LEASEHOLDER GUIDE
If you own a leasehold flat, you will pay a service charge. It is one of the most significant ongoing costs of leasehold ownership, yet many leaseholders are unclear about what their service charge actually covers, how it is calculated, or what rights they have if they believe it is unreasonable.
Service charge disputes are among the most common sources of friction between leaseholders and managing agents. In most cases, the underlying issue is not the amount itself but a lack of clarity about where the money goes.
This guide explains how service charges work in residential blocks of flats, what they typically cover, how budgets are set, and what you can do if you have concerns.
A service charge is the contribution each leaseholder pays towards the cost of maintaining and running the communal parts of the building and the services provided under the terms of the lease. The specific items covered will depend on what your lease says, but most service charges include the following categories.
Some leases also include contributions towards a reserve fund (sometimes called a sinking fund), which sets aside money for future major works such as roof replacement or external redecoration. Not all leases include a reserve fund provision, but where they do, it is a prudent way to spread significant costs over time rather than issuing large one-off demands.
Each year, the managing agent (or the management company directors, depending on the arrangement) prepares a service charge budget for the building. This budget estimates the total cost of running and maintaining the communal areas for the coming year.
The budget is typically broken down into individual cost categories — maintenance, insurance, utilities, management fees, cleaning, compliance, and any reserve fund contributions. Each leaseholder's share of the total budget is determined by the apportionment set out in their lease, which is usually expressed as a percentage or fraction.
At the end of the service charge year, the actual costs are compared against the budget. If expenditure was lower than budgeted, leaseholders may receive a credit. If costs exceeded the budget, an additional demand may be issued. This is sometimes referred to as a "balancing charge".
The managing agent should consult with directors during the budget-setting process. If your agent sets the budget without any input from the board, that is worth raising as a concern.
Leaseholders have specific statutory rights when it comes to service charges. These rights are set out primarily in the Landlord and Tenant Act 1985 (as amended).
Service charges must be "reasonably incurred" and the work or services they pay for must be of a "reasonable standard". If you believe a charge is unreasonable, you have the right to challenge it at the First-tier Tribunal (Property Chamber), which can determine whether the charge is payable.
Leaseholders have the right to request a summary of costs that make up the service charge. The management company or landlord must provide this within one month of the request. You also have the right to inspect the invoices and receipts that support the summary.
If any individual leaseholder's contribution to a particular piece of work will exceed £250, the managing agent must follow the Section 20 statutory consultation process. This gives leaseholders the opportunity to comment on proposed works and nominate alternative contractors. Failure to consult properly caps the amount recoverable from each leaseholder at £250.
Qualifying tenants have the right to commission a management audit of the management functions carried out by their landlord or managing agent. This can be useful if you have concerns about how the building is being managed or how funds are being spent.
If you believe your service charge is unreasonable, unclear, or that the managing agent is not providing adequate financial transparency, there are several steps you can take.
Start by requesting a detailed breakdown of costs from your managing agent. You are entitled to see how every pound of your service charge has been spent. If the agent is unable or unwilling to provide this, that is a significant concern.
Raise the issue with your RMC or RTM directors. The board has a duty to oversee the managing agent's performance and ensure that service charge funds are being spent appropriately.
If the matter cannot be resolved informally, you can apply to the First-tier Tribunal for a determination on whether the charges are reasonable. The Tribunal process is designed to be accessible to leaseholders without the need for legal representation, although some leaseholders choose to instruct a solicitor.
You can also consider whether the current managing agent is providing the level of service your block requires. If the answer is no, the board may wish to explore changing the managing agent.
COMMON QUESTIONS
If your block's financial reporting lacks transparency, a free consultation with one of our Partners can help you understand your options and what better management looks like.
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