Block Management Service Charges Explained
One of the things that leaseholders and landlords rarely come to terms with are service charges. The following article explained the main provisions that have been set by the law.
What are service charges?
Landlords regularly provide plenty of services to buildings they own. Simply put, service charges make sure that landlords can recoup the cost they incur while performing these services. The tenant’s lease or tenancy agreement are the places to look if you are interested in the breakdown of service charges or to find out how these are calculated.
General maintenance, repairs, insurance of the building, lifts, porters, central heating, lighting as well as cleaning of common areas of the building are usually included in the service charges.
If you’re worried about your landlord charging you for services, they shouldn’t be charging you for, check the lease agreement. Leaseholders usually pay for the services while the landlord makes sure the services are rendered. There are also cases where management companies take on the role of providing the services that are covered by service charges.
Some landlords charge people for information when a property is sold. These charges aren’t clubbed with service charges and are put under administration charges.
Fixed and variable charges
In the past, all service charges were clubbed together under rental payments. However, as time went by, inflation and other costs crept in which resulted in landlords paying out of their own pockets to cover service charges. This resulted in most landlords today splitting rental fees and service charges to make sure they didn’t make a loss. There are rare cases where old landlords still club together block service charges and rental fees to make fixed costs.
Presently, service charges are calculated on the actual or estimated cost of services which results in them varying each year.
Service charge structure
Landlords have a responsibility to perform certain services. They are allowed to charge a service charge for doing so. Usually, the format of the service charge can be found in the lease. Details such as the dates of the service charge as well as how often payments should be made will be included in the lease. Usually, service charge periods are for a year. However, the contract might specify that payments ought to be made every six months or every quarter of the year. In rare cases, payment is asked for in arrears.
Service charge limits
There is no limit to service charges. They can go up or down. Landlords have the right to recover reasonable costs. In a similar vein, there are rights in place for leaseholders to challenge service charges which they feel warrant some questioning at a Tribunal.
Reserve or sinking funds
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 so that the management has the funds to pay for irregular as well as expensive work such as repairs to a building’s structure, lift replacement, and so on. Reserve funds usually earn interest so that they can meet increased budgeting costs.
Recovering service charges
The landlord has the power to charge a service charge while leaseholders must pay the said service charge as mentioned in the lease. Leaseholders do not have any obligation to pay charges not covered in the lease as the lease acts as a contract between the landlord and the leaseholder. Service charges are requested by way of Service Charge Billings, any over or under collection is reimbursed once service charge accounts are prepared, service charge accounting is done by specialist in-house or external service charge accountants who have years of experience working in the property management industry.
Expected requirements for reasonableness
The lease will include avenues for the landlord to recover any payments made by him/her for the repair as well as upkeep of the building. Under normal circumstances, the landlord is not given the opportunity to profit from managing the building.
The landlord is expected to act reasonably regarding the expenses of the building. In addition to this, landlords aren’t required to minimize costs. The law does say that service charges must be in the realm of ‘reasonable’ and also the works or services covered by the expenses related to them must be of a reasonable standard.
There is no definition of what is reasonable when it comes to service charges when looking at the law. However, landlords and leaseholders both 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.
Applications can be made regardless of the status of payments. If the charges have been agreed to by the leaseholder or determined by the Tribunal or by a court, or by post-dispute arrangements, an application cannot be made to the Tribunal.
What the law states
The basic rules for service charges are defined and outlined by the Landlord and Tenant Act 1985. This act talks about what a service charge is as well as the requirements for reasonableness.
Service charges are defined in Section 18(1) of the Act as an amount that is payable by a tenant of a home as part of or in tandem with the rent. There are additional lines of text in the act that define service charges as those charges which are payable, indirectly or directly, for services, repairs, maintenance, improvements, or insurance of the landlord’s costs of management.
Demands for service charges
Any claims made about service charges must be in writing as well as have the landlord’s address and name. If these details aren’t provided, the service charge need not be paid until the information is supplied. The name, as well as the address of a managing agent, will not be enough unless the managing agent is also the landlord. Landlords who have addresses outside England or Wales are required to have an address in England or Wales that can be served by the leaseholder.
The rule ceases to be valid if the service charge is payable to a management company which is also mentioned in the lease as a party. In this case, demands must still be made in writing. However, these demands need not have the name and address of the landlord.
Service charge letters, as well as demand and reminder letters, have to come with a formal summary of rights and obligations. The Parliament prescribes the content of these rights and obligations.
English law states that all leaseholders must be consulted before any work above a specified value is carried out. Leaseholders must also be consulted when a long-term agreement for providing services has been entered.
The gist of service charges is that the landlord takes decisions when it comes to spending leaseholder’s money. This principle is in effect in all situations where flats are managed centrally as well as applies to cases where the leaseholders are in charge of the management of the building. English legislation does give protection to service charge payers as well as puts obligations onto the provider.
To sum up, the main takeaways are as follows –
- All charges incurred must be of a reasonable nature as well as can be challenged at the Tribunal.
- People who pay service charges have to be formally consulted before any qualifying works are begun by the landlord which results in the leaseholder paying more than £250.
While there are many more takeaways from this article, the gist of it is that service charges are meant to be used for the development as well as upkeep of a building. There are also laws in place which are intended to protect both the leaseholder as well as the landlord.
Clear House Accountants are specialist Service Charge Accountants in London, having worked with a large number of Landlords, RTM’s, RMC’s, Developers and Property Management Companies they have acquired the necessary skills to address all your service charge accounting needs.
Anam has a degree in accounting from the Prestigious St John’s University, and works as a senior director in Clear House.
Before working in Clear House, Anam worked in various commercial roles, the last one being the VP Operations for a prestigious business organisation,working on improving the organisation’s operational efficiency, growth and high level client management.
Anam manages clients ranging from software companies to large property developers and managers. Notably, she recently worked with a large property development company building large scale developments in London and the surrounding area.