What is a property service charge and why do I have to pay it?

Buying a flat or apartment is exciting. It often presents a sensible investment. As a smart buyer, you’ll want to make sure everything is in order before making a big decision. Part of this means knowing what service charges are. One of the many things to think about is the flat service charge. But if you look at the big picture, it can save you money. If you can’t decide between the three places you love, the one with the best service charge might be the best option for you. This guide tells you everything you need to know about the service charge you’ll have to pay on a property on top of the mortgage, utilities, and other costs. Although not as common as in England and Wales there are freehold properties in Scotland.  Plus much of the information relating to the service charges can also be applied to the factor fees system that is more prevalent in the Glasgow area. We’ll even tell you the average service charge that Glasgow freeholder flat owners pay.

What is a Service Charge?

Service charges don’t affect houses; they are paid by people who buy flats, apartments, maisonettes, and homes in other types of multi-dwelling buildings. Your service charge is what you pay as a homeowner to cover the cost of taking care of communal areas like hallways, stairs and the garden or land around the building. Each household on the land pays its own charge.

When you buy a rental flat, the owner who owns the freehold is responsible for the whole building. This includes repairs, general maintenance, and getting the right kind of protection for the building. In the lease deal, the amount you’ll pay is written down, along with what it will cover.

Service charge agreements are different for each property and place, so take the time to read and understand yours. They usually list everything that needs to be cleaned, fixed, or maintained in common areas like halls, lobbies, lifts, gardens, and stairways. The building’s insurance part of your fee pays for damage to the building’s structure that can’t be anticipated, like fixing a roof that was damaged by a storm.

Service Charge Examples:

• Ground rent
• Energy from electricity, gas, or oil, and is used for warmth and lighting in an area.
• Landscape, horticultural, and other work
• Cleaning
• Maintenance for the Lift
• Doorbell, entry phone, and security upkeep
• Insurance
• Maintenance and repairs to the entire building
• Grounds upkeep and repairs, including parking lots and outbuildings
• Business management and building administration
• Major repairs
• Necessary Improvements

Different Types of Service Charges

Let’s move on to the specifics now. Here are some of the most typical items that are subject to service charge payments and what you need to know.

In simple terms, ground rent is an additional amount of rent that must be paid in accordance with the lease’s conditions to the owner of the land the building is located on. If your lease expired before June 30, 2022, there is no ground rent unless the landlord makes a formal written demand for it. Where ground rent is applicable the land owner has the right to sue you if you don’t pay. If this is the case, they may pursue you for unpaid ground rent that dates back up to six years; and you may have to pay it all at once.

Only if you and your landlord have already agreed to an increase or if your lease specifically permits one, can your landlord raise the ground rent. If your lease began on or after June 30, 2022, the landlord may not impose a ground rent greater than the so-called Peppercorn rate. Since Peppercorn rent is a token or nominal amount, there is no exchange of funds. However, it is still a legally enforceable agreement with the landlord, a formality recognising the landlord’s ownership of the property.

In order to cover longer-term expenses, service charges on property agreements typically include a Reserve Fund and/or a Sinking Fund. To ensure that there is money available when it is needed, such as to replace the carpeting in the hallways, landings and staircases, or to enhance the fireproofing, all unit owners in a building pay into a common fund through service charges.

There is a little difference whether your fund is referred to as a sinking fund. The funds are intended to cover relatively specific expenses, such as repairing an outdated front door, that might only occur once over the course of a 99-year lease.

Your landlord is responsible for paying for building insurance, which provides coverage for a variety of unpredictable risks like fires, floods, earthquakes, and storms. It is not necessary for you to purchase your own building insurance, and since you are not the freeholder, you are unable to do so. Only your own content cover is required. If you’d like, you can view a summary of the insurance contract. You can appeal to a tribunal if you believe the premiums are excessive and you are unable to come to an alternative agreement.

Advice on Service Charge

You are allowed to participate in the flat service charges you pay as a leaseholder, but only if the price totals more than £250 per leaseholder for scheduled work or more than £100 per year. The freeholder must follow a set of procedures known as Section 20 consultation if they decide to consult you over the service charge. If you weren’t properly consulted, the freeholder can only demand a portion of the whole amount from you.

Raising a Dispute over Service Charge

You can formally dispute a service charge when a cordial dialogue and mutual negotiating efforts have failed to find a solution. If you believe the charge is unfair, you might be able to do so through a tribunal. The same applies if you feel that the quality of the work isn’t high enough or that you shouldn’t have to pay for it in the first place.

