A Tenants Guide to Service Charges

Are you a leaseholder or a tenant who’s ever been baffled by the concept of service charges? You’re not alone!

Service charges are a vital aspect of property management, impacting both landlords and tenants. By understanding the intricacies of service charges, you’ll be better equipped to manage your property, avoid disputes, and ensure a positive landlord-tenant relationship.

In this guide, we delve into service charges and help you understand if you’re paying the right amount to your property management company.

What you need to know…

• Understanding service charges involves expert knowledge of legal requirements to ensure proper management and property maintenance.
• Calculating service charges requires precise calculations considering multiple factors, with cost allocation ensuring fair distribution for tenants.
• Transparency and communication are key to successful financial reporting, addressing tenant concerns promptly while adhering to best practices guidelines.

Understanding Service Charges

Service charges cover property maintenance, repairs, and services, and are accounted for through annual statements prepared by landlords or property managers for leaseholders.

They encompass building insurance, common area maintenance, and communal gardens and grounds for residential properties, while commercial service charges may include additional fees.

The legal term for service charge accounts is “summary of relevant costs”, and they should include a balance sheet for the service charge fund, a breakdown of the revenues and expenditures, and explanations of the numbers. The lease will clearly define the expenditures that can be recovered.

It also mentions how service charge accounts should be handled and indicates the length of time they must be accounted for.

It is important that service charge funds are effectively managed, as they are vital to the property being maintained, repaired and upgraded when necessary. Successful management of service charge accounts hinges on adherence to legal requirements like the Landlord and Tenant Act.

Proper management of residential service charge accounts can enhance the property’s common areas, boosting its value and appeal to prospective buyers and tenants, so they are an important part of property maintenance and are essential – but only if they are fair.

Service charges for residential properties

In accordance with the Landlord and Tenant Act, residential service charges must be held in trust and allocated to a designated service charge account.

Furthermore, the Royal Institution of Chartered Surveyors (RICS) code requires service charge monies to be ring-fenced by holding them in a designated bank account. This ensures that the service charge funds are protected and used solely for their intended purpose. If you find that this isn’t happening, this is where you need to act.

Service Charges and your Lease or Tenancy Agreement

Lease or tenancy agreements play a crucial role in outlining the expectations and distribution of service charges.

They specify:

• How service charges are established
• The payments the leaseholder is responsible for
• Any expenditures that may be recovered
• The period of time the accounts should cover

Tenants and leaseholders need to be informed about their rights and responsibilities concerning service charges. Here are some key points to remember:

• Tenants are entitled to full transparency of the accounts and may request to view them, including the breakdown of service fees.
• Leaseholders and tenants should consult their lease or tenancy agreements for specific details on service charges. For more information, please see your lease or tenancy agreement.
• Any concerns regarding service charges should be addressed by the landlord or property manager promptly.

Lease agreements ensure that this is all down in black and white, and that everyone understands their responsibilities.

How Service Charges are calculated

Service charges, encompassing various cost categories, including the reserve fund, are calculated annually in advance and apportioned among residents based on a calculation which is generally set out in your tenancy agreement or lease.

These costs typically cover three categories: day-to-day costs, cyclical expenses, and reserve funds (sinking funds).

To ensure fair charges for leaseholders, service charge contributions should be calculated in a manner that is transparent, consistent, and compliant. This involves considering factors such as:

• day-to-day costs
• cyclical costs
• repair and maintenance expenses
• improvements
• insurance
• landlord costs of management
• overheads

Proper cost allocation and budgeting are fundamental for service charge accounts and can help prevent disputes among residents.

Most property owners will use a block management company, like us, to manage the collection of rent, service charges and more. This is often the best way to ensure that the money is used effectively and protects the interests of both the tenant and the property owners.

How service costs are allocated

Cost allocation ensures that leaseholders are responsible for their charges, which may be based on variables such as the proportion of the property occupied by each unit or the services provided to each unit.

When allocating costs for service charge accounts, factors such as day-to-day costs, cyclical costs, repair and maintenance expenses, improvements, insurance, landlord costs of management, and overheads are taken into consideration.

