Leasehold Service Charge
(Last Updated: 29/05/2024)
09/12/2019
14
9 min read
Key Takeaways
- If you purchase a leasehold property, you will need to pay a service charge for the maintenance of the property and its grounds.
- You could be asked to pay for a reserve fund, in preparation for any future or irregular works
- The amount you pay can increase or decrease, within reasonable limits, but if you believe the charge is too high, you can dispute this with your freeholder.
Leasehold service charges only apply when you've bought a leasehold property. Leasehold properties are predominantly flats, although the number of houses sold as leasehold has been rising in recent years.
The Leasehold and Freehold Reform Act 2024 was passed on the 24th May 2024, but is not yet in effect and the date for this is not yet clear. We will update our content as and when the finalised legislation is published. Read more - Expected changes
What is service charge leasehold?
Leasehold service charges are payments you have to make as a leaseholder to your freeholder for all the services they carry out which benefit the areas you share with other leaseholders in the entire freehold.
You make service charge payments directly to your freeholder, but there may be a proxy involved to whom you make your payment to. This might be any of the following: leasehold management company, managing agent, housing association or landlord. This article uses the term 'freeholder' to cover all of these.
What is included in a service charge?
Service charges are intended to pay for things such as:
- servicing the lighting, walkways or roof
- maintaining the lift in a block
- running estate staff
- cleaning communal areas
- gardening
- insuring the building
The amount of money that the freeholder bills leaseholders for service charges is often disputed when the leaseholders think it is too large.
This article is intended for those who are considering buying a leasehold property, where leasehold service charges are one of the costs to consider. It is also to benefit those who simply wish to know more about the topic.
It examines the following matters:
- Is it mandatory to pay service charge?
- How are service charges structured?
- What are reserve or 'sinking funds' and 'major works'?
- What powers does a freeholder have to recover service charges?
- How do I challenge leasehold service charges?
If you're thinking of buying a leasehold property, we offer highly experienced leasehold conveyancing solicitors who are used to scrutinising leasehold contracts and how service charges are set to work in practice.
- 1
Is it mandatory to pay service charge?
Yes, as long as the leasehold contract you've signed states that you are liable for them. The reality is that you'll invariably have to pay them if you live in a block of flats. The contract sets out the details of what services you have to pay your freeholder for.
It also sets down what the freeholder cannot charge you for and what proportion of the total cost you'll be expected to pay.
In terms of the law, any service charge items the freeholder imposes must be reasonable. Modern leases generally permit the freeholder to collect estimated service charges in advance and to repay any surplus or shortfall at the year's end. Leasehold service charges are predominantly variable, as they are based on the actual or estimated cost of services, which will vary from year to year.
You should always find out what current and future service charges are likely to be before you commit to buying a leasehold property.
You should also investigate if there is a reserve fund (more below) and if there are any plans for major works (more below) planned which might increase the service charge in the years following your purchase.
If you've bought a leasehold as a share of freehold and the block consists of 2 maisonettes, then you'll normally have an agreement with the other share of freeholder about how you will jointly pay for looking after communal property such as the roof, effectively absorbing all the service charges.
- 2
How are Service Charges Structured?
The lease sets down the chargeable service charge period which is normally 1 year, but may be half-year or a quarter and may be in arrears rather than in advance. It also normally details the proportion or percentage of the total service charge, which the leaseholder is liable for. It's often based on the square footage of the flat as a proportion of the whole building or it might be a simple percentage.
There may be more than one percentage for different leaseholders, if the actual services received vary according to the nature of their individual leaseholds (a ground floor flat might receive some different services from a top floor flat in the same block, for example).
There may be other variants, such as a provision for a final charge at year end if there is a shortfall and when real costs become apparent. There may be provision for a credit to the leaseholder if there is an overpayment.
Provision for an estimated payment can prove highly important because the freeholder is expected to pay for services upfront before receiving reimbursement from the leaseholders. If this provision isn't present, the freeholder might be reluctant to carry out essential work.
