Landlords of long residential leasehold properties can recover the cost of maintaining and managing a building by charging leaseholders a service charge, as long as the lease allows it. These charges cover shared services and expenses such as repairs, insurance, and communal facilities. 

What are Service Charges 

Under section 18 of the Landlord and Tenant Act 1985, a service charge is defined as a payment made by a tenant (as part or in addition to rent) which:

• Covers services, repairs, maintenance, improvements, insurance, or management costs; and
• varies according to the actual cost incurred by the landlord. 

The legal definition does not overrule the lease - charges must be clearly outlined in the lease to be chargeable. 

Fixed and Variable Service Charges

Service charges are typically either fixed or variable.

• Variable service charges fluctuate year to year based on actual or estimated costs. 
• Fixed service charges, found in some older leases, remain the same regardless of the actual cost. 

Most modern leases will specify what percentage or proportion each leaseholder must contribute, and whether payments should be made in advance, based on previous year’s cost or future estimates. Having these terms clearly stated helps prevent misunderstanding and disputes. 

Service Charge Demands 

When issuing a service charge demand, landlords must ensure:

• the demand is in writing
• it includes the landlords name and address
• for variable service charges the demand must be accompanied by a Summary of leaseholder rights and obligations

Reasonableness Of Service Charges 

Whilst service charges may fluctuate, landlords must comply with section 19 of the Landlord and Tenant Act 1985 which states that service charges are only payable to the landlord to the extent they are reasonable and directly related to the service provided. 

If a leaseholder feels the amount they are paying is unreasonable, they have the right to challenge the and seek redress through the First-Tier Tribunal under section 27 of the Landlord and Tenant Act 1985. 

Leaseholder Rights To Inspect 

Leaseholders have the right to request detailed information about service charges. Section 21 of the Landlord and Tenant Act 1985 allows leaseholders to request a summary of costs for the most recent accounting year.  Section 22 of the Act gives the right to inspect supporting documents like receipts and invoices within six months of receiving the summary.  

The Leasehold and Freehold Reform Act 2004

The Leasehold and Freehold Reform Act 2004 brought in a range of measures concerning leasehold property in the UK, including increasing transparency of service charges and buildings insurance policies.  Although most of the provisions are not yet in force due to secondary legislation requirements. The government is consulting on measures aimed at improving the transparency of service charges and insurance arrangements. Both landlord and leaseholder are encouraged to participate. 

Landlord Resources 

Property contains a range of professionally drafted templates for use by landlords issuing service charge demands which can be accessed below:

• Estimated Service Charge Statement
• Service Charge Demand
• Service Charge Apportionment Schedule
• Actual Service Charge Statement  
• Summary of Tenant’s Rights and Obligations for Variable Service Charge Demand