Service charges in Residential Property – overview
What are service charges?
If you are the owner of a leasehold property (such as a flat in a block) it is highly likely that your lease will provide that you must contribute towards the service charges. Your Lease will set out what you need to pay, how the fees are calculated, when payments are due and who you have to pay them to. It should also say what happens if you don’t pay your service charges!
The service charge funds are collected in by the landlord and will be used to maintain the building and undertake any repairs and upgrades.
Service charges cover both amenities and services provided by the landlord on behalf of all of the tenants.
Although there is a long list of things that could be covered by the service charge provisions of a lease, here are the most common items:
- Maintenance of the building
- Repairs, from minor to major structural issues
- Heating and air conditioning
- Refuse collection
- Staff costs to undertake the necessary work
- property management fees
- insurance costs
- lift maintenance and replacement
- a sinking fund which maybe needed to replace facilities or to maintain common areas
What’s in the lease?
All leases are different. Ideally, a well drafted lease will give a good and clear description of precisely which services are chargeable to tenants. However, this is not always the case. If you are buying a leasehold property, make sure you look closely at the service charge provisions so that you know what to expect.
For example, just because you are on the ground floor, doesn’t mean that you won’t have to contribute towards the cost of the lifts, even though you may never use them.
Tenants also need to establish the proportion of service charges which they will face, especially if the property is not fully-occupied. So, for example, if you are buying a new build, does that mean you will have to pay more service charges until the rest of the building is sold? A ‘fair’ proportion should be based on the square footage of their particular property in comparison to other similar flats in the property. If it is a new lease, you may have the ability to negotiate a service charge cap which sets a limit on any payments which they might be required to make.
Landlords should provide the lessees with an annual schedule of the estimated costs for the forthcoming year, usually before the new financial year starts. The lease will then usually provide for collection of the service charge payments in quarterly instalments. If you have not received an estimate for the forthcoming year, you should speak to your landlord to request one.
The landlord should have his or her service charge expenditure audited by a surveyor and ensure that this information is passed onto their tenants.
Disputes between landlords and tenants over service charges are not common and can be notoriously difficult to resolve. If you are in doubt you should seek professional advice regarding service charges, whether you are a landlord or a tenant.
If services which are included in your Lease are not being done, the first thing you should do is speak to your landlord. It could be that the landlord wasn’t aware that the services were outstanding or needed doing. If the works still are not done, start thinking about what action you want to take but be careful about withholding payment in the meantime as that can have serious consequences for you.
Check your Lease to see whether there is a service charge clause. If there is a clause including the amount or provisions that you are paying, then you should pay. Before you sign the Lease make sure you’re happy with the terms and that you fully understand the consequences. If you are not happy then you should seek legal advice regarding the terms before you sign.
With larger, or poorly managed properties, it can sometimes happen that landlords lose track of what payments they have received. Make sure you keep records of any payments you have made. Review the landlords accounts for the building to see that everyone else is paying, and if there is a shortfall, consider how that might affect you and what action you might want to take. For example, if you are thinking of selling your property soon, a purchaser might be put off if there are high levels of arrears, as it may be a sign of a poorly managed block.
How are service charges calculated?
The charges are usually calculated in one of two ways:
- Fixed – these will be a set percentage of the total anticipated services charges for the entire building
- Proportional – these will be based on the area of the tenant’s unit as a proportion of the total area of all the units
Where the service charge is separate from the rent, the service charge might be capped so that there is a limit on the amount that can be charged by the landlord in each service charge year. In addition, the cap may be subject to increase in accordance with the Retail Price Index.
Limits on service charges
Service charges can go up and down without any restriction, depending on how much money the landlord is actually spending on the property. This year it might be very high, if, for example, the property needs a new roof. However next year it might be much less. The landlord can only recover those costs which he has reasonably incurred.
Leaseholders who think that the service charges are unreasonable have the right to challenge such service charges in court.
The power to recover service charges
Generally, the lease will govern the landlord’s power to levy a service charge and a leaseholder’s obligation to pay the service charge. The lease is essentially the contract between the landlord and the leaseholder and there is no obligation to pay anything other than what is provided for and agreed in the lease.
In addition, if the lease provides that the landlord will carry out certain works or provide certain services and there is a service charge to be payable in relation to these, then the lease must also include a power for the landlord to recover such incurred costs from their leaseholder. Also, the lease should usually specify whether the charge is recoverable in advance or in arrears of the provision of works or services.
Top tips for dealing with service charges:
1 ) Limiting service charges
- these can be limited through negotiations at the initial stages before heads of terms are agreed.
- You need to take advice from us at an early stage so we can outline what you should avoid and how to avoid it
2) Take legal advice to fully understand service charges
- it is key that both parties understand how the service charge provisions will work and how best to protect their interests
3) Communication – speak to your landlord to see how things can be resolved.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.