What Is A Reasonable Service Charge? Increase In Service Charge

What Is A Reasonable Service Charge? Increase In Service Charge

What Is A Reasonable Service Charge?

A service charge is a payment made by leasehold property owners to contribute towards the cost of maintaining and managing the building they live in.  These are additional fees that leaseholders of residential properties pay on top of rent to cover the costs of maintenance, repairs, insurance and services associated with the building and common areas.

Service charges typically cover things like:

  • Building insurance
  • Maintenance and repairs (e.g. to common areas like hallways, lifts, exterior walls)
  • Cleaning of common areas
  • Garden maintenance
  • Managing agent fees

What constitutes a reasonable service charge depends on various factors, but there are some general principles:

  • The costs must have been reasonably incurred i.e. they are appropriate and represent value for money. Excessive or unnecessary spending is not reasonable.
  • The amount charged to leaseholders should be in proportion to their use of or benefit from the services. For example, those with larger flats may pay more towards costs relating to the building structure.
  • There should be transparency – leaseholders are entitled to see a summary of costs and supporting invoices/receipts.
  • Consultation should take place on major works or significant budget increases.
  • The landlord/agent has a duty to keep service charges low where possible. Costs should not be inflated or include an unreasonable profit element.
  • Leaseholders have a right to challenge service charges they consider unreasonable at the First Tier Tribunal.

Typical service charges range from £1,500-£4,000 per year for a 2 bedroom flat outside of prime central London. Charges are usually higher for more prestigious developments and in central London locations. Increases around 10% per year are not uncommon to account for inflation in maintenance costs.

What Is A Reasonable Increase In Service Charge?

Service charge increases should be reasonable and reflect the actual costs incurred by the landlord or property manager. Factors like inflation, rising operating costs, and increased demands on the property can justify an increase.

Regular moderate increases reflecting inflation and true cost changes are generally reasonable. But tenants have recourse if large spikes seem unfair and can’t be properly justified.

However, leaseholders can challenge unreasonable increases through an application to the First-tier Tribunal.

The key factors in determining if a service charge increase is reasonable include:

  • The costs must be properly incurred and reasonable for the services provided. The landlord needs to provide transparent details and justification.
  • Inflation and increased operating expenses can justify moderate increases year-over-year. Large spikes may require more scrutiny.
  • Higher quality buildings and more amenities tend to have higher service charges. The costs should align with the building specifications.
  • Lease agreements may specify caps on annual increases, often linked to inflation indexes.
  • Tenants can challenge unreasonable increases through applications to the Tribunal. The landlord must provide evidence the increase is fair.

Why Are Service Charges So High?

Location, building characteristics and lease terms have a major influence why service charges can be high, but exploitation and mismanagement may also play a role in some cases.

Here are some key reasons why service charges can be high for some residential properties:

  • Location – Service charges tend to be highest in prime central London and other high value areas. These locations have very high property values so overall maintenance costs are higher.
  • Luxury developments – New build luxury apartments often have extensive communal facilities like gyms, pools, concierge service etc. The costs of running these facilities get passed on through higher service charges.
  • Age of building – Older buildings tend to have higher maintenance and repair costs which drives up service charges. Newer builds generally have lower charges in the first 10 years or so.
  • Onerous leases – Some leases obligate the landlord to provide services to a very high specification, exceeding what is normal. This allows them to justify higher charges.
  • Lack of competition – Where there is no resident management company, the landlord has a monopoly and there is less downward pressure on service costs.
  • Profiteering – There have been cases of landlords deliberately inflating service costs to make excessive profits from leaseholders. This is against the law.
  • Major works – Large repair or renovation projects can cause a temporary spike in charges, although this should even out over time.
  • Building insurance – Premiums in some cities, especially London, have risen sharply leading to higher insurance costs to leaseholders.

What Is Service Charge In Apartments?

A service charge is a payment made by apartment owners to contribute towards the cost of managing and maintaining the shared and communal areas of the building and development.

The service charge is usually payable annually or quarterly in advance based on a budget set by the owners’ management company or landlord.

The amount each apartment owner pays will depend on the size of their unit and terms in the lease. Service charges often range from £2,000-£5,000 per year for a 2-bed apartment in the UK.

 Typical things covered by the service charge in an apartment block include:

  • Cleaning and lighting of communal areas like lobbies, corridors, stairwells.
  • Maintenance, servicing and repairs of lifts, entry systems, fire alarms etc.
  • Upkeep of any shared gardens, grounds, parking areas.
  • Insurance of the building and public liability insurance.
  • Staff costs like concierge, caretakers, cleaners.
  • Management fees for the managing agent or owner’s company that administers the development.
  • Utilities like electricity and heating for common areas.
  • Sinking fund contributions for future major works and refurbishments.
  • Security costs including equipment maintenance and guards.
  • Waste management and recycling facilities.

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