Service Charges Explained – Part Two

As explained in Part One, service charges are collected according to the lease terms. However, demands sent to leaseholders should match the payment dates stated in the lease, such as quarterly, semi-annually or annually. Using standing orders for monthly payments is only allowed if the freehold company directors agree. Non-compliance can lead to payment arrears and administrative issues, especially as property ownership changes over time.

The service charge funds must be held in trust by the managing agent in a designated bank account, as required by Sections 42 and 42a of the Landlord and Tenant Act 1987. Any interest earned must be credited to the fund, not retained by the agent. Where permitted by the lease, a reserve fund should also be established, which we have discussed in a subsequent post given its importance.

Section 19 of the Landlord and Tenant Act 1985 states that service charges must be reasonable. Therefore, when setting budgets and issuing demands to leaseholders, the managing agent should thoroughly examine costs compared to prior years, consider any existing excesses, and confirm approved works with the client before distribution. Leaseholders can dispute unreasonable charges with the First-Tier Tribunal (Property Chamber).

Generally, as specified in the lease provisions, service charges can recover landlord costs for maintaining services to the building (though not improvements), along with fees such as for managing agents, landscaping, surveyors and accountants.

Importantly, Section 18 of the 1985 Act defines service charges as variable based on actual or estimated annual expenditures, not fixed amounts. However, the lease terms still take precedence. Additional posts address budgets, major works and reserve funds.

Please do not hesitate to contact us for more information and feedback is welcome.

Bethany Nicol February 2024