Last edited 02 Feb 2018

Service charge

A service charge is a charge made by landlords to recover costs incurred in providing services to leased premises.

Service charges may covers costs such as:

General maintenance and repairs.
Building insurance.
Cleaning of common areas.
Central heating.
Lifts.
Caretaking and porterage.
Garden maintenance.
Lighting.
Alarms.
Management fees.

Generally improvement works are not chargeable, although they may be in local authority or housing association leases.

The leasehold agreement should set out the way in which the service charge is organised, and may include details of:

The costs that can be charged.
The proportion payable by the leaseholder.
The service charge payment period.
Whether payment is made in advance.
The method of calculation.
The value of chargeable works above which the leaseholder must be consulted.

Service charges can be fixed, but increasingly they are calculated based on actual or estimated costs which can vary from year to year. Payment may be in advance, with a ‘sinking fund’ to even-out irregular costs. Such a fund must be in an account held in a trust. At the end of the year an additional payment or credit may be made to balance the charge. Where chares are in arrears, there may be an interest payment.

Where service charges are variable, prospective leaseholders should establish the level of historic charges to give an indication of the likely payment that will be required.

Service charges are a common cause of dispute between leaseholders and landlords. The Landlord and Tenant Act 1985 sets out the rules for service charges, defining what is considered a service charge and setting out requirements for reasonableness and for prior consultation of leaseholders.

Service charges are not limited by the Act, but the landlord may only make reasonable charges. However, there is no statutory definition of what is ‘reasonable’.

Service charges can be challenged at a Leasehold Valuation Tribunal (LVT). An appeal may also be made to a Leasehold Valuation Tribunal for charges for work that has been poorly carried out.

Service charges are not payable until a demand has been made in writing which includes the landlord’s name and address. The landlord must issue demands within 18 months of incurring the cost. Leaseholders have a statutory right to seek a summary of the service charge account.

Failure to pay service charges can lead to court proceedings, and under extreme circumstances, to eviction.

Additional charges outside the service charge might include; ground rent, consents to make alterations, the provision of information when a property is being sold and so on.

NB: Leaseholders of flats were given the Right to Manage by The Commonhold and Leasehold Reform Act 2002. This gives leaseholders the right to force the transfer of a landlord's management to a ‘right to manage company’ set up by the leasholders. The right was introduced to empower leaseholders, who generally hold the majority of value in the property.