How much should the Service Charge be?
What is The Average Service Charge Bill?
There has been some recent and interesting research done on the level of the Service Charges in England Wales.
The Competition and Markets Authority (CMA) has undertaken research into Service Charges in England and Wales and published a report in December 2014 entitled: market study of the residential property service. In this report the CMA estimates that the average amount of an annual Service Charges bill is £1,123.
The London Assembly also undertook similar research into Service Charges paid by Leaseholders in London in 2012. They found the average amount paid yearly for Service Charges varied depending on the type of Landlord:
- Private Landlords: £1,800 to £2,000 per year
- Local Authorities: £850 per year
On this basis the average amount a Leaseholder can expect to be asked to pay as a Service Charge would be between £1,000 or £2,000 a year (£80 to £160 per month) depending on what type of Landlord they have and the type of property they lease.
Service Charges for the Leasehold Property I am looking to buy
If you are buying a leasehold Property it is normal part of the conveyancing process (this means the checks normally made by a solicitor before purchase) to request the seller provides copies of previous Service charge bills going back 3 years.
There are two types of Service Charge bills which Landlords issue: ‘Estimated’ and ‘Actual’. A purchaser will want to focus on the Actual bills as these will show the finalised costs for each year. The absence of such Actual bills for previous years can itself indicate a problem, as it generally means that the Landlord is not keeping his accounts up to date.
The amount of the Actual bill for a previous year is generally a good indicator of what costs will be incurred during the coming year. However, there are many reasons why costs can, and often do, fluctuate from year to year and prospective purchasers cannot be 100% sure that the level of the Service Charge might not increase or decrease in following years.
Some of the main reasons for these fluctuations in the amount charged each year are:
- Repairs: Larger repair costs come up infrequently. These can add thousands of pounds to the yearly Service Charge.
- Changes in Services: Services can sometimes be added or withdrawn and this can affect the level of the Service Charge.
- Late Billing: A Landlord which is slow in reconciling their accounts may add the costs from a previous year to a future year.
- Change in the method of calculation: A Landlord may change the way they calculate how part or all of the Service Charge is shared out between the users of a building or estate.
- Increase in the Management Fee: The amount which a Landlord or their managing agent charges to provide services and administer the Service Charge may go up.
- Charges had been kept artificially Low: On new developments in particular the Service Charge is sometimes kept low for the first few years as part of a marketing strategy to sell the finished units on a new development. One way this is done is by not asking for contributions to sinking fund until several years after the first leases are sold. Many buyers on new development experience a sharp hike in the level of the annual Service Charges several years after they buy their Lease as a consequence.
At points during the course of a Long Lease it is very likely that the Leaseholder at the time will be liable to very large one-off Service Charge bills. This is because Major parts of the structure of buildings tend to need replacing or extensive repair work every 20 to 30 years and these costs are normally the responsibility of the Leaseholders in that building. These costs can sometimes be equivalent to 5% to 10% of the value of the property itself, and even more if extensive improvement works are undertaken
It is very important for a prospective purchaser to know whether such costs are coming up after the next few years and how they will be paid for when the work needs doing. These costs can run into tens of thousands of pounds and can affect the market value of the flat for sale, and determine whether or not the flat will be affordable for a purchaser. For this reason a prospective purchaser should request:
- A Building Survey: A purchaser’s own independent surveyor should be able to provide information on the condition of the building and estimate when major works will become necessary.
- Section 2o Notices: Before major works take place Landlords are required by law to consult Leaseholders by sending a Section 20 Notice. These notices indicate that Major Works are due to take place and they should be made available to anyone considering buying the property.
- Plan of Works: Many large Landlord, particularly those on the public sector, tend to have a plan of scheduled works across their Housing Stock. If such a plan exists then it will be a good indicator of when major works will take place.
- Details of Sinking Funds: It may be that provision for any future works has already been collected into a Sinking Fund.
- Right to Buy and Right to Acquire: As part of an Offer Notice (called a Section 125 notice) sent to applicants for these schemes, they are also sent estimates of the cost of Annual Service Charges, Repairs and Improvements over the coming 5 years. The Landlord are restricted as to how much they can charge in relation to these estimates.
Some Advice For People Buying a Leasehold Property
As well as knowing what costs are likely to come up in the future, the prospective purchaser also needs to know whether there are costs which have already been incurred but not yet paid for.
The Law does not normally allow a new Leaseholder to be charged for a Service Charge bill which has been issued to a previous Leaseholder but was not paid. However, sometimes there can be a considerable period of time between the costs themselves being incurred and the bill being issued. A new Leaseholder can be billed for costs which were incurred before they owned the property if there is a delay in the billing, and there is always some kind of delay as Service Charge accounts are usually produced once a year.
For this reason, it is normal for any such costs incurred, but not billed, to be identified at the point of sale and for the seller to leave a sum of money (known as a ‘Retention’ or ‘Retention Monies’) with their solicitor to pay the Service Charge bill when it eventually gets issued.
Moreover, it should be noted that whilst a new Leaseholder cannot normally be charged for a bill which was not paid by the previous Leaseholder, any such unpaid debts can still create problems for the new Leaseholder. Landlords, can and do, frequently refuse to acknowledge of the change of ownership until the debts are cleared and there is a small possibility that a Landlord could take possession of a Leasehold flat because of debts which were not paid by a previous Leaseholder through a process called ‘Forfeiture’.
All round, the safest route for a prospective purchaser is to insist that all Service Charge accounts are cleared at the time of sale and that an appropriate retention is left to cover any costs which have been incurred but have not yet been billed.
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