I still don’t understand my service charge?

At Inspired Property Management we like to help our clients and customers and ensure they fully understand what a service charge is and why they have to pay it.

Most new apartment tenants have no idea what a service charge is or why it’s required. IPM will guide you through understanding your service charge and the reason it is required.

What is a service charge?

Service charges are payments made by residents for services that are provided by the landlord or managing agent in respect of common parts of buildings and external communal areas of the estate. For example; if you live in a flat, you are required to pay services for internal communal areas in the building that your flat is situated as well as external communal areas. Examples of these charges could be internal cleaning, painting and gardening. Examples of further services you may be charged for are: sweeping of footpaths, litter picking and gardening to communal areas. In short, service charges are costs that are incurred by landlords for the upkeep of communal areas which are then charged to residents under the terms of their lease or transfer agreements. Your lease will detail more information on your services charge and may specify your individual percentage share of estate/block costs.

How do service charges work?

Estimates At the beginning of your service charge year (which is detailed in your lease) we will send you a service charge estimate. This letter estimates the amount we expect to spend on your block/estate during the next year. IPM calculate the estimates based on known servicing costs, contracts and prior year actual costs. You then pay for the full service charge year based on the amount listed within the estimate. Service Charges are variable, meaning that they will change each year depending on the amount spent on your block or estate. Your estimate may increase some years and decrease in others.

Final Accounts

Once the financial year ends, IPM have 6 months to review all expenditure carried out to each block and estate for the past 12 months. Once we have reviewed all of the expenditure, we post out an end of year statement to each resident which details the actual costs incurred. The estimated service charge amount is also shown on this statement as a credit; the charges are shown as a debit amount. The end of year statement then shows whether overall your service charge for that year is in credit or in deficit.

Please note – your estimated service charge amount on your final account statement will be less any ground rent or sinking fund payments. This means you only pay for the services that have been provided. IPM do not make a profit from service charges as we are only allowed to pass on costs that we have incurred. You can check your actual account against your estimate to see the exact differences between estimated costs for each element and the actual costs for each element. If we are unable to finalise the review of expenditure to your block or estate within 6 months we will send you a Section 20B Notice. This is a formal notice required under service charge legislation which sets out the amount we estimate your service charge might be.

Credit

If your end of year statement of account is in credit this means that the amount you have paid towards your service charges for the year is more than the actual amount spent and money is due back to you.

Debit

If your account is in debit this means that the amount that you have paid towards your service charges for the year is less than the actual amount spent. You are liable for the additional costs under the terms of your lease.

Other Charges

In addition to your service charges depending on your lease you may have to pay the following additional charges. Rent is payable if you are a shared owner and have not purchased the full 100% of your property. In this situation, under the terms of your lease you will be required to pay rent on the remaining share of your property. More details on your rent and how this is increased each year is detailed within you lease.

Ground Rent

Some leases allow IPM to collect a ground rent for leaseholder and shared owners. Please refer to your lease for more information on the amount of ground rent and information on when/how this increases.

Sinking Fund

Some leases allow IPM to collect a sinking fund from leaseholders and shared owners. Sinking fund monies are held separately from service charges in a bank account. They are collected each year and usually spent on major works for the block / estate; for example: A lift replacement, a new roof for the block or re laying tarmac on a road within the estate. Please refer to your lease for more information on the sinking fund.

Help and Support

If you still have queries surrounding your end of year service charge account then please contact our customer service centre on 01302 729500. They will be able to direct you to the correct team who can assist you with your query.

Outside of IPM there are also other organisations that may be able to assist you with your queries.  The Leasehold Advisory Service can provide free information, initial advice and guidance to members of the public about residential leasehold law.

What is a Service Charge and Why do you have it?

 

Anyone that owns a Leasehold flat will know that they are liable to pay a service charge but few people truly understand service charge definitions and what your service charges are used for, so let us explain:

When you buy a leasehold flat you sign a Lease. Within that Lease there are certain covenants or agreements that you are legally promising to uphold. One of those agreements is to contribute towards the running / maintenance costs for the building, known as the Service Charge.

Service Charge budgets should be agreed with your freeholder or IPM Managing Agent within 2 months of the buildings financial year end, so if your year end is December, your budget should be discussed and agreed in November at the latest.

What is the average service charge cost?

A study by the Competition and Markets Authority in 2014 estimated that the average level of service charge in the UK to be £1,100 per annum. However, within London it is estimated to be higher due to the levels of maintenance required. Levels do vary widely depending on the services and facilities at your building as well as the power of negotiation by your Expert IPM Property Manager.

How are the service charge costs are determined and calculated?

Typically, service charges are determined by the freeholder, your property manager or possibly by an independent surveyor, dependant on the terms of your Lease. Your IPM Property Manager will consult with the flat owners in order to maintain a productive relationship, leading to the micromanagement of spending through open communication. Each Lease will state what contribution the individual leaseholders must make. This will typically be based on an equal percentage split between the number of flats in the building or based on the actual square footage of the flat in question. Your IPM Property Manager should be able to help you find your contribution allocation within your Lease. It will also be noted on your service charge invoice.

How to challenge a service charge invoice

Should the budget be set without the leaseholders knowledge it can cause confusion and lead to the budget expense levels being challenged. Whilst this can usually be resolved with transparency and open discussion, Leaseholders do have the right to legally challenge a cost if they feel that their concerns have not been solved. In accordance with Section 27A (1) of the Landlord and Tenant Act 1985, an owner of a flat can make an application to the First Tier Tribunal to make an assessment whether the service charges are payable and the reasonableness of the amounts being charged.

Are you liable for service charge payments demanded before you have bought a flat?

Read this carefully as many people have been caught out be this error when purchasing a leasehold flat. During the conveyancing process, your solicitor will request an up to date service charge. This will determine any amounts outstanding or any invoices that will be forthcoming from the agent. This is your opportunity to negotiate with the seller to compensate for any amount outstanding.

It is important to note that if you have been made aware that service charges have been raised and currently haven’t been paid, as soon as you have signed the Lease, all responsibility for service charges, old and new, will be borne by you. You must ensure that you consider the financial status of the flat before signing onto the covenants.

How to find out what your service charges are being used for

Your Lease will typically include an obligation for your Freeholder to provide a summary of the Service Charge accounts for the previous year. These are required to be provided within 6 months of the buildings financial year end giving you a full breakdown of where the Service Charge income as a whole is being used. If you are still not satisfied and require further information, under Section 22 of the Landlord and Tenant Act 1985 you have the right to inspect invoices and receipts so you can find the answers you are looking for.

For more information about services charges or if you would like to know more about how we can manage your property portfolio, contact a member of our team who will be happy to assist on
01302 729 500.