What is a Service Charge on a Property?

What are Service Charges?

A service charge is payment to the Landlord for the upkeep of an area or the freehold building where the leaseholder or tenant’s apartment or flat is situated.  Examples could include insurance of apartment building, cleaning, hallway maintenance, gardens, drainage, access road/car parks.

The lease or tenancy agreement determines what type of service charge is payable, the proportion and when it is due. Service Charges are not associated with Ground Rent.

Why do I have to pay a Service Charge?

When a freehold is built, it may be necessary for certain maintenance, services and facilities to be funded by the leaseholders or homeowners at the development they may benefit from shared areas or services, or it may be because the local authority were not able to take on areas of the development that require them to provide constant maintenance.

When entering into a lease, the documentation will contain a legal requirement for the leaseholder or homeowner to pay their share. It is always recommended that the prospective leaseholder contact a property solicitor or conveyancer to advise on their obligations and to make them aware of any potential issues as to the property and on any service charges to be paid.

At the beginning of each financial year, the Landlord or management company will produce an estimate of the likely service charge expenditure and how much that will be.  At the end of the financial year the actual amount of money spent is compared against the estimate and the amounts should be balanced.  Leaseholders may then receive credit if less has been spent or they may be required to pay more funds if more has had to be spent. Sometimes that may mean that service charges are variable year to year.

What happens if I don’t pay my Service Charge?

If you or other Leaseholders do not pay the required service charge, it may affect the value of the building. Since there may be insufficient funds for the Landlord to pay out from the service charge account resulting in services being reduced and maintenance not being carried out. This in turn may ultimately have an effect on the overall building insurance, shared areas and condition of the property.

Leaseholders are also likely to have a legal obligation to pay the service charge. Failure to pay a service charge could result in legal action being taken against you as well as, court proceedings and a county court judgement. This could jeopardise credit ratings, prevent you from purchasing another leasehold, prevent you from selling your leasehold if service charge funds need to be cleared and even result in forfeiture of your home. Be warned that some leases may also permit the Landlord to recover their legal costs for proceedings from the Leaseholder.

What if I do not agree with the Service Charge I am being asked to pay?

If you feel that a service charge is unreasonable or that you are not liable to pay a service charge you may be able to make an application to the First Tier Property Tribunal for determination of liability to pay and reasonable of service charges.

The following may need to be considered to establish if an application can be made and will also be dependent on what the terms of your lease say:

• Does the lease provide for recovery of the specific works and items?
• Has the cost been incurred outside of the accounting period?
• Have the charges been correctly apportioned?
• Is the service charge reasonable?
• Has the Landlord complied with conditions within the lease such as following the correct consultation procedure, providing notice, specification of the works or certificates to the leaseholders?
• Has there been any historical neglect of the property by the Landlord?
• Has the leaseholder agreed or admitted to the service charge?
• Does the lease provide for the Landlord to recover legal costs?

With the above in mind and any other areas that may need to be considered, the Tribunal may be able to determine the amount that should be payable, when and how it is to be paid, by whom it is payable and to who it is payable. The Tribunal may decide the matter on papers or by a hearing.

The decision of the Tribunal will only bind the parties to the case and either party may be able to appeal the Tribunal’s decision if they are not satisfied with the judgement. It is worth considering the legal costs of making an application to the Tribunal as these may be more than the service charge you are being asked to pay.