It’s exciting buying a flat or apartment. It’s also a common sense thing. As a wise buyer, you’ll want to get the right ducks in a row before making the big decision, and that’ll include knowing the answer to the question of what are service charges. Understanding flat service charges is just one of the numerous things to consider. But it can save you money when you factor it into the big picture. If you face a tricky toss-up between three places you absolutely love, the home with the best-value service charge could be your best bet. This guide reveals all about the service charge on a property you’ll be paying on top of the mortgage, the utilities, and the rest. We’ll even reveal the average service charge London flat owners pay.
Service Charges: What are they?
First, the official service charges meaning. What are property service charges?
Service charges don’t affect houses, they’re paid by people who buy flats, apartments, maisonettes and homes in other kinds of multi-dwelling buildings. Your service charge is what you pay, as a homeowner, to cover the cost of looking after communal areas like hallways, staircases, and the garden or land surrounding the building. Each household in the property pays its own charge separately.
When you buy a leasehold flat the landlord who owns the freehold has a set of responsibilities for the building as a whole. This includes repairs, general upkeep, and the right kind of buildings insurance. The amount you’ll pay is formalised in the lease agreement, along with exactly what it covers.
Bear in mind service charge agreements vary depending on the property and the location, so take the time to read and understand yours. They usually detail all the cleaning, repair and maintenance works needed in communal areas like hallways, lobbies, lifts, gardens and stairways. The buildings insurance element of your charge pays for unpredictable structural damage to the building itself, for example replacing a storm-damaged roof.
Examples of Service Charges
- Ground rent
- Energy: electricity, gas or oil-run communal heating and lighting
- Planting, landscape and other horticultural work
- Caretaking and cleaning
- Lift maintenance
- Entry phone, doorbell and security maintenance
- Insurance premiums
- Repairs and maintenance to the entire building
- Repairs and maintenance to the grounds including car parks and outbuildings
- Business management and administration of the building
- Major repairs
- Essential improvements
Types of Service Charges
Next, let’s dive into the detail. Here’s what you need to know about some of the most common things covered by service charge payments.
Ground Rent is what you pay to the owner of the land the building sits on, basically a kind of extra rent paid under the terms of the lease. If your lease dates to before 30th June 2022 there’s no ground rent unless the landlord sends you a formal written demand for it. If you don’t pay they can sue you for it. If so they can recover unpaid ground rent from you going back as long as six years – and you have to pay it all at once.
Your landlord can only increase the ground rent if you’ve agreed on the increase beforehand or if the lease says it can be increased. If your lease dates back to on or after 30th June 2022 the landlord can’t charge more than a so-called Peppercorn ground rent. A Peppercorn rent is effectively nothing, so no money changes hands. But it’s still a legally binding contract with the landlord, a legal formality acknowledging the landlord owns the land.
Service charge on property agreements usually contain a Reserve Fund and / or a Sinking Fund, there to meet longer-term expenses. The owners of all the units in a building contribute to it via their service charges so the money’s there when it’s needed, for example, to re-carpet the hallways, landings and stairs, or improve the fire-proofing.
If yours is called a Sinking Fund, there’s a slight difference. These funds are designed to pay very specific costs that might only come about once in an entire 99 year lease, for example replacing an old front door.
Buildings Insurance pays out for a collection of unpredictable risks like fires, floods, earthquakes and storms, and your landlord is responsible for it. There’s no need to buy your own buildings insurance – and because you’re not the freeholder you couldn’t buy it anyway. You just need your own contents cover. You can see a summary of the insurance policy if you like. If you think the premiums are too high and you can’t agree on an alternative, you can take it to a tribunal.
Consulting Over Service Charges
As a leaseholder, you’re allowed to get involved in the flat service charges you pay, but only if the charge is more than £250 each leaseholder for planned work or more than £100 a year each. In reality this means you’re almost always consulted since these numbers are so low. If the freeholder does consult you over the service charge they have to take a set of steps called Section 20 consultation. If you haven’t been consulted properly the freeholder can only ask you to pay a limited amount, not all of it. More about that later.
Disputing a Service Charge
If a polite discussion and mutual negotiation hasn’t resolved the issue, you can officially dispute a service charge. You might be able to do it via a tribunal if you think the charge is unreasonable. The same goes when you think the standard of work isn’t good enough, or you don’t think you should have to pay for it in the first place.
You can’t bring your objection to a tribunal if you’ve already said you’ll pay the charge. Nor can you do anything if the dispute is already being dealt with in a different way, maybe through a solicitor or another independent expert of some kind. The same goes if you pay a fixed charge.
