Service Charges Explained
The Service Charge
A service charge is a payment that all flats or houses on a development make towards the costs of providing and maintaining services to the block or estate.
Under Section 42 of The Landlord and Tenant Act 1987 service charge monies are trust money and should be held in ring-fenced designated bank accounts.
The Estimated Budget
The lease or transfer deed will state when the service charge year starts and ends and when leaseholders or homeowners are required to make payment e.g. annually, half yearly or quarterly etc.
The extent of the services provided and the contribution towards these will be specified within the lease or transfer deed. The service charge is an estimate of the running costs for the block or estate for that financial period. Each year every property will be sent details on how much is estimated to be spent for that financial year and their share.
Many leases and transfer deeds provide for a contribution towards a reserve fund or sinking fund in the service charge payment. A provision for such is usually built into the budget each year with these funds built up over a number of years to cover the cost of significant expenditure.
A healthy sinking fund is essential to maintain the long-term value of an asset and at Aspire we review contributions annually.
End of Year Accounts
At the end of each financial year formal accounts will be produced by a Chartered Accountant, these will either be certified or audited depending on the specific wording of the lease or transfer deed.
There is no statutory requirement for annual statements to be issued within a specific time frame unless the lease or transfer deed states. However, best practice is that these are issued six months of the end of the financial year as this helps to avoid any issues with S20B of The Landlord and Tenant Act 1985 commonly referred to as the “18 month rule”.
Balancing Charge and Balancing Credit
Once an Accountant has produced end of year accounts there will either be a deficit or surplus.
If these costs on which the charges are based exceed the estimates for that year resulting in a deficit, then lessees and homeowners will be required to pay a one-off additional payment to cover the difference. If on the other hand the actual costs were less than the estimates resulting in a surplus, then the difference will be credited to lessees and homeowners service charge account. In some circumstances the lease or transfer deed will provide for the surplus amount to be placed into a reserve/sinking fund for any future major works.
Service Charge on New Builds
Much as the same as an existing development an estimated budget of expected running costs for the block or estate will be prepared for the first financial year. This is based on information provided by the Developer and the Managing Agents experience of managing similar developments and expected costs. It is not uncommon for properties to complete throughout this period, usually on differing dates.
New buyers will either pay their share of the first years’ estimated budget in advance or the costs will be apportioned for the financial year from the date the property completes to the end of the financial year. It is important to remember that if you pay a full years’ service charge in advance you are not paying for costs which occurred prior to the properties completion and are therefore likely to receive a balancing credit at the end of the financial year once formal accounts have been produced.
Where properties remain unsold Developers often contribute towards the service charge share for these properties until they complete.
Aspire Block and Estate Management – 01923 372169