Block Management – Service Charge Explained

27th February 2023

A service charge in block management is a charge levied by the building owner to recover the costs incurred in providing services to the building. The key in understanding what is chargeable and how often is the lease and it is important that a leaseholders obligations are fully understood. Here we will cover off the costs that are usually within the service charge including cleaning, maintenance, management, utilities, insurance and importantly a contribution towards the long-term maintenance of the building and estate.

How is my service charge calculated?

The management company usually appoints a block managing agent as the buildings and  estate manager. Your managing agent will take a detailed look at the design and specification of the building and either obtain quotations or approximate costs for running the estate and buildings and servicing the equipment on site. The total cost is then calculated for the residential flats and split between each flat according to the size of the property as a percentage of the total residential area.  

Is the service charge quoted an exact cost?

Depending on whether you are living in a new build or an existing development, will depend on how estimated the service charges may be. For example there could be changes in a new build to the specification and design of some equipment which may ultimately effect the costs that have been budgeted for. However, regardless of building type, a service charge is calculated on the basis of an estimate only. Whilst an agent will do everything they can to stay within the quoted budget sometimes costs arise that are unforeseen and they will have to charge more than their original estimate. For example the cost of living crisis will have affected a lot of budgets, especially for budgeting utilities and ultimately will impact the cost a leaseholder pays.

What happens if the service charge payment is more than the cost of running the building or estate over the year?

If the service charge estimate that you pay is more than the service charge cost then the overpayment may be put towards your next year’s bill or you could get a refund.  In some leases this can also be contributed to reserves if it is deemed appropriate. It is important to check your lease to understand what happens in your building, as this will vary.

What happens if the service charge payment is less than the cost of running the building or estate over the year?

If the service charge estimate that you pay is less than the cost of running the building then you will be invoiced for the balance at the end of the service charge year. In extreme circumstances where there is not enough money in reserves to continue operating the building then you may be asked to make an extra contribution outside of your normal payment dates, but this would be highly unlikely.

What is the breakdown of the service charge fund?

The service charge fund is determined by the services at the development, these are usually  broken down into different areas, an example would be:

• Servicing
• Maintenance and Repairs
• Compliance
• Cleaning Utilities and Insurance
• Management, Finance and Staff
• Capital Items and Reserves

What is a reserve fund and how does it work? 

Whilst most items in the service charge are spent in the year they are charged, or accrued over a couple of years, there should also be a provision for a contribution towards a reserve fund included in a service charge. This is to save for irregular or expensive costs on the building over the course of its lifetime as at some point items like the roof will require replacing and instead of asking for extra money up front from the leaseholders this can be saved over time and deducted from the reserve fund when required.

What is an Annual General Meeting or Residents Meeting?

Managing agents for buildings will hold an Annual General Meeting (AGM) or a Residents meeting depending on the management company structure, approximately 30 days before the end of the service charge year. You will be notified within the terms of your lease. This is opportunity to get an update as to what is going on in the building and provide feedback. This is also usually where a potential budget is proposed for the following year and will determine what service charges you will incur for the year ahead.

Why do agents put money by for capital items and reserves?

Every item in a building, like the roof, lift, paintwork etc. has a limited lifespan.  A good managing agent will try to estimate how long it will take before that item has to be replaced or repaired and how much it will cost and split that over the relevant time period.  It is only fair that people that have had the use of the building over time pay towards the upkeep of the building for the time that they are there as opposed to those that happen to live in the building paying for the repair.  This is obviously not an exact science but that is what this fund is for.  Hopefully it also avoids having to ask leaseholders for large one off costs as there are funds put by in reserves to cover the cost.

Is service charge money safe?

Managing agents are required to hold service charge money in Trust and so this is often held in a client account. This is protected by special insurance and managing agents should also have an independent audit from an accountant to ensure the money is being kept correctly and recorded appropriately.

Should you need to get in touch with us regarding any query with your service charge you can contact us by phone or email where our Block and Estates team will be able to help you.  

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