Explaining Service Charges – Part One

Service charges are funds collected in accordance with the lease agreement that are based on a budget created by the property owners or managing agent. They are used to cover all building-related expenses such as repairs, maintenance, common area utilities, cleaning services, landscaping, management fees, accounting fees, and more.

As described in previous posts about lease agreements, service charges are apportioned based on the square footage of each unit. The percentages for all units in the building should total 100% (although this is not always the case, which can cause issues and should be verified promptly). For example, if the annual budget for a building is £5,000 and a unit’s apportionment is 14.87%, the annual service charge for that unit would be £743.50. It is important to note that ground rent and service charges are separate line items.

The lease will specify when service charges are due, which is typically annually, semi-annually, or quarterly. Residents should confirm their due dates by reviewing the lease agreement. If demands are issued on a different schedule than stated in the lease, owners should notify the property manager.

Per the Landlord and Tenant Act 1985, service charges are only obligated to be paid if demands include a summary of tenant rights and obligations (Section 21b) and state the landlord’s contact information (Sections 47-48 of the Landlord and Tenant Act 1987), unless payment is remitted to a named managing agent. Withholding payment for other reasons does not benefit any party and can prevent necessary building maintenance when funds are unavailable. Therefore, open communication and adherence to legal procedures is critical.

Some leases may stipulate a nominal quarterly service charge, with the remainder collected at year-end after reviewing annual expenditures. This collects any shortfall to fully cover annual costs.

Proper budgeting for service charges is an important part of management, which will be covered in an upcoming post.

Bethany Nicol February 2024