Service charges are often misunderstood. In this brief guide, we explain exactly what service charges are, what services they include, and why leaseholders must pay them. We also indicate the difference between service charges and ground rent, even though often we must pay both.
What is a service charge?
A service charge is a fee paid by leaseholders as their contribution towards the cost of maintaining their residential building and surrounding area.
What is a service charge comprised of?
Typically, a service charge includes:
- Repairs and maintenance of shared areas of the building such as entrances, corridors, and elevators.
- Repairs and maintenance of the external structure of the building including the roof, walls, drainage system, pipework, TV mast and so forth.
- Administration and management costs to the freeholder.
- Shared service costs such as cleaners and a caretaker.
Ground rent isn’t part of the service charges, but you must pay it as it is the rent for the land on which the dwelling is built. This might be a peppercorn rent (the legal term for a very small or nominal rent) or it might be a significant amount of money.
Check your lease
Details of your leasehold property management agreements should be specified in your lease. Usually the services you must pay for will be itemised, but there may also be a paragraph the refers to general services that are not itemised.
Typically, your lease will specify:
- Services you will be charged for
- When payment becomes due
- How charges are allocated to the various leaseholds
- The percentage of the total cost you must pay
- Information on any reserve funds that may be held
- How frequently you will be billed, which is usually annually
Note that the actual costs aren’t stipulated as these are likely to vary from year to year.
Reserve and sinking funds
A reserve or sinking fund may be set aside to cover future repairs, and your share of this will be included in your service charges. Typically, this will be used to pay for the cost of major repairs and renovations such as replacing the roof.
In some circumstances that will be specified in your lease, should you sell your home you may be entitled to a refund of some of your contributions to the sinking fund. Alternatively, your purchaser may reimburse you for your contribution to the fund.
Restrictions on increases to the service charge
Certain restrictions are imposed on the leasehold property management company regarding significant increases to service charges. Should they wish to set up new cleaning, gardening or similar service or extend an existing one that would increase your service charge by over £100 a year, or undertake repairs or maintenance that would increase your service charge by over £250 a year, specific rules apply.
They must inform you of their intention in advance, providing with cost estimates, and you are entitled to challenge the charges for instance by suggesting alternative contractors.
Warning – failing to pay your service charge could mean you lose your home
It is essential that you pay your service charge. If you fail to do so, your leasehold property management company may approach your mortgage lender and request that they pay your arrears. In most cases your lender will do so and add the cost plus administrative fees to your mortgage. This is because the management company could apply to the courts to take possession of your home.
If the property management company successfully applies to the court for forfeiture of your lease, and you fail to comply with any court order, the freeholder will be entitled to repossess the property and you will lose your home.
This also applies should you fail to pay ground rent that is due.
You are entitled to see the service charge management accounts. Often the leasehold property management company will provide these annually, but if this isn’t the case you can request to see them. They must be sent to you within a month of your request.
While service charges should reflect the actual cost of repairs and maintenance plus a reasonable charge for freeholder management costs, the freeholder charges ground rent directly. While the amount should be set out in the lease, sometimes this includes an escalator, which means that ground rent could increase significantly over time, so always take care to read your lease carefully.