Buying a flat – What is a service charge and how much could it cost?
With ‘First Time Buyer Relief’ and ‘Help to Buy’ assisting buyers to get on to the property ladder, as a firm, we have seen an increase in the number of leasehold/flat purchases. Often clients are surprised when we tell them that when purchasing a leasehold property, one of the costs they should factor into their budget is the “service charge”.
In 2016, the average annual property service charge in the UK was £1,863. Staggeringly, service charges for new builds are 96% higher than older properties, with owners paying on average £2,777 per year.
As the name suggests, service charges are levied for various services provided by the landlord (or the managing agent that they employ). The services will vary depending on the terms of the lease, but usually include maintaining buildings insurance, cleaning and maintenance of communal areas, servicing any lifts in the building and the upkeep of any communal heating systems.
Service charges are usually payable in advance at regular intervals throughout the year (often half yearly). A service charge budget is prepared each year and a fixed proportion charged to each flat owner based on square footage or a “fair and reasonable proportion”. At the end of each service charge period, a set of accounts showing the actual expenditure incurred is produced. Any surplus is carried forward and set off against service charge demands made for the next period. Similarly, any deficit is also carried forward and added to the next service charge demand.
Works which are anticipated to cost in excess of £250 per flat owner, are classed as “major works”. The landlord has to follow a strict procedure before carrying out such works. To avoid hitting owners with a large service charge demand when major works are undertaken, flat owners may be asked to contribute to a sinking fund for major renovations each year as part of the service charge. A sinking fund is essentially a savings pot for the building which builds up over time and then when larger works need to be carried out, the cost can be paid in part or full from this fund.
It is important that the service charges are correctly apportioned between the buyer and the seller before the purchase is completed. If accounts for any previous years are yet to be finalised, the buyer’s solicitor should make sure that there are contractual provisions requiring the seller’s solicitor to hold back a fixed sum from the sale proceeds (a retention). If there is a deficit when the accounts are finalised, the buyer will then be able to claim the seller’s share from the retention.
Clearly, service charges are an important factor to consider when purchasing a leasehold property. Checks by the buyer of the finer details such as whether water consumption is included in the service charge, or whether it is billed direct by the water authority, are advisable. A new buyer may not want to end up paying for other people’s long showers! When viewing a property, a look at the state of the building is always a good idea – does it look likely there are going to be major works in the near future and if so, is there a sinking fund in place?
A good solicitor should be able to give advice regarding any service charge payable but it pays to be aware of this additional expense at the outset and when budgeting.
You can also contact one of our other solicitors in the residential property team here.