Navigating Fair and Reasonable Service Charges

Service charges are in the news. They are increasing. They are unjustified. They are too expensive. They are lining the pockets of the developers, the Housing Associations and the Agents. They are unfair. They are unreasonable.

This is just a brief synopsis of the stories we are seeing and within this post, we are exploring whether they are right…have we forgotten what fair and reasonable is?

The Leaseholder Association advises that the legal definition of services charges is “…an amount payable by a leaseholder/tenant, in addition to any ground rent, for services, repairs, maintenance, improvements, insurance and the cost of management; the whole or part of which may vary, from year to year, according to the costs incurred.”. Not for profit and not so developers can make extra money following the sale of a flat. 

Most leases will define that the service charges demanded by Landlords in advance, are a fair and reasonable estimate as to the costs that will be incurred in the forthcoming financial year to deliver the obligations of the Landlord in accordance with the Lease.  However, against the backdrop of the ongoing cost of living crisis causing household bills to increase across the board, there seems to be a growing discontent that service charges are rising as sharply and as unfairly as the news depicts.

In addition, leases will define the specific services chargeable in the service charge. The breakdowns issued to Leaseholders which accompany the demands for payments should include a full breakdown detailing how they have been calculated, the methodology used to apportion costs and what steps have been taken to demonstrate value for money.

The numbers that the news are reporting are truly shocking.  The increases that have been applied to service charges over such a short period of time do highlight the need for the costs, budgeting, and service charge reporting processes to be managed. 

The Developer, Freeholder, Housing Association or RMC that has the obligations as defined in the Lease should therefore be ensuring that the process for calculating, demanding, and reconciling their service charge budgets is being tightly managed to demonstrate to your Leaseholders the charges are in fact, fair and reasonable. If you cannot, you should expect complaints from Leaseholders and in some cases further action may be taken against you.

So, if you are a Developer, Housing Association, RMC that owns the Freehold of a Block/Estate or a Managing Agent that is experiencing these issues, the question should be, am I doing what I should be doing? 

We would recommend that you start by understanding how Leaseholders are being communicated to. What is the engagement plan for service charge?  How is the comms plan being managed? What is the consultation process and how are service charge estimates and expenditures being explained? The days of a mere covering letter accompanying the annual service charge bill along with the (required) Summary of Tenants’ Rights and Obligations are behind us.  With such large increases being applied as a result of market forces and increasing costs, the communication and explanation of service charge needs to start from the day someone moves into their home.

You should also understand how the service charges have been calculated. Have costs increased because there was a percentage compared to last year’s sum? Have contracts been tendered to maximise value for money, or have they just been rolled over? Have the estimates been based on what has been spent previously? What is the supporting information and data?  The strategy for setting the budget should start six months prior to the bills being issued and there must be a sign-off process in place to ensure that the charges being issued (on your behalf!) are indeed, fair and reasonable.

You should also ensure that you are fully aware of how previous years’ service charges have been spent and whether Leaseholders' funds are being well managed, and that your own risk is being considered. Has the relevant compliance with the lease, legislation and best practice been followed?  Has all the evidence for expenditure been collected and collated?  Have service charge monies been spent on the right thing?

The above is what any person or company should be doing to ensure that the costs being charged to Leaseholders are fair and reasonable, as a minimum.  It is entirely justified for an individual Leaseholder or a group of Leaseholders to understand how their money is being managed, what it is being spent on and whether adequate due diligence is in place to ensure that the budgeted costs have been calculated and signed off using a trusted process.

Ignorance is never a defence.  The legal system in place to protect Leaseholders will look dimly on anyone who claims they did not know what was being charged, or if they claim that someone else was responsible. 

Unless you have a clear and robust process in place to ensure that service charge budgets are calculated correctly and accounts are reconciled accordingly, Leaseholders are likely to distrust the figures presented and will hold the person with the Freehold responsibility accountable for the management of their money.

At SAY Property Consulting, we can help.  We have developed a suite of services which can be called upon to assist with the management of service charges, how they are calculated, how they are presented and how Managing Agents stay accountable.  We have assisted several clients with bespoke services to audit, review and manage the service charge process and would be happy to help.

Following an increase in enquiries from clients looking for support, Richard Lewis , Consultant at SAY commented “Service charges are under more pressure and more scrutiny than ever before.  We have found an alarming number of clients have little to no process in place to ensure that their risk is being managed in the issuing and oversight of the service charges they are required to administer. We have developed a bespoke service which assists our clients with the management of their responsibilities and ensures that the milestones on the annual service charge journey are hit, on time, with transparency and accountability.”

For more information on how SAY Property Consulting may be able to assist, contact us now for a confidential discussion: richard@sayproperty.co.uk or 07552 219491.