Service charges at properties can be a hidden time-tomb just waiting to go off if you don’t understand them right from the beginning.
The idea is simple – to share-out costs for running and maintaining the shared parts of a property.
But the practice is complicated, with sudden charges and unexpected issues.
Therefore, whether you’re a tenant left to pay a service charge, a landlord working out how to operate and raise one, or an advisor stuck in the middle trying to communicate them – here are five key questions answered about them.
1. What is a Service Charge at a Property?
In short, different tenant occupiers pay towards the shared costs and services at a multi-let property that a landlord arranges.
Therefore, the meaning of a service charge is all about someone having to cover communal costs such as a roof repair or cleaning of stairs that many people use, and then who contributes towards.
In terms of why it is needed, they help a landlord recoup these costs, although you can look at ‘all-inclusive’ rents, which would assume the landlord does these without an additional service charge.
When looking at who pays a service charge, tenants are obliged to under a specific clause lease. And under good practice, this also includes a landlord covering the costs of any areas currently not let out.
2. What Do Service Charges Cover?
There are three main areas to consider here; the first is what part of the UK you’re in and aware of any differences between Scotland and Wales.
Secondly, whether you are dealing with residential or commercial properties – and even mixed-use, with residential flats above retail units.
And third, who you’re dealing with – typically between a landlord and tenant, but these can involve third parties such as RTM management companies and appointed agents and surveyors.
3. How Much is a Service Charge When Calculated?
It begins with an annual budget of what the landlord believes it will cost to maintain the property, which is then apportioned between different tenants, often on the relative size of their areas to each other.
At the end of the year, the landlord correctly accounts for what was spent at the property and does a balancing charge or credit – so tenants pay a bit more above the budget or have the money paid back if the expenditure was below budget.
Therefore, when looking at why the amount of service charge you need to pay varies, this initial budget should reflect the expected running costs of the shared areas of the property. The end-of-year accounts then reflect the final reality.
This is not on rent or ground rent in that it is a separate cost and obligation under the lease; however, in reality, they can be on the same invoice and time periods when being issued.
Regarding whether a landlord can increase a service charge, the answer is often yes. But, there must be a good reason for genuine expenditure being incurred and a procedure for doing this, ideally every year rather than sudden one-off charges and proper consultation.
4. What is the Law Surrounding Service Charges?
Residential properties have legislation such as the Landlord & Tenant Act 1985 and Commonhold & Leasehold Act 2002, which shapes how service charge sums are raised and organised.
However, the golden rule is what the lease says about the obligations and duties, particularly with commercial property. There can also be good practices and regulations, such as the RICS professional statement of managing service charges for qualified surveyors completing these.
Also, watch out for prescribed information and templates, or examples of specific notices to be issued with invoices for long leasehold residential properties, and then certain types of accounts at what they call the year-end accounting.
If tenants are disputing the service charge and refusing to pay, then look carefully into what the lease and legislation say, as often the regular on-account charge must still be paid, with a separate procedure for complaints and requests of information made to the landlord.
Regarding where you can find out more information about service charges, then after first looking at your actual lease or agreement, request any necessary information from your landlord (particularly with residential properties with an obligation to) or independent and advisory body.
5. How Do You Account For Service Charges?
Getting down into the detailed service charge accounts, these are usually provided every year after being produced and authorised by a qualified accountant or an appropriate person acting on behalf of the landlord.
You will have different schedules of costs that group them for other parts of the property that different tenants benefit from, for example, those for outside instead of inside the premises.
These are then apportioned and split between tenants, often on an area basis, and reflect these services' actual use and benefit (a service charge apportionment matrix should also be issued).
Annual budgets are issued to raise invoices and on-account demands, ideally in writing by post with any prescribed information; however, demands can be sent by email and, say, an attachment.
These often cover three monthly quarters at a time, but you may be able to agree to say monthly payments, which is clearly documented even though the invoice says they still need to remain the same.
In terms of where the service charge monies are kept, these should be a separate bank account away from regular rent monies. However, unregulated landlords of commercial properties may well combine these.
And finally, don’t forget the taxman – and check if VAT is due on these (or can not be as with residential ones), which can probably be tax-deductible for business tenants paying them.
Getting the Right Service Charge
As mentioned earlier, service charges at properties can end up being a nightmare if not properly managed and communicated. They inevitably become complicated, and therefore, the detail will matter.
In addition to asking questions about them, both going forwards accounting for historical ones, you’ll probably need specialist advice if you still have problems.
This is where good property management will pay off – knowing the legal stance of what leases, say against the reality of maintenance and repairs required at the property in question.