Service charges are the lifeblood of blocks of flats and leasehold houses and how these payments are used are broken down into 3 main areas:
- Day-to-day expenditure such as external lighting, security camera maintenance, drainage cleaning, buildings insurance, salaries and management fees all of which are payable every year and collected according to the terms of the lease;
- Cyclical expenditure such as external redecoration, according to the lease;
- Periodic long-term expenditure which is usually major spending on infrequent problems such as a lift or roof replacement.
Because leases are created by a deed and as a binding contract, the covenants are not only binding on the original parties to the lease but to their successors when the lease is sold.
Another area of service charge control is set out by the ICAEW Tech 03/11 Residential Service Charge Accounts which is now recognised as best practice and included in the RICS Service Charge Residential Management Code and Additional Advice 3rd Edition.
Other Acts of Parliament relating specifically to block management are those of the Leasehold Reform, Housing and Urban Development Act 1993, the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002.
Payable in advance or in arrears?
It will be the lease that will specify a) whether service charges are recoverable in advance or in arrears of the provision of works or services, b) whether they are to be collected on a regular basis and c) whether they are to be levied as costs arise. The most common provision for collection is where prescribed dates for payment (known as interim service charges) are typically required either twice or four times a year, usually around the ‘quarter days’ of 25th March, 24th June, 29th September, and 25th December.
If the service charges are collected in advance then under s19 of the Landlord and Tenant Act 1985 (limitation of service charge costs and ‘reasonableness’) then the amount payable must be reasonable. Such payments must be clearly presented against actual expenditure and the landlord must a) repay any excess paid or b) deduct it from subsequent charges once the costs have been incurred. The issue of ”reasonableness’ has three components:
- The service charge must be reasonably incurred;
- It must be reasonable in amount;
- The services are of a reasonable standard
When a landlord demands a service charge, whether directly or via a managing agent, it must contain the landlord`s name and address (because an agents name and address is not enough) and a ‘summary of leaseholders’ rights and obligations’. The law states that if the demand does not comply with either of these requirements, the leaseholder has a legal right not to pay unless and until the service charge is demanded in the proper manner.
SERVICE CHARGE MONIES HELD IN TRUST
This means that all variable service charge payments should be held in ring-fenced designated bank accounts which must contain the words ‘trust’, ‘client’ or the property name in the bank account title. They must not be mixed up with the business accounts of whoever is holding them. Unless required by the lease, there’s no obligation to put reserve funds into separate bank accounts.
It is important to note that leaseholders have the right to challenge the reasonsableness of their service charges, more on which can be read here.