A service charge is a payment made by leaseholders to the freeholder or management company to cover the costs of maintaining, insuring, and managing the building and communal areas. It applies to all leasehold properties.
What service charges typically cover
- Buildings insurance (for the whole building, not your contents)
- Communal area cleaning, lighting, and maintenance
- External decoration and maintenance
- Roof maintenance and repairs
- Lift maintenance (where applicable)
- Managing agent fees
- Reserve fund contributions
How service charges are structured
Service charges are usually estimated in advance (a "budget") and then reconciled against actual costs at year end. If actual costs exceeded the budget, you may receive a demand for the shortfall. If actual costs were lower, you receive a credit.
Most buildings operate on an annual accounting cycle. You should receive annual accounts, a summary of expenditure, and a note of the reserve fund balance.
What to look for when reviewing accounts
Year-on-year increases: A service charge that's risen 20% per year for three years is a concern — ask why.
Reserve fund balance: The reserve fund (or sinking fund) is money set aside for large future costs. A building with a thin reserve fund and ageing infrastructure (an old roof, outdated lift) is a significant financial risk for buyers.
Planned major works: Your solicitor will check for any notice of intention to carry out major works. Under Section 20 of the Landlord and Tenant Act, freeholders must consult leaseholders before major works exceeding £250 per leaseholder. Any planned works affecting your share of costs should be reflected in the price you pay.
Challenging unreasonable service charges
Leaseholders have the right to challenge service charges they believe are unreasonable at the First-tier Tribunal (Property Chamber). This is a relatively accessible process and is free to apply.
This glossary entry is for general information. Always consult a solicitor for advice specific to your property and lease.