What is a Service Charge?
One of the most common questions we are asked by purchasers of leasehold property, and in some cases freehold properties is “What is a Service Charge?”
Our blog this month covers the most common questions we receive in relation to service charges, and why these are required.
What is a Service Charge/Estate Charge & what do I get for paying it?
A service charge, or Estate Charge as it may also be known, is where each property within a development contributes a financial sum each year to pay for the upkeep of the communal facilities from which they benefit.
In apartment blocks this could be contributions towards insurance, the upkeep of the structure and fabric of any buildings, cleaning and lighting the communal hallways, and tending to gardening in external areas etc. and in housing developments this could include public liability insurance, the maintenance and upkeep of roads, drainage, areas of public open space, play areas, etc.
The exact services provided for a development, will vary development to development and will be detailed within the documentation under which each property is sold in the form of a lease (apartments) or a transfer (houses), and will also be dependent on the number of households or apartments required to contribute.
What is the lease/transfer and what does it do?
A lease for apartments, or transfer in the case of houses, sets out the benefits of and obligations associated with a property. Where properties contribute towards service charges, the documentation forms a contract that legally obligates the leaseholder or home owner to pay the service charge and explains what maintenance and services will be provided in return. The documentation may contain covenants which may require the occupier to do, or not do, certain things. An example of a positive covenant would be for the occupier to clean their windows whereas an example of a negative covenant could be that the occupier could not play loud music late at night. It is important to know what you can and can’t do in your property to prevent breaching the terms of the documentation.
Leases are used where the property in question is sold leasehold. This means that property is constructed on land that is owned by another party and the holder of the lease can occupy that land for a set period of time. Apartments are almost always sold leasehold because they are built on top of one another and as such, more than one property occupies the same piece of land. In broad terms, it is not possible for more than one party to own to land so it must have one owner that then leases the spaces that each apartment occupies to each leaseholder (apartment owner).
Why do I have to pay a service charge?
It is necessary for certain maintenance, services and/or facilities to be funded by the property owners at the development that have use of those benefits through a service charge.
The documentation under which each property is demised contains a legal requirement for the leaseholder or homeowner to pay their share. Your conveyancer should make you aware of all details surrounding the legal structure of the documentation under which your property is demised and any service charge or other mandatory obligations contained therein.
How much will my service charge be?
The amount collected under the service charge allows for all anticipated expenditure required to provide the maintenance and services necessary at the development alongside contributions towards cost of any planned major works in the future. The exact amount payable depends on a number of factors including the maintenance and services provided to the development and the number of contributing properties. As an example: a small number of apartments sharing luxury facilities will always pay more than a large number of properties paying for minimal areas to maintain.
No two developments are the same and as such it may be possible that people at neighbouring developments pay more or less than you, however there is always a good reason why if this is the case.
At the beginning of each financial year, an estimate of service charge expenditure is produced and this details all services and maintenance anticipated and the likely cost, it also details your share and how much that will be.
At the end of the financial year the actual amount of money spent is compared against the estimate and the amounts are balanced. If less is spent then you will receive a credit, if more is spent then it may be necessary to collect additional funds.
Service charges are estimated shortly before the beginning of each forthcoming financial period and invoiced in good time ahead of the coming year so you always know in advance how much needs to be paid. The service charges is variable and therefore will alter from year to year dependent on the needs of the development, however usually any increases are purely inflationary, unless a major unexpected incident has occurred.
When do I pay my service charge?
The timing of payments will be specified in the legal documentation under which your home is demised, your lease or transfer. Each service charge period is one year and this financial-year can start and finish on any date but will be clearly defined by the developer and/or the conveyancing solicitors. The demise also requires the service charge expenditure to be estimated and collected in advance of service and maintenance delivery at the development.
Realty offer the facility to spread the cost of payments over the course of a year regardless of the timing of payments specified in the legal documentation under which your apartment is demised. This ensures that making service charge payments is as easy and affordable as possible.
How do I pay the service charge?
Realty customers will be written to either when you complete your purchase, when a development has been handed over to us from your Developer, or when you change from another agent to ourselves. Realty will then explain the terms of the service charge and how much you need to pay. At the same time we will advise you of all the possible methods and frequencies of payment. With the exception of where very small amounts are payable, it is always our preference to setup a long-term monthly payment method that makes paying the service charge as easy as possible for you. This means you don’t have to worry about forgetting to make payments and the cost is spread throughout the year. In addition to monthly payment methods, Realty can accommodate most other payment types including, bank transfer, cheque, credit and debit cards.
What is ground rent?
Apartments can never be sold with an absolute freehold title as by nature they are built on top of each other and therefore occupy the same area of land. As such it is necessary for the freeholder of the land to attach a ground rent to each apartment to permit it to be there. The amount of ground rent payable is specified within the lease for each apartment and you are legally obliged to pay this amount in full. Ground rent is a contractual rental payment for the occupation of part of an area of land and anything occupying that space.
Ground rent is completely unconnected to the service charge and is not related to the provision of maintenance or services. In most cases, ground rent is not applicable to freehold properties, but there can sometimes be rare exceptions. The Solicitor can advise on your property tenure and obligations.
What should I do if I notice something that needs repairing?
If you notice something that needs fixing or attending to then please let us know straight away. We regularly visit every development under our care but sometimes repairs arise in between visits that need urgent attention. It is also far better to know about a problem when it is small and fix it, than to wait and potentially let the problem get worse and more costly to repair.
Once we know about a problem we will investigate the matter fully and take action to rectify the issue. Emergency, health & safety, security & access issues are always attended to as quickly as possible. Realty operate a 24h emergency telephone line to ensure that genuine emergencies can be tended to at any time of the day.
More routine maintenance however, may be combined with other works or tendered in the interests of efficiency and value for money. Dependent on the scale of the works, some repairs require statutory consultation before works can commence. The emergency telephone line will not handle routine maintenance issues and these should be reported by email to your property manager or discussed during office hours.
Planned redecoration and major works do not need reporting as these will already be scheduled into a professional long term maintenance plan and budgeted for accordingly.