Best Practice for Handling Service Charges
There are ‘best practice’ guidelines for handling service charges contained within the ICAEW Technical Release TECH 03/11 which are laid down by the Institute of Chartered Accountants for England and Wales (ICAEW), the Association of Chartered Certified Accountants (ACCA) and the Royal Institution of Chartered Surveyors (RICS) and whilst not included in property management legislation, freeholders and agents face financial and legal issues if they fail to adhere to them.
The guidelines are as follows:
- All monies that leaseholders pay are trust monies under s42 of the Landlord and Tenant Act 1987 (contributions to be held in trust) which means they must be held in ring-fenced bank accounts;
- Landlords and managing agents are not required to have separate bank accounts for each individual property or scheme, unless the lease requires one;
- It is a breach of trust if those monies are a) used by one scheme to fund the requirements of another and b) pay the freeholders’ bills. Therefore the funds must be able to be clearly and separately identified.
- .All lessees paying variable service charges should receive an annual service charge statement from their landlord or residents’ management company (including right to manage companies (RTMCo’s) within six months of the end of the accounting year so tht leaseholders are provided with the full details of service charge costs following the service charge period;
- The annual service charge statement should include an income and expenditure account and a balance sheet and be prepared on an accruals basis;
- Where relevant costs can be recovered in the service charges, all annual statements of account should be subject to an examination by an independent accountant before being issued to lessees;
- If the service charge statement is prepared on behalf of an RMC or RTMCo then it should be a separate statement to the annual accounts for the company the latter of which are to be filed at Companies House;
- Leaseholders can request a summary of costs in accordance with s21 of the Landlord and Tenant Act 1985 (service charge information) which must be provided by the freeholder within one month of the request, or within six months of the end of the accounting period in question, whichever is the latter.