Everything You Need to Know About Your Service Charges

Those property costs just keep coming. One of the largest ones you will face is the Service Charge, which is mainly payable by anyone owning a leasehold property. Have you ever wondered what exactly you're paying for?

It's all about the costs that come from maintaining the communal areas, and if you're unfortunate, the lifts - are they ever working? 

In this insight, we cover all you need to know about the property service charge,

Key Takeaways

• A service charge is a fee paid by owners or tenants of leasehold properties to cover the costs of maintaining communal areas and additional services.
• The service charge covers expenses such as maintenance and repairs, administrative fees, and costs associated with additional facilities.
• Leaseholders have rights to receive information, challenge unreasonable charges, request insurance policy summaries, and apply to a tribunal for dispute resolution.
• Freehold property owners may or may not have to pay a service charge, depending on the circumstances. If there is a service charge, it is important to pay it to avoid legal consequences.

What is a Service Charge?

A Service charge is a fee that property owners or tenants pay to take care of common areas in the place where they live. It's usually connected to leasehold properties in a building with shared spaces, like an apartment complex or a housing development that provides extra services such as a gym or a front desk service.

What Does a Service Charge Cover?

The property Service Charge is collected to cover three main costs:

Maintenance and Repairs

These charges cover the cost of keeping shared areas clean and fixing any damages. For example, if there are hallways, lobbies, elevators, or gardens that everyone in the building uses, the service charge helps pay for their maintenance.

Administrative Fees

These fees are for the costs of managing the property. This can include things like building insurance, which protects the property against risks. The service charge also covers the expenses of managing and maintaining the shared areas and facilities.

Additional Facilities

If the property has extra amenities like a gym, pool, or concierge services, the service charge will include the cost of using these facilities. A property management company usually collects these charges and takes care of organising and managing these services.

The service charge can specifically include the costs of:

• Taking care of the outside areas like cutting the grass, maintaining gardens, and keeping them clean.
• Making sure the shared indoor areas are well-lit, heated, and cleaned.
• Cleaning the windows, both outside and inside the shared areas.
• Keeping the lifts in good working condition.
• Maintaining the fire equipment for safety.
• Taking care of other electrical and mechanical equipment that the property has, like water pumps or security gates.
• Doing general repairs and maintenance work.
• Paying the salaries of staff who work on-site to help with the development.
• Having insurance for the building, which is required by the lease and covers things like fire, floods, and other risks.
• Paying for bank charges and fees for financial audits.

Who is Responsible for Paying the Service Charge?

When it comes to paying the service charge, it can be the tenant or the landlord who is responsible. Sometimes, landlords include the service charge in the rent, meaning they pay it themselves. Other times, landlords and tenants agree to share the costs. The agreement on who pays and how much should be clearly stated in the rental agreement.

It's essential to know that landlords cannot charge tenants for services that are not mentioned in the rental agreement. So, if the service charge is specified in the agreement, the tenant or owner must legally pay it.

How Are Service Charges Calculated?

The service charge is calculated by the property management company based on how much they expect to spend for the year. They look at the costs from the previous year and consider things like inflation and taxes. Then, they divide that estimated cost equally amongst all the people who live in the property and are responsible for paying the service charge. If the actual costs end up being more than the estimate, they can add the extra charges to the next bill.

You can choose to pay the service charge in advance, either every three months, every six months, or once a year. The specific payment terms should be clearly stated in your rental agreement or the contract with the property management company.

Depending on where you live and the property type, a service charge can typically range between £2k to £4k annually.

Is The Service Charge the same as Ground Rent?

No, ground rent is an additional payment made by the person who is leasing the property to the person who owns it. This payment might be included in the lease agreement. The landlord doesn't have to provide any specific service in return for this payment.

If the lease was granted before a certain date, the person leasing the property doesn't have to pay ground rent unless the landlord sends them a written demand for it. If the leaseholder doesn't pay the ground rent after receiving the demand, the landlord can take legal action. The landlord can ask for all the unpaid ground rent from the past six years at once.

