What is the service charge? Understanding the service charge The lease of a property that a leaseholder purchases is a contract that entitles them to own that property for a set period of time. That period of time is stated in the lease, although the leaseholder is entitled to extend their lease, for a fee, for a further fixed period of time. If they do not extend their lease, it will eventually revert back to the freeholder who owns the building in which the flat is situated. By entering into this contract, a leaseholder is agreeing to abide by the terms and covenants of the lease. What is the service charge? The service charge represents the leaseholder’s contribution towards the cost of maintaining the shared parts of the building such as the fabric of the building (windows, roofs etc) gardens, pathways, car parks, stairwells and hallways. Responsibility for the maintenance of a building is normally with the landlord, as the owner of the structure and common parts of the building and the land it stands on. An owner of a flat can generally assume that some kind of service charge will apply to them. Costs such as buildings insurance, provision of central heating, lifts, staff, lighting and cleaning of common areas are costs borne by the landlord and recoverable through the service charge that is billed to the leaseholders. The lease will contain a provision regarding the payment of this charge and when it should be paid. This charge is usually paid to a managing agent who acts on behalf of the management company (the body set up to manage the building) or the freeholder. The lease will also describe the proportion of the charge the leaseholder is liable for. Sometimes a lease may describe the required proportion of fees as 'just’ or 'fair’. Sometimes the required proportion is a percentage of the whole charge or is based on the size of the leaseholder’s property in relation to the whole of the building. There may be a difference in what each tenant pays depending on how they benefit or use different services. Why is a service charge payable? The service charge appears in most leases because it performs a number of vital functions. It allows for the proper management of the communal parts of the leaseholder’s property which in turn makes the leaseholder’s building a pleasant place to live in, a place that abides by health and safety legislation to keep them and their visitors safe and a place that maintains good relationships between neighbours. These considerations will contribute positively to the market value of the leaseholder’s individual property. When are service charge payments due? The lease will usually give the dates of the service charge period and how often the payments are due. The service charge period is often a year, but payments may be due every six months or on a set day every three months. In some cases, service charges may be levied once the costs have been run up. A lease will state whether leaseholders must make advance payments for works or if the landlord must recover their costs after they have paid for works. If an advance payment is due, then the amount charged will be an estimate of the costs. Then, when the works are finished, the landlord will know whether to refund the difference if works did not cost as much as had been collected, or if there is a shortfall, to issue a demand for further monies. A refunded sum could be used to reduce next year’s service charge or go towards a reserve fund. Most modern leases allow for the landlord to collect estimated service charges in advance, repaying any surplus or collecting any shortfall at the end of the financial year. How is the service charge calculated? Block Management UK Ltd produces a forecasted budget that estimates the service charge for a leaseholder’s property. We then monitor ongoing expenditure and report on the impact on the forecast should costs change. We advise on expenditure control, budget control and ad hoc charges. We keep the client up to date and informed about the budget particularly when it comes to funding future expenditure. (12 June 2019 )

What is the service charge?

Understanding the service charge

The lease of a property that a leaseholder purchases is a contract that entitles them to own that property for a set period of time. That period of time is stated in the lease, although the leaseholder is entitled to extend their lease, for a fee, for a further fixed period of time. If they do not extend their lease, it will eventually revert back to the freeholder who owns the building in which the flat is situated.

By entering into this contract, a leaseholder is agreeing to abide by the terms and covenants of the lease.

What is the service charge?

The service charge represents the leaseholder’s contribution towards the cost of maintaining the shared parts of the building such as the fabric of the building (windows, roofs etc) gardens, pathways, car parks, stairwells and hallways. Responsibility for the maintenance of a building is normally with the landlord, as the owner of the structure and common parts of the building and the land it stands on. An owner of a flat can generally assume that some kind of service charge will apply to them.

Costs such as buildings insurance, provision of central heating, lifts, staff, lighting and cleaning of common areas are costs borne by the landlord and recoverable through the service charge that is billed to the leaseholders.

The lease will contain a provision regarding the payment of this charge and when it should be paid. This charge is usually paid to a managing agent who acts on behalf of the management company (the body set up to manage the building) or the freeholder.

The lease will also describe the proportion of the charge the leaseholder is liable for. Sometimes a lease may describe the required proportion of fees as 'just’ or 'fair’. Sometimes the required proportion is a percentage of the whole charge or is based on the size of the leaseholder’s property in relation to the whole of the building. There may be a difference in what each tenant pays depending on how they benefit or use different services.

Why is a service charge payable?

The service charge appears in most leases because it performs a number of vital functions. It allows for the proper management of the communal parts of the leaseholder’s property which in turn makes the leaseholder’s building a pleasant place to live in, a place that abides by health and safety legislation to keep them and their visitors safe and a place that maintains good relationships between neighbours. These considerations will contribute positively to the market value of the leaseholder’s individual property.

When are service charge payments due?

The lease will usually give the dates of the service charge period and how often the payments are due. The service charge period is often a year, but payments may be due every six months or on a set day every three months. In some cases, service charges may be levied once the costs have been run up.

A lease will state whether leaseholders must make advance payments for works or if the landlord must recover their costs after they have paid for works.

If an advance payment is due, then the amount charged will be an estimate of the costs. Then, when the works are finished, the landlord will know whether to refund the difference if works did not cost as much as had been collected, or if there is a shortfall, to issue a demand for further monies. A refunded sum could be used to reduce next year’s service charge or go towards a reserve fund.

Most modern leases allow for the landlord to collect estimated service charges in advance, repaying any surplus or collecting any shortfall at the end of the financial year.

How is the service charge calculated?

Block Management UK Ltd produces a forecasted budget that estimates the service charge for a leaseholder’s property. We then monitor ongoing expenditure and report on the impact on the forecast should costs change. We advise on expenditure control, budget control and ad hoc charges.
We keep the client up to date and informed about the budget particularly when it comes to funding future expenditure.

(12 June 2019 )

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