There are many advantages that come with buying a flat, but I suppose you could say that a service charge is one that sits in the middle of being an advantage, and both a disadvantage at times.
If you’re a first time buyer or looking to purchase your first flat for a second home/investment then you’re going to want to be fully clued up on everything from the service charge, and ground rent to the lease. Let’s take a full look at what a service charge means when you own a flat, what it includes and why it’s one of those things you have to pay for.
What Is A Service Charge?
A service charge is laid out in your lease and demanded by the leaseholder each year. The cost of this can vary depending on the leaseholder and the terms of the lease. The service charge you pay goes towards relevant servicing of the property. This usually includes but is not limited to; cleaning of communal areas, your share of building insurance, servicing costs, communal electric, managing agent fee and a sinking reserve fund.
What Does The Service Charge Include?
The service charge can include many different services that the property requires. This will vary depending on your location, the size of the block or building of flats, and also who the leaseholder/managing agent is. However, some of the most common things that the service charge includes are;
- Communal cleaning
- Communal electric charges
- Sinking fund (the sinking fund is carried over each year, and credited with funds if they haven’t been used for previous quoted work. This is called upon if there is any emergency issues that arise and are not otherwise quoted for. This could be things like structural issues, roof leaks, drain blockages etc).
- Building insurance
- Managing agent fee
- Lift or door entry maintenance
- Accountancy fees
- Fire risk assessment and equipment
- General repairs/painting
How Are Service Charge Costs Worked Out?
Service charges are budgeted as accurately as possible at the start of the year. Dependent on the terms in your lease, the service charge is usually charged and budgeted before any of the actual work has taken place.
You will usually receive a total budget for the year for the property outlining every single cost. This is then divided by the number of flats proportionally, and this is what forms your service charge. Whilst it can be frustrating that you are charged before/or if any of the work is carried out, if a service that you have paid for hasn’t been carried out in that year, the money you have already paid is carried over into a sinking fund for the following year.
How Much Does a Service Charge Cost?
A service charge can vary greatly depending on the location, size of the property and/if there is a managing agent of the property. Generally speaking, flats that have a managing agent make a service charge more expensive as you usually get stumped with a managing agent fee, and their accountancy fees which don’t come cheap.
When you buy a flat, the terms of the lease will lay out what the service charges will be and how much they can increase them by over a percentage of time. In the flat that I owned, the leasehold was owned by two different managing agents in the time and I paid anywhere between £500 to £1,000 for the year. But I know of some people who live in much bigger blocks of flats in an incredibly popular location that pay £2,500 a month.
Understanding the service charge and ensuring you can afford it every year is really important. Bigger blocks generally do come with a higher service charge, and even more so if there is a lift because you will contribute to annual servicing for the lift.
Do I Have To Pay A Service Charge?
If you own a leasehold property and the terms of the lease state that you are charged a service charge (there are some occasions where smaller blocks don’t have one, but very rare) then you have to legally pay a service charge. If your service charge is not paid, then legal action could be taken against you which could lead to country court judgements and could even mean forfeiting your mortgage in the worst case scenario. It really is something you can’t not pay. However, if there are items in the service charge that you feel aren’t a reflection of previous years or have been inflated, then you have every right to initially challenge these. You also have the right to ask for proof of receipts.
Understanding how service charges work is important before you purchase your first flat so all costs are fully transparent to you, and you know how much to budget for it each year. If you found this post useful, you might also enjoy reading the Costs of Owning A Flat.