Service charges explainer guide

Service charges are getting a lot of negative press at the moment.

Fixflo held a webinar with Jaclyn Thorburn, Chief Communications Officer at The Property Institute, and Nigel Glen, during which they discussed data that the TPI has collected on service charges and what it will mean for managing agents. 

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What is a service charge?

A service charge is the money a leaseholder pays for services to maintain the structure and common parts of a long leasehold building. 

This could cover:

  • repairs, 
  • maintenance, 
  • insurance, 
  • health and safety compliance, 
  • inspections, 
  • groundskeeping, 
  • improvements, 
  • on-site staff costs, 
  • management costs, 
  • energy supplies, 
  • and other general expenses.

The lease should detail how service charges are accounted for and which costs leaseholders should pay. 

Who pays the service charge?

The leaseholder pays the service charge to the landlord and must meet all service charge costs. They are obligated to do so under the terms of their lease. 

 

Does a leaseholder receive service charge accounts?

Yes, service charge accounts, or a summary of relevant costs, are legally entitled to a leaseholder at the end of each accounting year. However, they can also request details and invoices and challenge reasonableness through the First-tier Tribunal (Property).

Do you want to know what's going on with service charges now? Learn more.

What is the average service charge?

There is no such thing as an average service charge, as every building is different. In the UK, the service charge can vary depending on your property type and where you live. For example, the charge will be higher if the property has gardens, a rooftop terrace and leisure facilities.

Do property managers contribute to service charges?

The property manager does not contribute to the service charge. 

How is a service charge calculated?

The landlord or managing agent that provides the services will generate an estimated budget for the year, usually based on costs from the prior year but considering expected costs for the coming year. 

The final sum will be split between the leaseholders according to the terms of their leases. The budget is always the best estimate, and reality rarely matches this. 

Depending on the lease, it could be that if the estimate is over, the funds left will be removed from the next bill, but the extra will be added to the next bill if it is under. 

What is a reserve fund?

Leaseholders may also be required to contribute to a reserve fund. This fund is set aside to cover the costs of any major work needed for the block or other significant expenditures expected in the future. 

The landlord or managing agent holds the money in trust on behalf of the leaseholders. This means that it is all ring-fenced, and reserve funds cannot be used to pay creditors if the landlord goes into administration or liquidation. 

Are service charges rising?

Yes, service charges have been increasing, as have many, if not all, costs due to inflation. Jaclyn was keen to respond to the media and explained to Fixflo that the TPI had been concerned about service charges rising for a long time. 

After the General Election was announced for 4 July, some remaining legislation was rushed through Parliament. This included the Leasehold and Freehold Reform Bill, the final piece of legislation to pass before Parliament closed. This Act gives leaseholders more transparency over service charges by making managing agents or freeholders issue accounts in a standardised format. 

Discover more about the Leasehold and Freehold Reform Act in our blog. 

 

What does the data look like?

In February, the TPI took action to determine the rise's main drivers. By using a pool of 108 estates provided by its members, TPI broke down by main expenditure for its 2024 Service Charge Index. 

% Change in service charge costs between 2019 and 2024
The Property institute, April 2024

Service charge graph

 

What are the main drivers of service charge rises?

When comparing service charge data to a cumulative inflation rate of 23% over the past five years, the TPI found a 41% increase in total service charge costs. When comparing this year with 2023, there was just a 2% to 3% rise. 

"There weren't a huge amount of surprises for anyone in the industry," Jaclyn noted. 

The biggest rise was in insurance, with a 92% increase and a 73% increase in utilities. This will likely reflect the building insurance industry's reaction to Grenfell and energy price hikes after the Ukraine invasion. 

"This has helped us offset the negative media narrative that it's managing agents that are ripping off leaseholders whereas in fact, [the Management Fee is] the only category that has increased in the last five years below the rate of inflation," Jaclyn added. "That speaks to managing agents doing everything they can to actually try to keep their costs low in lieu of all of these other costs going up."

Repairs and maintenance are also experiencing a significant increase, having risen 4.5% on average per year and predicted to increase another 15% in the next five years. Jaclyn added that the rise in professional fees and staff costs were the biggest surprises to TPI. 

Nigel said: "If you take out the energy hikes due to the Ukraine invasion alongside the building insurance and ignore the professional fees, everything else is pretty standard but nearly 50% higher than inflation. Whether that's Brexit, builders having left, or transport costs, it's striking how similar everything is regarding its rise." 

Discover how Fixflo can further help block managers.

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