Block management service charges refer to the payments made by leaseholders to landlords for the purpose of covering the cost of maintaining the shared areas of a residential building. With these charges, landlords ensure that the property remains well-maintained and working for all residents. Notably, with regard to block management, service charges play an even greater part, as they cover the collective upkeep and administration of an entire building or block. This blog will explain the fundamental aspects of block management service charges, including their calculation, structure, and collection.
What Is Block Management
Block management is the management of the shared areas and services in multi-unit residential buildings like blocks of flats on behalf of Residents’ Flat Management Companies (RMCs) or landlords. It involves handling tasks such as maintenance, repairs, budgeting, insurance, and service charges. Block management is when a landlord appoints a managing company to handle the financial and operational duties of a block of flats, where the leaseholders own individual properties.
Moreover, block management is important for both landlords and residents since it ensures the building is well-maintained for the residents to have a safe and pleasant living environment.
What Are Block Management Service Charges?
Block management service charges are the payments that leaseholders and tenants pay to cover the costs of the services provided to them by the landlord.
Alternatively, the RMC or freeholder provides block management services in line with the lease in exchange for service charges paid by leaseholders. Generally, RMCs and landlords appoint a professional managing agent to act on their behalf to provide the services and collect the service charges.
Notably, block management service charges are distinct from rent or ground rent, and every leaseholder in the block pays these charges to the landlord or managing company, typically on an annual basis, so that the ongoing and future maintenance of the block can be funded.
What Are The Key Services In Residential Block Management?
The following are the main services provided in block management for which service charges are collected:
- Cleaning
- Maintenance and Repairs
- Landscaping
- Health and Safety Compliance
- Building Insurance
What Are Reserve Funds (Sinking Funds) In Block Management?
Most leases have a section that specifies that landlords can collect money in advance to fund a reserve or sinking fund. Reserve or sinking funds are created or set aside so that the management has the funds to pay for irregular as well as expensive work when the time comes, such as repairs to a building’s structure, roof replacement, lift refurbishment, and so on. Additionally, reserve funds usually earn interest so that they can meet increased budgeting costs.
When purchasing a property in the UK, it is important to be aware of the basic ownership structures, such as leasehold and freehold. Learn more about them.
Understanding Variable vs Fixed Service Charges
There are typically two types of service charges in block management: fixed and variable. To elaborate, the amount to be paid under them can either be fixed or variable. They can remain unchanged or vary from year to year based on the block’s management and needs.
Variable Service Charges
In variable service charges, the amount a leaseholder pays changes or fluctuates depending on the costs incurred by a landlord or management company over a given year. Currently, service charges are calculated based on the actual or estimated cost of block management services, resulting in variations each year.
A leaseholder might have to pay more or fewer charges based on all the work done on their block. For instance, in the event that the costs of building maintenance, cleaning, or repairs rise or decline, the variable service charges can also rise or fall accordingly. Moreover, the landlord can adjust the service charge amount according to the expenses incurred by the flat for the services. However, they must serve the notice of the variation to the leaseholder.
Lastly, to calculate the variable charges, the usage or share of the block that the leaseholder occupies is considered.
Fixed Service Charges
Sometimes, the landlord chooses to set a fixed amount for service charges at the start of the lease agreement. As a result, fixed charges are predetermined, and the leaseholder remains aware of what exactly they will be paying every year, irrespective of the actual costs spent on the flat. Lastly, fixed charges are generally more predictable and include services like management fees or building insurance.
The Role Of A Block Management Company In Managing Service Charges For Blocks
A block management company is crucial for properly managing the service charges. A professional block managing agent ensures:
- Transparent budgeting and reporting
- Competitive selection for a contractor.
- Compliance with health and safety requirements
- Proper allocation of costs among leaseholders.
- Fair handling of leaseholder issues.
Learn more about leasehold service charges for commercial and residential blocks:
How Are Service Charges Calculated In Block Management?
Leaseholders need to know the calculation of service charges for communal services in a block setting.
Typically, landlords calculate service charges by estimating the costs for the following year. Next, previous expenses are reviewed, upcoming needs are assessed, and property managers eventually develop a budget for expected costs. This budget will include a breakdown of expected costs, which will then be split among leaseholders.
Thereafter, actual costs are compared to the estimates. It is the responsibility of the block management company to provide the leaseholders with year-end accounts detailing actual expenses, which will enable them to know if the actual costs were greater or lower than the anticipated expenses.