As a prospective buyer, you should focus on actual service charge bills from previous years rather than estimated bills for cost purposes. The absence of actual bills for previous years is a cause for concern: it might mean that the freeholder has not kept their accounts up-to-date.
How much are you likely to have to pay for Service Charges?
Direct Line for Business carried out research in 2016 and found that buyers of new build apartments had to pay £2,777 per year in service charges.
It found that the average service charge for all leasehold properties in Britain was £1,863 but the charge levied on some new apartment blocks which line the River Thames can be as high as £7,000 per year.
- 3
What are reserve or 'sinking funds' and major works?
Leases most often allow for the freeholder to gather sums in advance for a reserve or 'sinking' fund. This fund's purpose is to cover irregular and expensive works, such as structural repairs and lift replacement. These works are often described as major works.
The reasoning here is that in this way, all occupiers contribute to the cost of the works rather than unfairly charging it to the leaseholders in occupation when the work is carried out.
Additionally, the creation of a reserve fund means that annual charges can be evened out and there's no sudden large one-off demands for cash, although if the cost of the major works is higher than estimated, it's most likely that the freeholder will look to obtain the balance from the leaseholders' service charges, assuming this has been set down as an option within the leases.
It's unlikely that you'll be able to recoup any reserve funds you've paid when you sell your lease; if you are, this will be stated in the contract. Reserve funds naturally generate interest before being used and the freeholder normally usefully adds the interest to the fund itself.
As a prospective flat buyer, you should find out whether major works are scheduled for the near future and how they are to be funded because the costs can be very expensive and can affect the resale value of your flat.
An experienced solicitor will always look into whether major works are planned and a home buyers survey can indicate the general repair of a building (disrepair can indicate that major works are in the pipeline).
- 4
What powers does a freeholder have to recover service charges?
The lease details what works the service charges cover and what powers the freeholder has to recover them from leaseholders.
The lease may give provision for the freeholder to surcharge the leaseholder for any legal costs they've incurred in recovering arrears in service charges.
- 5
How do I challenge leasehold service charges?
Your first step should be to ask the freeholder for full details or an explanation of the charges. You should be aware that you have various rights and options here:
- Whenever you receive a demand for service charges, the demand must contain a summary of rights and obligations, which you should inspect.
- You have the right to be consulted before the freeholder carries out major works which are set to cost each leaseholder more than £250.
- You have the right to be consulted about any agreement or contract for a service which will span more than 12 months and where it is set to cost each leaseholder more than £100 ("Long-term agreement").
- You have the right to appeal to the First-tier Tribunal (Property Chamber) for arbitration (see below).
- You and the other leaseholders can take up your legal Right to Manage, which gives you the right to change the management of your property (NB You cannot do this if your freeholder is a housing association or a local authority.)
- You can opt to buy the freehold (click for more information).
- You can apply to the First-tier Tribunal (Property Chamber) to vary your lease if you believe that it is defective in its treatment of service charges.
- You can complain about the management of your block and seek redress by applying to the redress scheme your property manager is enrolled with. It's a legal requirement for them and there are 3: the Property Ombudsman, the Property Redress Scheme and the Ombudsman Services: Property.
How does the Tribunal arbitration procedure work?
You can make an application regardless of whether the charge has actually been paid and it can concern costs already incurred for works, services or other charges or an estimate or budget.
The Tribunal examines whether it was/is reasonable for the costs to be incurred, whether or will the works provided be to a reasonable standard and what the freeholder's procedures for assessing and controlling the costs will be or were.
It normally costs £100 but the fee may be waived for certain applicants. The cost of the actual hearing is £200 but this fee can be reimbursed if the Tribunal rules in your favour.
If you're thinking of buying a leasehold property, we offer highly experienced leasehold conveyancing solicitors who are used to scrutinising leasehold contracts and how service charges are set to work in practice.
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Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