Once you’ve agreed to pay the fee, you can’t file a dispute to a tribunal. Furthermore, you are powerless to intervene if the disagreement is already being handled in a different manner, perhaps by a solicitor or another type of neutral expert. If you pay a fixed fee, the same applies.

When you must pay a service charge?

The service charge for the property is paid in advance on a quarterly, biannual, or annual basis. The details will be in your rental agreement paperwork or the contract you sign with the freeholder’s property management company.

Who is responsible for paying the service charge?

The leaseholder is responsible for paying their portion of the service charge. Each flat pays its own share into a single fund. Either the freeholder holds and manages the fund, or they employ a management firm to do so on their behalf.

Are Service Charges Required in Every Flat?

Unless the owners of the building decide to manage it themselves, most flats and other multi-household properties have a service charge.

Final accounts and estimated costs

Service Charges are calculated using a combination of actual and estimated costs for the services it cover. The majority are subject to annual change and are therefore variable. Your lease will specify whether the freeholder estimated the amount they will require for the upcoming year and, if so, on what basis.

Your agreement will often permit them to collect the money from leaseholders, a practice known as a balancing charge if the property’s end-of-year finances are negative. The lease will specify whether you’ll receive credit for the excess if they spend less than expected or whether it will be applied as a credit towards your next payment if it is carried over to the next year.

There are three ways to compute service charges: 

• Daily expenses such as cleaning fees for public areas and monthly insurance premiums
• Sinking or reserve funds are intended to cover longer-term and more expensive upkeep, such as replacing a roof or installing triple glazing.
• Cyclical expenses that occur frequently yet rarely, such as those for exterior and interior enhancement and drainage maintenance

The usual service charge payable by leaseholders in Glasgow can range from anything from £500 to £1200 a year depending on the size of development, what area it is in and what facilities it includes.

Service charge amounts depend on a number of factors

There are many factors that can change your annual service charge on property. If major repairs are needed right away and can’t wait, there might not be enough money in the reserve fund to pay for the repairs. In this case, your freeholder will want to ask you for more money. Some services could be added and others could be taken away throughout the year. The prices from one year might not have been figured in until it was too late. The management company or freeholder might also change how the costs are split among the leaseholders.

The freeholder’s fees to the property management company could go up, either because of the economy or because they chose a more expensive, hands-off management plan. They can also go down if the freeholder chooses to take over more or all of the property management. Some leaseholders might not have to pay into the Sinking Fund part of their charge until they have lived in the house for a few years.

Your leasehold agreement will make it clear how the service charges are split between the leaseholders in the building. It could be an easy, fair split. If some flats are bigger or have more bedrooms than others, or if only one apartment has access to the yard, it might be split accordingly.

Major Works and Consultations

Section 20 of the Landlord and Tenant Act of 1985 says what are called “major works” or “qualifying works.” They are basically big, important building repair jobs, and freeholders can ask leaseholders to pay for them through their flat service charges.

As we’ve already said, section 20 of the Act says that the freeholder must talk to you all if the repair will cost more than £250 per leaseholder. During the planning process, the freeholder gives you a clear description of the project’s scope, but not a full specification. The freeholder must also “take into account” any comments you make and respond in the right way. This just means that they have to listen to your worries and give you good answers.

Service Charges Frequently Asked Questions

#1. Where can I find out what services I will get and how much they will cost?

If you pay a service charge, you can ask the freeholder for a breakdown of how it was calculated and how the money will be spent.

#2. Why is the service charge for my flat different from my neighbour’s?

Most likely, your flat is different. Theirs might be bigger, have a balcony, be the garden flat, or just have more beds. It could also be smaller than the others or not have as many amenities. Some agreements divide the total charge evenly, while others figure out the charge based on how much each person pays.

#3. What if the real cost is more or less than the estimate?

The freeholder can’t change the charge you pay if the actual total annual cost is less or more than what you’ve paid. But if the agreement lets them, they can change the price for the following year.

#4. What’s the difference between the rent and the service charges?

As a renter, you don’t have to take care of or fix up the common areas. The rent pays for it. Leaseholders pay service charges to freeholders to cover the costs of the common services that come with their lease.

#5. Am I really required to pay for the service charge?

No. If the lease specifies that the freeholder may legally collect the cost from you, then you just have to pay a service charge for the work or services. You are not required to pay it if your lease does not mention it.

#6. If service charges are not paid, what will happen? 

Speak with the freeholder or management company if you are behind on your service charge to find out your options. If you put off taking care of your arrears, they may sue you, which could result in you losing your home. If you ever want to purchase your own house again, it will also be more difficult to get a mortgage.