Service charges are one of the most contested areas of leasehold property. Leaseholders in England and Wales collectively pay billions of pounds in service charges each year, yet surveys consistently show that most cannot explain what their money was spent on. This guide aims to change that.
What are service charge accounts?
Service charge accounts are the annual financial statement for a leasehold building. They record the income collected through service charges during the year, the expenditure incurred in managing and maintaining the building, and the balance of any reserve fund held for future major works.
For residential buildings with more than four units, the accounts must be certified by a qualified accountant. They must be provided to leaseholders within six months of the end of the accounting year, or as specified in the lease.
Your right to information: Under Section 21 of the Landlord and Tenant Act 1985, you have the right to request a written summary of service charge costs. Under Section 22, you have the right to inspect receipts, invoices, and supporting documentation. These rights are exercisable at any time.
What should the accounts include?
Well-prepared service charge accounts should contain:
- A summary of all income received and total expenditure incurred
- A line-by-line breakdown of expenditure by category
- A comparison of actual expenditure against the budget set at the start of the year
- A note on the reserve fund: opening balance, contributions received, amounts drawn, and closing balance
- An accountant's certification (for buildings with more than four units)
- Notes explaining any significant variations from budget
If your accounts do not contain these elements, that is itself worth questioning.
Understanding the key figures
Management fee
This is what your managing agent charges for their services. It should be clearly stated as either a fixed annual sum or a percentage of total service charge expenditure, and it should match what is in your management agreement. If the fee has increased year on year without explanation, ask for the basis on which it is calculated.
Buildings insurance
Insurance should be placed on competitive terms and renewed by comparison. If your insurance premium has risen significantly, ask your agent for the renewal summary showing the quotes obtained. Be alert to arrangements where the agent places insurance through a connected company, which may result in undisclosed commission.
Reserve fund (sinking fund)
This is money set aside for future major works — roof replacement, lift refurbishment, external decoration, and similar large expenditure. A well-managed building has a reserve fund plan that identifies upcoming major works and calculates what needs to be set aside each year. A building with no reserve fund is accumulating a large bill for its leaseholders.
Expenditure variances
Compare actual expenditure against the budget for each category. A significant overspend, particularly in repairs and maintenance, should come with a clear explanation in the accounts. If it does not, ask your agent to account for it in writing.
Arrears
Some accounts include a note on service charge arrears: amounts due from leaseholders that have not yet been collected. Persistent arrears can affect a building's ability to maintain services and carry out works. Ask your agent what recovery action is being taken and what the arrears position has been over the past three years.
The questions worth asking your agent
Ten questions to put to your managing agent
- Why did maintenance costs increase from the previous year, and which specific works account for the difference?
- What is the reserve fund earmarked for, and when are those works expected?
- Were any major works contracts tendered competitively, and how many quotes were obtained?
- How is the management fee calculated, and has it changed since last year?
- Does the agent or any connected party receive commission from contractors or insurers?
- What is the current arrears position, and what recovery action has been taken?
- Who certified the accounts, and are they independent of the managing agent?
- Was the insurance placed competitively, and can I see the renewal summary?
- Are there any anticipated major expenditure items not currently reflected in the reserve fund plan?
- Can I inspect the supporting invoices and receipts for any item in the accounts?
Red flags to watch for
Warning signs in service charge accounts
- Accounts that arrive late or are not certified by an independent accountant
- A management fee that is unclear, uncapped, or significantly higher than in comparable buildings
- No reserve fund, or a reserve fund that has not grown despite regular annual contributions
- Significant unexplained variances from budget
- Insurance placed through a connected company without disclosure of any commission or arrangement fee
- Maintenance costs that are high relative to the size of the building, with no corresponding improvement in condition
- An accountant who shares an address with the managing agent or has a commercial relationship with them
- Arrears that have grown year on year with no explanation of recovery action
What to do if you have concerns
If you believe your service charges are unreasonable or that money has not been properly accounted for, you have the right to apply to the First-tier Tribunal (Property Chamber) to determine whether the service charges are reasonable. This process does not require a solicitor, though professional advice is often useful.
You also have the right, under the Landlord and Tenant Act 1985, to inspect all receipts and invoices supporting the accounts. A managing agent who refuses or delays this request is in breach of their statutory obligations.
If you are a leaseholder in a building where you have concerns about how service charges are being managed, speaking to a specialist managing agent, even informally, can help you understand what is normal and what is not.