What is a service charge?
A service charge is an amount of money paid to the owner of the property. It is paid by those who benefit from the services and facilities provided for the property they occupy and it enables the owner to recover the costs of servicing and operating the property.
The owner could be a person or a management company.
The lease is the contractual document that the owner and tenant/leaseholder have both agreed to and signed. It governs the arrangements for the service charges. Service charges usually include reasonable maintenance, repair and replacement (if the item is beyond economical repair) or anything used for the property’s operation.
Often a property owner has a property manager or managing agent to manage the operation of the property on their behalf.
Tenants who have agreed to pay their service charge based on a surveyors estimate (at the beginning of the financial year according to the lease) or an accountants certificate (confirming the costs and income at the end of the financial year) have to rely on these professional people to perform their roles with diligence and integrity. The job of the property manager is not to recover as much money as they can for the landlord as the landlord is not entitled to the service charges and will not profit from them. Best practice recommends that services are procured on an appropriate value for money basis and the property manager should obtain competitive quotations.
Management Fees must be on a fixed price basis and should not have hidden markups. Management fees which are based on a percentage of the total costs are old fashioned and no longer best practice.
Cost allocation of the service charges depends on the lease. Sometimes a lease will have different schedules of costs. For example on a mixed site you could have one schedule for the external areas of a site and another schedule for the internal communal areas of the property.
Cost apportionment is also based on what the lease says. Some leases will specify a particular apportionment in terms of a percentage for example. Other leases will simply say it should be fair and reasonable. Common ways to apportion the charges would be based on the number of flats and may this can vary depending if you have a 1 or 2 bed flat for example. You can ask to see the full list of apportionments if you wish.
Certified Accounts are prepared at the end of the financial year. The financial year for your property may be different to one at another block of flats. It is usually shown in the lease, but can be changed on companies house. Service charge accounts are usually prepared by the managing agent from the information they hold. A pack of information is sent to an independent accountant who checks the records reflect a true and accurate record of the expenditure incurred.
Financial competence is an important part of a property managers role as they are spending other people’s money and must therefore demonstrate a high degree of competence, professionalism, objectivity and transparency. The property manager must act as an expert and ensure that costs incurred are recoverable in accordance with the lease.
The bank account in which service charges are held must be a designated client account. Banks are strict on who can open a client account and checks will have been made on the person opening and operating the client account. The bank will have agreed that the money held in the client account does not belong to the person or company administering the account and therefore the bank cannot use that money to offset any charges in the property managers own account which is often called an office account. The property management company must also adhere to strict rules imposed by ARLA propertymark and RICS.