It is noteworthy that the lease outlines how service charges are divided between leaseholders, how each leaseholder’s share is calculated, and what services are covered. For example, service charges in a block are apportioned to the leaseholders based on:
- The size of their flat
- The number of rooms in their flat
- The rateable value of their property
- How do different leaseholders benefit from different services
- The number of leaseholders in the building ensures an equal splitting of charges.
In addition, the lease also specifies the payment frequency, which can be yearly, twice-yearly, quarterly, or even monthly. However, they are calculated on an annual basis.
How Do Landlords Collect Block Management Service Charges From The Leaseholders?
Typically, service charges are requested through Service Charge Billings, which means that any over- or under-collection is reimbursed once the service charge accounts are prepared.
To elaborate, the landlord will state the leaseholder at the end of the year to verify the actual costs, and the service charge will be amended accordingly. Thus, if the estimate did not meet all the actual costs, or it was greater than actual costs, the landlord will ask the leaseholder to contribute additional funds. In contrast, if the actual costs spent were less than the estimated amount, the overpayment or refund will be credited to the leaseholders’ account for the next year.
Additionally, service charge accounting can better be accomplished by an in-house specialist, or better yet, the vetted outsourced service charge accountants can make the process of service charge accounting a seamless one with their years of experience in the property management industry.
Is There Any Limit To Service Charges For Block Management?
There is no limit to the amount of the service charges in block management. As previously stated, they can fluctuate depending on the costs of the services rendered. The lease typically includes avenues for the landlord to recover any payments made by them for the repair and upkeep of the building. However, the landlords only have the right to recover reasonable costs. Besides, under normal circumstances, the landlord is not allowed to profit from managing the block.
Understanding The Expected Requirements Of Reasonableness For The Landlords
The landlord is expected to act reasonably regarding the expenses of the building, meaning they must not ask the leaseholders to overpay the service charges. Similarly, they are not required to minimise costs. Notably, in line with the law, service charges must be in the realm of ‘reasonable’ and the works or services covered by those expenses must be of a reasonable standard.
Now, a situation arises where a landlord asks for an overpayment or an unreasonable amount. In that case, leaseholders have the right to challenge service charges they believe warrant scrutiny at a Tribunal.
Understanding Block Management Service Charges in Light of the Law
The basic rules for service charges are outlined in the Landlord and Tenant Act 1985. This act expounds on service charges and the requirements for reasonableness.
It is pertinent to mention here that in Section 18(1) of the Act, service charges are defined as:
“An amount payable by a tenant of a flat as part of or in addition to the rent:
(a)which is payable, directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management, and
(b)the whole or part of which varies or may vary according to the relevant costs. “
Similar to Section 18, the 18-month rule of Section 20b, Section 20 is also instrumental in understanding the dynamics of service charges between landlords and leaseholders. To learn more about it, read the following guide:
Understanding The Role Of The First-Tier Tribunal In Block Management Service Charges
The reasonableness of the service charges is often determined based on factors such as the nature of the services provided and the costs involved in block management and maintenance.
Essentially, both landlords and leaseholders hold the right to find whether a charge or proposed charge is reasonable by asking the Tribunal. The Tribunal will look at all the evidence submitted and then decide whether a charge is fair or not. The Tribunal can assess whether the charges are fair even if the payment status is unresolved.
Do The Landlords Need To Consult Leaseholders Over Service Charges?
The leaseholder holds the right to be consulted about charges for running or maintaining the building if the landlord asks them to pay more than:
- £250 for planned work.
- £100 per year for work and services lasting longer than 12 months.
More importantly, the landlords are under a legal duty to follow certain steps when consulting the leaseholders.
For added information, Section 20 refers to a specific section of the Landlord and Tenant Act 1985. Principally, the section outlines the consultation requirements that are mandatory for the landlords to follow before any works costing over £250 are undertaken, which is particularly relevant for communal areas in block management.
To learn more about Section 20, refer to the following guide:
Conclusion:
In conclusion, block management service charges are primarily used for maintaining the quality, safety, and smooth running of shared buildings. Mostly, it is the landlord who makes the decisions about spending the leaseholder’s money on the services rendered when they are undertaking block management. However, when the leaseholders take over the building’s management through the Right-to-Manage company, it is then the leaseholders who collectively decide how the service charges are used, i.e., now the leaseholders themselves control the spending.
Clear House Accountants are certified Service Charge Accountants in London, having worked with a large number of Landlords, RTMs, RMCs, Developers, and Property Management Companies. Skilled and vetted, they have acquired the necessary skills to address all your service charge accounting needs.
By contacting them, landlords and leaseholders can alleviate the stress of service charges.
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