In terms of what is a service charge budget at a property, then this is a way of predicting what the shared costs are between different tenants for maintaining and servicing the communal shared areas of a property that a landlord is responsible for.
Often completed every year, it is a plan of future expenditure divided between occupiers.
And in terms of a good example of a service charge budget, you can look at your monthly finances towards eating and food.
So, your monthly food budget might comprise regular supermarket shopping, one-off convenience store purchases, and restaurant and takeaway meals.
Of course, each month, of course, these actual costs do differ, both your total outlay and each element. It may be that the total stays about the same, but the split changes, so although you over-spend on your eating-out part, there is an under-spend on the main supermarket shop.
Applying this principle to a property service charge, the landlord may budget £800 per month made up of £400 repairs and maintenance, £120 cleaning and gardening, and then £80 towards the electricity and fire compliance. This is just a budget which in reality, may change for the better or worse.
Although you might not have seen the complete £120’s worth of cleaning and gardening, this might have been cut back because there was a higher fire-alarm cost that was unbudgeted for.
So, even though you may not have seen a tangible service does not mean that, firstly, the original budget was a fair estimate at the start. Secondly, you need to wait until the end of the period and the fixed reconciliation to see the accurate picture.
The Procedure to Prepare and Set Service Charge Budgets
The process of setting a service charge budget is simple in principle but harder, in reality, to get right - we have 5 fundamental questions here.
You need to begin by looking at the actual expenditure costs at the property and then reviewing to see if they should continue with new reviewed prices (we have ten service charge principles detailed here).
Then look into the future and see if you can bring in a sinking or reserve fund to accrue monies for future expenditure and any one-off issues predicted in the next year.
Finally, you form the proper structure of these costs in various schedules that different tenants benefit from and pay towards, often apportioned on an area basis.
When looking at how to prepare service charge budgets, it’s ideal to use a template of typical schedules and types of expenditure and then slowly go through and make sure it applies to the property in question.
Excel spreadsheets are suitable for these as you can quickly amend the budget's structure and numbers, including links between different sheets of, say, service charge expenditure against the apportionment between tenants.
A service charge budget report should finally present things, an overview of the property and services, a detailed explanation of how the service charge budget is formed, and various expenditure headings with an overview and budget cost.
Three Key Service Charge Budget Lessons
Therefore, to some degree, the original budget needs to be stuck with until the facts are known; however, here are three ways to help move things along in the meantime:
1. The Landlord or Their Managing Agent Should Explain What These Actual Costs Are, and When the Actual Reconciliation and Accounts Will be Issued
So, this service charge budget should be issued every year well before it commences, showing the planned expenditure and split for the year.
If they don’t have actual figures to hand yet, then a good Property Manager should have a feel for it anyway, so chatting through can often help you get the bottom-line facts.
This is particularly important for those buying a property with a service charge in place, literally picking up the phone to the current agent and asking them what the reality is as opposed to the theoretical budget, and can save solicitor’s fees going around the houses trying to answer this.
2. Know a Tenant’s Right for Information and Communication, and How to Apply This
With residential properties, there will be more rights, for example, to have accounts issued within certain periods, rights to be notified of high one-off or on-going qualifying works, rights to request information and actual accounts, and even rights to withhold monies if a notice hasn’t been correctly issued.
Check the leases for any specific requirements, particularly with commercial property, and any good practice any landlord or agent should be going by.
3. When Things Are Not Working Out, Start Taking Action
But make sure this is the right and legal action.
So, for example, a tenant will instinctively want to withhold some or all of the service charge when in fact, it’s probably worth looking at options like requesting information as above, or maybe longer-term options like Rights To Manage or Enfranchisement for residential properties.
There are two words of caution here, though, for tenants; first is to be fair and always pay at least some of the majority of the money, although it’s tempting to pay nothing to prove a point if everyone did this. There would be no money in the service charge to pay even normal undisputed costs like insurance and fire compliance.
Secondly, only look at the threat of things first, and still be amicable yet clear and concise. This will often prompt action rather than getting carried away with solicitors who can easily rack up costs and delay things as people have points to prove.
So, issue notice before formally speaking with an advisory body, go through the company's complaints process or report the matter to their regulatory body.
5 Key Principles to Service Charges
Here's a video explaining the 5 key points about property service charges, with budgets being an essential one of these (full resource available here).
Clarifying Property Service Charge Budgets
As you ponder on often complex schedules and accounts, trying to explain what the service charge budget is for the next year, then start with the basic principles of what it’s trying to achieve.
In short, a way of sharing costs for the shared communal areas of a commercial or residential property.
They should be reasonable in number and value and fairly apportioned between different tenants through schedules and an apportionment matrix.
And most importantly, they’re only an estimate of future costs, with the final year-end service charge reconciliation accounts then eventually reflecting reality and forming a balancing service charge debit or credit.
If you want to go further, service charge training courses and management schemes are available. The real skill is marrying up financial accounting with real-life services and maintenance at a property interest.
Also, check what regulatory and support bodies like RICS have further explanations and even support to make sure the service charge budget for your property truly makes sense and is fair.
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