Costs are usually distributed based on the percentage of living space occupied by each tenant, therefore, a smaller apartment would incur fewer charges than a penthouse apartment.

Compliance and Regulations

Successful management of service charge accounts mandates adherence to legal regulations like the Landlord and Tenant Act 1985 and the Commonhold and Leasehold Reform Act.

These laws ensure that service charge calculations and administration are conducted in a transparent and fair manner, protecting the interests of both landlords and tenants and ensuring that everyone gets a fair deal.

By complying with legal regulations, landlords and property managers can avoid expensive and time-consuming sanctions, fines, or lessee disagreements.

Understanding and adhering to applicable laws and best practices, as well as seeking guidance from professional organisations such as the Royal Institution of Chartered Surveyors (RICS) and the Financial Reporting Council (FRC), can help ensure the proper management of service charge accounts and can help tenants ensure that they are being charged fairly and in a transparent manner.

Resident Management Companies (RMCs)

Resident Management Companies (RMCs) are entities dedicated to overseeing the common areas and services of leasehold residential properties in the UK.

RMCs are financed through service charges remitted by residents and are integral to the effective management of communal areas for the benefit of all residents. As per the Landlord and Tenant Act, service charges and any reserve funds are held in accordance with a statutory trust.

Properties with RMCs are benefited by having a completely independent party taking care of the day to day maintenance and funds. This can often mean that both tenant and landlord are much more protected from any potential dispute.

What happens if there is a dispute?

The Leasehold Advisory Service (LEASE) is a public body that provides free, expert advice on the law pertaining to residential leasehold property in England and Wales, as well as producing publications on service charges.

By offering comprehensive information and advice to leaseholders, LEASE helps them understand their obligations, provides guidance on what can be charged, and can help leaseholders get vital information about service charge expenditure.

LEASE also offers resources and support for resolving matters concerning service charges, including providing guidance and advice, offering mediation services, and facilitating arbitration processes.

Access to these services and resources can help leaseholders navigate the dispute resolution process, ensuring a fair and equitable outcome for all parties involved rather than going it alone.

Transparency and Communication

Transparent communication is indispensable for the successful management of service charge accounts, ensuring tenant satisfaction and averting potential disputes.

By providing clear and detailed information on service charges, landlords and property managers can maintain a positive relationship with tenants and ensure their understanding of the charges they are paying.

Promptly addressing tenant concerns and providing clear details on service charge accounts can avert potential disputes and uphold a mutually beneficial landlord-tenant relationship.

Keeping tenants informed about their rights, responsibilities, and any changes in service charge accounts is indispensable for maintaining trust among all parties. This open communication is essential to ensure that there is no miscommunication and that everyone involved is happy with their responsibilities.

Ask for financial statements

If you’re unsure whether your service charge is fair or not, financial statements for service charge accounts must include comprehensive details of inflows and outflows, along with explanatory notes.

These statements should detail service charge accounts accounting for:

• Service charge income
• Contributions received
• Expenses related to communal area maintenance and management, such as cleaning, repairs, insurance, utilities, and management fees.

Depending on applicable laws and the terms of the leasehold agreement, leaseholders or tenants usually receive these statements on an annual or quarterly basis, so tenants should make sure they have sight of this if they are in any doubt about their service charges.

It is essential for property owners to adhere to the best practices and guidelines provided by professional organisations such as the Royal Institution of Chartered Surveyors (RICS) and the Financial Reporting Council (FRC) when preparing financial statements for service charge accounts.

Summary

In conclusion, understanding and properly managing service charges are crucial aspects of property management that impact both landlords and tenants.

By adhering to legal regulations, implementing fair and accurate charges to tenants, and maintaining transparency and communication, landlords and property managers can avoid disputes and foster a positive landlord-tenant relationship.

By staying informed and proactive, both landlords and tenants can navigate the complexities of service charges with confidence and ease.

If tenants experience any issues, open communication is key to finding a resolution, alongside accessing the support from LEASE, who can help guide tenants and inform them of their rights.