actual costs of running the block. If too much is collected, the surplus should either be credited back or moved into the reserve fund. If too little is collected, a balancing charge should be raised so the books even out. The point is that the landlord or ManCo shouldn’t make a profit from these payments.

The not for profit concept is what should make service charges fair, that is if money is spent wisely and passes the two legal tests:

a) Reasonably incurred (legalities of the cost item itself)

b) Reasonable in cost (value of the item/cost)

What are balancing charges and why do they matter?

A balancing charge is the adjustment made at the end of the financial year to reconcile the service charge budget with the actual costs. If the budget was lower than the real costs, leaseholders pay the difference. If it was higher, they may get a credit or see the surplus transferred to the reserve fund. Without balancing charges, accounts give a false picture.

But what happens if your ManCo hasn’t been raising them? The first step is to start doing it now—delaying only makes the problem worse. In theory, you may be able to go back several years, but limitation rules and Section 20B of the Landlord and Tenant Act can block recovery. Section 20B requires landlords or ManCos to notify leaseholders of actual expenditure within six months; if this isn’t done, the deficit isn’t recoverable. This can create real difficulties, especially where not all leaseholders are ManCo members—mistakes in billing can unfairly fall on the shoulders of those who are.

In short: balancing charges are essential to keep accounts accurate, maintain fairness between leaseholders, and protect directors from legal and financial risk.

Why does this matter if a leaseholder is taken to court?

Here’s where things get serious. If you take a leaseholder to court for unpaid charges, the court will look at your accounts. If those accounts are wrong because balancing charges weren’t applied, the judge might rule against you. Depending on the lease wording, you may not even get the chance to correct the mistake. That could mean losing your case, with costs to pay.

How should directors handle past years without balancing charges?

Directors should get professional advice from accountants or property managers on how far back to go. It may be possible to tidy up by using reserves to offset past surpluses or deficits. What’s important is to draw a line in the sand, start applying balancing charges properly, and keep leaseholders informed about what’s happening and why.

What's the best way to avoid future problems with balancing charges?

The answer is simple: make balancing charges part of the routine. Each year, once the accounts are ready, compare the budget to the actual spend and issue balancing charges or credits promptly. This keeps the accounts accurate, prevents nasty surprises, and helps directors avoid awkward disputes or legal challenges.

Service charges are not for profit, but they do have to balance. If your block hasn’t been applying balancing charges, the safest move is to start now. It may feel uncomfortable at first, especially if past deficits have built up, but transparency and accuracy are essential. Handled properly, this keeps the accounts trustworthy, leaseholders reassured, and directors protected from nasty surprises in court.

Let’s face it—managing the financial and legal side of a block isn’t just admin, it’s a minefield. From issuing valid service charge demands, to making sure Section 20B notices are served correctly, to producing year-end service charge accounts that comply with the law—there’s a lot that can go wrong. And when it does, it’s the directors who are left exposed.

That’s exactly the burden ServiceChargeSorted.co.uk is built to remove.