Service charges is the term given to instances where a managing agent, Block Management Company or Right to Manage company spend money on repairs, maintenance, improvements, insurances, services or costs of management on a block of flats and possess the right to collect an appropriate amount from each resident within the block to pay the fee.
Sometimes service charges can be referred to by other terms. Commonly these are:
- Variable Service Charges: If an amount varies according to costs incurred in a particular year, this term will be used to refer to the charge.
- Fixed Service Charges: If the service charge amount is fixed within the terms of the lease or tenancy agreement, this term is used.
Service charge accounts should be prepared on an annual basis and must record the costs that the block has incurred during that period of time. This allows residents to clearly perceive how costs have been calculated and how their service charge figure has been arrived at.
What can service charges be based on?
Service charges are based on either an estimate or budget of all the running costs relating to the management and upkeep of a block of flats. Common elements include insurances, groundskeeping, and the upkeep of communal areas but other elements can include:
- Landscape Maintenance: Includes cutting the grass in external areas, the upkeep and maintenance of communal gardens like watering, cleaning, filtering and sweeping
- Internal Upkeep of Communal Areas: Includes lighting, heating, cleaning and sanitising
- Window cleaning: For block managers this includes all external windows on all floors, as well as the cleaning and maintenance of internal windows in communal areas
- Lift servicing and maintenance
- Fire equipment servicing and maintenance
- Electrical and mechanical equipment maintenance: Specific to each block, but could include equipment such as water pumps, electric entry or security gates, intercoms, external security cameras or processes and communal area heating equipment like boilers or electric radiators
- General repairs and maintenance both internally and externally
- The Paying of Salaries: Primarily for any specifically employed onsite staff that work for the development, i.e gardeners, security guards, cleaners, or other contractors
- Building insurance: For blocks of flats, full building insurance is a requirement written into lease agreements. It covers risks relevant to the block including fire, explosion, lightning strike, flooding, storm damage, sprinkler leakage or damage, subsidence, landslides as well as terrorism or vehicle crashes or accidents (i.e car, airplane).
- Bank Charges and subsequent Auditing fees.
How to Manage Service Charge Accounts
As outlined by multiple institutes including the Royal Institution of Chartered Surveyors (RICS), Association of Chartered Certified Accountants (ACCA) and the Institute of Chartered Accountants for England and Wales (ICAEW), there are a number of regulations block management companies must take into account to ensure their actions meet the best practice guidelines when managing service charge accounts.
- Money paid by leaseholders to contribute to service charges should be regarded as trust money and should therefore be held in designated bank accounts.
- Block managers do not need individual bank accounts for each property, unless the lease specifically requires one.
- Funds for each flat or apartment in the block must be easily identifiable so should be kept separated. Block managers will be in breaches of trust if service charge money from one property contributes toward paying the costs of another.
- If a lease or tenancy agreement specifically depicts how service charges should be presented in an account statement, what costs can be claimed and states a period of time in which the service charge accounts should be prepared, then these requirements must be met.
Whilst these guidelines do not appear as official requirements, they are considered to be important regulations that ensure service charge accounts are handled transparently, fairly and correctly. Residents are likely to feel more assured and comfortable when paying service charges if they trust that their money is being correctly handled.
How to Prepare Service Charge Statements
The Landlord and Tenant Act (LTA) of 1985 outlines requirements for summaries of costs to be prepared when requested by residents. This is a fair practice that allows for complete transparency as to how service charge figures have been calculated, which reassures residents.
Further guidance compiled by the Royal Institution of Chartered Surveyors (RICS) and the Residential Managing Agents (ARMA), suggests that service charge statements of accounts should be handled as accruals. They also suggest accounts should include a balance sheet that explains the service charge fund, as well as income and expenditure accounts alongside explanatory notes.
The service charge statement must always therefore always include:
- Details of costs accrued across the relevant accounting period that are in relation to the block and in accordance with lease agreements.
- A balance sheet plus income and expenditure statements.
- Notes which explain the figures, for example if any movements have occurred on reserves which represent costs not included in either the income or expenditure statements..
Service Charge Accounts and Annual Statements
Currently, there is no legislation that suggests how quickly annual statements of accounts of service charges should be created and relayed to residents after the close of the accounting year. However some leases will have a statement included that suggests the information should be issued as soon as is possible and practical to do so. Others will state a specific time period.
The LTA of 1985 does set limits on the recovery of service charges. It suggests service charges should not exceed 18 months before the relevant costs are requested from residents.
In addition if a resident requests a service charge statement, block managers should try to supply the aforementioned statement of accounts within at least one month of the resident asking or alternatively within six months of the end of the relevant accounting period.
Issuing the service charge statement at around six months before the accounting year end is therefore considered good practice.
Service Charge Audits
Some lease agreements contain requirements that not only should service charge accounts be prepared each year, but that these accounts must also be audited.
While service charge audits are seen as cumbersome, requiring time and paperwork, carrying out a service charge audit will reassure residents and managing agents that there is nothing awry in the books.
If the terms of the lease agreement state that an audit is required, International Standard on Auditing 800 (ISA 800) procedures should be applied by a qualified accountant.
However If the lease does not state an audit should be undertaken, a common arrangement is to ask an accountant to compile a report of the findings to provide the same peace of mind to both residents and block managers.
Whilst property service charges can be a point of contention and often anxiety for residents, if block managers are transparent in their handling and calculating of the figures, the process becomes much smoother.
Block managers should work with registered chartered accountants, and always ensure that residents’ bank accounts are ring fenced and separated for this purpose, as well as providing as much detail as possible with regard to what the charge is funding.
At Scanlans, our experienced team of property managers and experts know all about service charges and the legislation behind them. If you need help with managing your block or need advice on any aspect of service charges or external assistance, contact us today.
[…] Because it is possible for leaseholders to form their own Right to Manage (RTM) company and take control of the management of the property without the permission of their landlord, it’s imperative that the process of forming a Right to Manage company is done correctly. Once an RTM is in action, it is wholly responsible for delegating duties, managing the property and its upkeep, maintaining communal areas and structural parts, as well as collecting service charges. […]
Thank you that was clear and informative, however, I was quite interested in how to budget for future expenditure such as refurbishment costs, which I believe are included within the ‘sinking’ fund. Particularly this year when inflatiion rates are likely to rise and it is unclear whether the Government will prioritise the 2.5% target.