For leases granted on or after a certain date, the person leasing the property usually doesn't have to pay more than a very small amount called a 'peppercorn' ground rent. The value of this payment is basically nothing, so the leaseholder doesn't have to pay anything, but it's still a legally binding agreement with the landlord.

Are Service charges Included in rent payments?

Sometimes service charges are included in the rent, so you pay one amount that covers everything. Other times, you have to pay the service charges separately in addition to the rent. It depends on what the landlord and tenant agree upon. The important thing is to check your agreement to see if the service charges are already included in your rent or if you need to pay them separately.

Is Buildings Insurance Included in my Service Charge?

In most cases, the cost of insuring the building (not the things inside it) is included in the service charge, and it's the landlord's responsibility to handle it. As a leaseholder, you have the right to ask for a summary of the insurance policy if you want to know the details. If you believe that the insurance cost is too high or unreasonable, you can challenge it through a tribunal. This means you can raise your concerns with a legal body that can assess whether the cost is fair or not.

What Is A Service Charge Reserve or Sinking Fund?

Service charges can include money that goes into a reserve or sinking fund. This fund is like a savings account for unexpected big repairs, such as fixing or replacing the roof. Leaseholders usually can't get the money back from this fund, but it's there to help pay for these unexpected costs. It's like having some money set aside for emergencies or big expenses that might come up in the future.

What Rights Does a Leaseholder Have About Service Charges?

Leaseholders do have Rights when it comes to their service charge. These Rights have been put in place to protect the property management from overcharging and taking advantage of leaseholders. The rights are related to proper consultation about charges for running or maintaining the building, particularly if they exceed a certain threshold. These Rights, known as a 'Section 20' consultation, ensure that landlords must follow certain steps when consulting leaseholders about maintenance costs:

Right to Receive Information

You have the right to receive a summary of the service charge costs and how they are calculated. This includes details of any expenses incurred, such as maintenance and repairs.

Right to Challenge

 If you believe the service charge is unreasonable or that the costs are not justified, you have the right to challenge them. You can request more information or seek clarification on specific items.

Right to Request a Summary of Insurance

You can ask for a summary of the insurance policy for the building covered by the service charge. This helps you understand what is covered and the associated costs.

Right to Apply to a Tribunal

If you are unable to resolve disputes regarding service charges with the landlord or property management company, you have the right to apply to a First-tier Tribunal (Property Chamber) for an independent assessment.

Right to Management Information

You are entitled to access certain management information related to the service charges, such as the annual budget, accounts, and receipts.

Do You Have To Pay Service Charge If You Own a Freehold?

If you own a freehold house, you may or may not have to pay a service charge, depending on the specific circumstances.

Most freehold houses in England and Wales are taken care of directly by the local council. They handle things like roads, pavements, street lighting, and signs in the neighbourhood. In these cases, you usually don't have to pay a separate service charge.

However, there are some freehold houses that are built on private land or part of a private development. This could be because there's a mix of houses and flats on shared grounds, the property is behind gates or has a private access roadway, or the developer and council agreed that the private management of green spaces and roads is needed. This is becoming increasingly common for New Build Developments. In these scenarios, you may be required to pay a service charge for the upkeep of the land.

Do You Legally Have to Pay a Service Charge?

You can't get out of paying your service charge, but you may be able to negotiate a service charge. If you don't pay your charge, there can be serious consequences. The person who owns the property (the freeholder) can take you to court to get the money you owe. If you can't show that the freeholder or the management company did something wrong, you might have to pay extra fines or even lose your property. It's important to pay your service charge to avoid these problems.

Summary

To wrap it up, service charges are important for managing properties with shared spaces or extra services. Knowing what they are, what they include, and how they're calculated and paid help you avoid problems and keep things running smoothly. 

Read More: What Is A Reasonable Service Charge?