The hidden cost of leasehold ownership: Understanding service charges

Being the owner of a leasehold flat can be confusing, especially if you’re a first time buyer. Having bought the property, you are now liable for an ongoing service charge that’s payable to the landlord or managing agent. Let’s take a look at what’s involved.

What does the service charge cover?

A service charge is payable by every leaseholder in the building. The precise amount is dependent on the size/value of individual flats. The funds thus collected enable the freeholder to look after the common areas of the building – in other words, the bits that are not included in your lease. The terms of your lease will specify how your share is calculated, when it is payable and what it should be used for.

As a general rule, your service charge covers items such as:

• Ongoing property maintenance and repairs as necessary (e.g. locksmiths, electricians)
• Regular contractors such as cleaners and gardeners
• Utility bills for common areas (e.g. lighting, heating), and building insurance
• Property management costs and other administrative expenses
• Contribution towards a sinking fund for occasional major maintenance projects including roof replacements, block redecoration or refurbishment

How is the service charge calculated?

The exact amount of the service charge is likely to vary from year to year, depending on estimates for block maintenance and upkeep requirements. Your landlord or managing agent should have a good idea of upcoming expenditures including regular contractors, planned maintenance schedules and future projects.

The total estimate for the year is then divided by the number of apartments in the block, and the service charge apportioned according to flat size or value. For new build apartment blocks, the managing agent will look at comparable properties in the neighbourhood to get an idea of the level of charges levied locally elsewhere.

It should be pointed out that every block of flats, new or old, has different maintenance and upkeep needs. This unfortunately makes it very difficult to attempt any kind of comparison between different leasehold properties.

Is the service charge fair and reasonable?

Your landlord or managing agent is technically able to set the service charge at any level they see fit. That said, the charges must be based on the actual costs of maintaining and managing the building, rather than as a means to generate a profit. All the funds collected must be used for the running and upkeep of the block, with ‘reasonable’ charges made for the property’s size, age, condition, facilities and location.

If you are worried about excessive charges being levied, you are perfectly entitled, as a leaseholder, to ask the freeholder or managing agent to provide copies of relevant invoices and accounts so you can verify the charges yourself. In fact, your landlord or his agent must provide you with an annual statement of account to show you how the money was spent.

How reliable is the managing agent?

If the freeholder has instructed a managing agent to manage the block, the agent should be accredited by the regulatory body for the industry, the Association of Residential Managing Agents (ARMA).

Accreditation should give freeholders and leaseholders the peace of mind that they are receiving best practice customer care in property management, “forcing quality, friendly and honest advice rather than income as the starting position,” Estate & Property Management.

ARMA estimates the average service charge bill in the London area to be somewhere around £1,800-£2,000 per annum, with regional variations. If your service charge bill comes in at a significantly higher level, you’re well within your rights to ask questions.

What to do if there’s a problem?

The most important thing you must not do when querying the amount you’re being charged is to withhold payment, since this would put you in breach of contract of your lease. If in doubt, make the payment and seek advice on how to challenge the charges at a later date.

In the first instance, contact your freeholder direct to try and seek a resolution. Also check with your fellow leaseholders to see if anyone is having the same problems. You may have a stronger case if you make a group complaint. Your next port of call should be your tenants’ association. If there is such a group, it must be consulted by the freeholder regarding all works and long-term arrangements.

If all else fails, you can seek legal recourse and apply to the First Tier Tribunal. According to the Housing Act 1996, you have the right to take your landlord to tribunal if you think the level of service charge is excessive compared to the level of service provided. This route is less formal and less costly than going to court, and you won’t be liable for the freeholder’s fees regardless of the outcome.