When are Service Charges Payable?
You pay the service charge on property in advance, either quarterly, bi-annually or annually. The timing will be made clear in your leasehold agreement paperwork, or in the contract you sign with the freeholder’s property management company.
Who Pays the Service Charge?
You, as the leaseholder, are responsible for paying your own part of the service charge. Each household in the building pays separately into a single fund. The fund is held and managed by either the freeholder or a management company hired to do it for them.
Do All Flats Have a Service Charge?
Most flats and other multi-household properties come with a service charge, unless the homeowners in the building want to handle it between them.
Estimated costs and Final Accounts
Service charges are based on a mix of the real-life and estimated cost of the services it covers. Most are variable and can change annually. Your lease will say if the freeholder has estimated the amount they need for the coming year, and if so what they’ve based their estimates on.
If the end-of-year accounts for the property are in the minus, your agreement will usually let them recoup the money from leaseholders, something called a balancing charge. If they’ve spent less than expected, then the lease will say if you’ll be credited with the extra or if it’ll be carried over into the next year as a credit towards your next payment.
Service charges are calculated in three ways:
- Day-to-day costs like bills for cleaning communal areas and monthly insurance premiums
- Reserve funds or sinking funds, designed to take care of longer-term and more expensive maintenance, say a replaced roof or triple glazing
- Cyclical expenses that come around regularly but not often, like exterior and interior decoration and maintaining the drainage
The average service charge London leaseholders pay is more than the UK average. It can easily top £2000 a year for flats in London and new builds in the capital. Elsewhere in the country, you’re probably looking at more £1000 – £2,000 a year.
Factors that Affect Service Charge Amounts
All sorts of things can affect your annual service charge on property. If major repairs are needed and they can’t wait, there might not be enough in the reserve fund to cover the job. In which case your freeholder will want to ask you for more money. Some services might be added and others removed throughout the year. The costs from one year might not have been factored in until it’s too late. And the management company or freeholder might change the way the costs are shared amongst the leaseholders.
The fees the freeholder pays to their property management firm might go up, either through economic forces or because they’ve opted for a more expensive, hands-off management package. They can also go down if the freeholder decides to take more or all of the management responsibility themselves. Some leaseholders might not need to contribute to the Sinking Fund part of their charge until they’ve lived in the property for a few years.
Your leasehold agreement will clearly show how the service charges are shared between the leaseholders in the building. It might be a simple, even split. If some flats are bigger than others or have more bedrooms, or only one flat has access to the garden, it might be split accordingly.
Major Works and Consultation
Major works, also called qualifying works, are defined by Section 20 of the Landlord and Tenant Act 1985. They’re basically big, important building maintenance jobs, and freeholders can ask the leaseholders to share the cost of this kind of work via their flat service charges.
As we’ve mentioned, if the works cost more than £250 per leaseholder the freeholder must consult with you all under section 20 of the Act. The consultation process involves the freeholder describing the works clearly, without actually giving you a full specification. The freeholder must also ‘have regard’ for any observations you’ve made, and reply in an appropriate way. This simply means they must take your concerns seriously and give you proper answers.
Service Charges – FAQs
Next, answers to a few popular questions about service charges and the overall service charges meaning.
Where can I find out what services I will get and how much they cost?
If you pay a service charge you have the right to ask the freeholder for a summary showing you exactly how it is worked out – and what it’ll be spent on.
Why is my flat’s service charge different to my neighbour’s?
Your flat is probably different. Theirs might be bigger, have a balcony, be the garden flat, or simply have more bedrooms. It might also be smaller or come without the same facilities as the others. Some agreements share the total charge equally, while others calculate charges based on the differences.
What if the estimate is higher or lower than the actual cost?
When the real-life total annual cost comes to less or more than you’ve paid, the freeholder can’t change the charge you pay. But they can change the charge for the next year if your agreement says so.
What is the difference between service charges and rent?
As a tenant, you don’t have any responsibility for the common areas or for maintenance. It’s covered by the rent. Service charges are paid by leaseholders to freeholders to cover the communal services provided under their lease.
Are service charges mandatory?
No. You only have to pay a service charge for work or services if the lease says the freeholder can legally recover the cost from you. If your lease doesn’t include it, you don’t have to pay it.
What happens if service charges are not paid?
If you’re in arrears with your service charge, talk to the freeholder or management company to find out your options. Leave dealing with your arrears too long and they can take you to court, which means you can lose your home. It also means it’ll be harder to get a mortgage if you want to buy your own home again in future.