How are Service Charges calculated: What you need to know
In the UK, leasehold properties often come with a financial obligation known as the Service Charge. This Strangford Management guide aims to demystify what service charge is, how it’s calculated, and your rights as a leaseholder.
1. The Basics of Service Charge
1.1 What is Service Charge?
A Service Charge is a fee collected by landlords or property managers for maintaining the shared or communal parts of a property. This charge is in addition to the rent or ground rent and primarily applies to leasehold properties, including flats and some houses.
The service charge covers a wide range of services such as regular maintenance, repairs, insurance, and management costs, ensuring the building or property is in good condition and well managed.
1.2 Why Service Charge is collected?
The main reason for collecting service charges is to ensure the smooth running of shared facilities and communal areas within a property. These charges provide the necessary funds for regular maintenance and unexpected repairs, ensuring that the property remains habitable and retains its value.
1.3 Who pays the Service Charge?
The onus of paying the service charge predominantly rests on the leaseholders. The lease agreement usually outlines the obligation of service charge payments.
2. Calculating Service Charges
2.1 How are Service Charges calculated?
The calculation of service charges typically involves splitting the overall maintenance costs among the leaseholders in a property. It is based on an estimate of the anticipated costs for the coming year, factoring in daily running costs, cyclical expenses, and contributions to a reserve or sinking fund (if allowed under your lease terms).
The proportion a leaseholder is required to pay is outlined in the lease agreement. It could be a simple division, such as each resident paying an equal share of total charges, or it might depend on other factors like the size of the flat.
2.2 The concept of Living Space Factor
One of the key factors influencing service charges is the size of a property. Each property is assigned a living space factor, which is compared to the total living space factors of the block. This comparison helps calculate your share of the service charge. Put simply, the larger your property, the higher the service charge you can expect to pay.
3. Typical Range of Service Charges
The average service charge for a flat in the UK varies depending on several factors including location, amenities, development size, all the way through to behavioral issues by the residents such as leaks, items being dumped communally, legal advice required and so on, therefore charges can range from £1,000 for smaller buildings up to and over £5,000 per year for more complicated developments. It is therefore difficult to make a fair comparison between the cost for any 2 buildings as the smallest factors could have an impact on the overall costs.
4. Advanced Collection of Service Charges
In the UK, service charges are often collected in advance. Although this practice might make the charge seem exorbitant, it helps prevent unexpectedly large bills in case of major repairs. Advance collection ensures that the landlord or manager has the necessary funds to provide services and carry out maintenance throughout the year. It is worthwhile checking the terms of your lease to check the frequency of collection and whether it is collected in advance so you can be financially prepared.
5. Leaseholders’ Rights and Obligations
As a leaseholder, you have certain rights concerning service charges. For instance, any service charge demand must include a summary of rights and obligations. In cases where this is absent, leaseholders have the right to withhold payment until a proper service charge demand is supplied.
Leaseholders also have the right to request service charge accounts at the end of each accounting year. Upon receipt of this summary, leaseholders can carry out an inspection of supporting documents.
On the flip side, leaseholders are obligated to abide by the service charge agreement stated in the lease. This includes paying service charges regularly and contributing to any sinking funds.
6. Disputing Service Charges
If you believe that your service charge has been overestimated, you have the right to dispute it. You can apply to the First-tier Tribunal, where a decision can be made on whether the proposed charge is reasonable. The tribunal will base their decision on the evidence presented.
7. Paying for Improvements and Extra Services
Your lease should clarify whether the costs of improvements can be included in the service charge. If the lease does not specify payment towards improvements, you may not have to contribute towards these costs. However, distinguishing between repairs and improvements can be challenging, and you may need to seek advice if you are unsure.
Similarly, the lease agreement should state whether you are required to pay for additional services such as health and safety inspections for communal parts.
8. Understanding Sinking Funds
A Sinking Fund, also known as a reserve fund, is a pot of money set aside for unexpected maintenance issues or larger, costlier repairs. Leaseholders are usually required to make regular contributions to any relevant sinking fund as per the terms of their lease.
9. Challenging Service Charges
Before challenging service charges, it’s important to understand that these are estimates of the amount required to manage the property for the coming year. The actual expenditure won’t be known until after the accounting year ends. If the actual expenditure is less than the predicted amount, any surplus will either be credited against future service charges or returned to the leaseholders, depending on the lease’s wording.
10. Consequences of Non-Payment
Failure to pay the service charge can lead to a breach of the lease agreement and may result in enforcement actions such as contacting your mortgage lender, civil action, or even forfeiture. Therefore, it is advisable to keep up with service charge payments and communicate with the landlord or manager if you are having difficulty making payments.
In conclusion, understanding your service charge is essential for managing your financial obligations as a leaseholder. Always refer to your lease agreement for specifics and seek professional advice if needed.
At Strangford Management we are experts in the creation of a service charge budget and the collection of charges. Get in contact with one of our experts today to discuss how your service charges can be managed more professionally.