Service Charges Explained – Why are they increasing?
Service charges have come under scrutiny, with some managing agents criticised for high fees that don’t match the level of service provided. This guide explores what service charges are, how they’re calculated, and why they’re on the rise.
What is a Service Charge?
A service charge is a fee paid by leaseholders to cover the maintenance and upkeep of a building’s structure and shared areas. This charge can include costs for:
- Repairs
- Maintenance
- Insurance
- Health and safety compliance
- Inspections
- Groundskeeping
- Improvements
- On-site staff costs
- Management costs
- Energy supplies
- Other general expenses
Your lease agreement outlines the method for calculating service charges and details the costs that leaseholders are responsible for.
Key Questions:
· Who Pays the Service Charge? - The leaseholder pays the service charge to the landlord or managing agent, as outlined in the lease agreement.
· Does a Leaseholder Receive Service Charge Accounts? - Yes, leaseholders are legally entitled to receive service charge accounts or a summary of relevant costs at the end of each accounting year. They can also request detailed invoices and challenge the charges' reasonableness through the First-tier Tribunal (Property).
· What is the Average Service Charge? - There is no standard service charge as it varies by building. In the UK, the charge depends on factors such as property type and location. Properties with amenities like gardens, rooftop terraces, and leisure facilities typically incur higher charges.
· Do Property Managers Contribute to Service Charges? - No, property managers do not contribute to the service charge.
· How is a Service Charge Calculated? - The landlord or managing agent estimates an annual budget based on previous years' costs and anticipated future expenses. This budget is then divided among leaseholders according to the terms of their leases. If the actual costs differ from the estimate, adjustments are made in the next billing cycle, depending on the lease terms.
· What is a Reserve Fund? - Leaseholders may need to contribute to a reserve fund for major future works or significant expenditures. The landlord or managing agent holds this money in trust for the leaseholders, ensuring it cannot be used to pay creditors if the landlord faces financial difficulties.
· Are Service Charges Rising? - Yes, service charges have been rising, driven by inflation and other factors. The recent Leasehold and Freehold Reform Bill mandates greater transparency, requiring managing agents to present accounts in a standardised format.
What Does the Data Show?
In February 2024, the TPI analysed service charge data from 108 estates, identifying a 41% increase in total service charge costs from 2019 to 2024, compared to a cumulative inflation rate of 23%. The main drivers of these increases include:
- Insurance costs rose by 92%
- Utility costs increased by 73%
- Repairs and maintenance costs increased by an average of 4.5% per year, with a projected 15% rise in the next five years
- Professional fees and staff costs also saw significant increases
Main Drivers of Service Charge Rises
Insurance and utility costs rose sharply, likely due to factors like the Grenfell Tower fire and rising energy prices after the Ukraine invasion. Although management fees rose below the rate of inflation, significant increases in repairs, maintenance, and professional fees have contributed to the overall rise.
This data illustrates that while some increases are expected, the rise in service charges is outpacing inflation, reflecting both economic conditions and unique industry challenges.
