The Service Charge explained
What is a Service Charge?
A service or estate charge is the way in which the costs of providing the services are met. Service and estate charges are allocated evenly (or as set out in a lease or transfer document), so that those who have the benefit of the common parts of the building and external grounds contribute to their share of the usage.
Who pays the service or estate charge?
How the service charge is allocated is usually set out in your lease or title/deeds.
Usually, the charge is split equally if the individual properties within the development are just apartments or just houses. If, for example, a private estate contains both apartment buildings and houses, the overall service charge is split between costs for the estate as a whole (for example maintenance of any roads not adopted by the local council) and costs relating just to the apartment building(s), such as lift maintenance. The first set of costs are allocated equally across all properties on the development and the second set of costs allocated equally across all apartments only.
How is the service or estate charge broken down?
Typically, the total service or estate charge includes the following:
- Monies needed to pay contractors for ongoing maintenance, including their time and third party costs.
- Monies or provisions needed for repairs.
- Monies or provisions needed to pay for cyclical, longer-term redecorations or maintenance.
- Monies needed to pay for insurance.
- Monies required for non-discretionary upkeep, such as meeting Health & Safety obligations, statutory reporting, billing and information provision.
- Monies needed for the services of the managing agent.
- VAT and IPT (insurance premium tax) as applicable on all the above.
What is the difference between a service charge budget and a year-end service charge account?
The service charge budget is an estimate of your share of the likely costs for the coming year and is payable in advance. The budget is based upon experience in previous years and known items of expenditure.
The year-end service charge account is a statement of actual spend over the past year and your share of those costs. When we send you the year-end service charge account, we include a summary of the amount you paid at the start of the year for the service charge budget, as well as the difference between the two. If the year-end service charge is higher than the estimated budget, you will need to pay the difference. If there has been an underspend and the year-end service charge account is lower than the estimated budget, the difference will be carried forward to the next accounting period as a credit.
Why might there be a difference between the service charge budget and the year-end service charge account?
There are a number of reasons why the actual amount spent each year may differ from the estimated budget and these could include:
- Unexpected, emergency repairs required.
- Additional costs incurred to remove non-domestic waste left around the development (fly-tipping).
- Removal of cigarette ends from the development (not covered under the usual maintenance contracts).
- Increased buildings insurance premiums as a result of an RCA (re-instatement cost assessment) carried out to work out the rebuild costs for the building.
- Insurance excess in the case of a claim on the buildings insurance.
Why do I pay council tax and a service or estate charge?
Your service or estate charge pays for the services provided by your freeholder or RMC (or their managing agent) that benefit your development, for example outside lighting, maintenance of any common areas, maintenance of any roads not adopted by the local council. These services are laid out in your lease (for apartment owners) or title (for freehold house owners).
Your council tax pays for the services provided by the council to the wider community, including refuse collections, social services, schools and the police.
