Service charge accounts can be a complex part of property management accounting, but they don’t have to be an impossible part. In this blog post, we’ll go over service charge accounts and everything you need to know about them.

What are service charge accounts?

To answer the question, we need to break down the phrase ‘service charge accounts’. First, a service charge is a payment a tenant or leaseholder must make towards the cost of services or repairs not to a property, but the wider area on which it sits.

For instance, if a communal garden of a block of flats needs maintenance, the cost – or service charge – is covered by all residents.

Services can include:

• general repairs and maintenance
• electricity bills for communal areas
• cleaning of stairwells and other areas.

Where a managing agent is involved, charges may also include their fees.

Service charges are usually paid in advance, and the frequency of the payments should be stated in the lease. Typically, payments are expected quarterly, annually or bi-annually.

Service charge accounts, meanwhile, also known as a ‘summary of relevant costs’, are accounts that show the allocation of service charges. Prepared yearly, they include the details of actual service charge income and expenditure.

The accounts are something that leaseholders have legal access to according to Section 18 (2) of the Landlord Tenant Act 1985.

Do service charge accounts need to be certified?

There is no legal reason for a service charge account to be certified, or signed off, by an accountant. Nevertheless, many leases stipulate that this must happen – and for good reason.

After all, leaseholders and tenants often challenge service charges, and, again, have a right to view the associated accounts. Therefore, they are free to view – and scrutinise – your accounts.

Having an accountant check and sign off your accounts, therefore, is an important part of ensuring there are no discrepancies in your work.

Are service charges needed for commercial properties?

Just as with residential properties, service charges and accounts can apply to commercial properties as well. And that is well, given the fact these properties will certainly need a lot of servicing and maintenance, the costs of which can be claimed back from tenants and leaseholders. Service charges can be applied on things like:

• maintenance and repairs
• cleaning
• refuse and waste collection
• heating
• lighting
• security

How is a service charge calculated?

Usually, landlords collect service charges ahead of each financial year, asking for more or reimbursing tenants as needed at the end. That can seem like a lot to tenants and leaseholders, but it’s designed to reduce the amount of administration needed when a large project unexpectedly arises.

Costs covered by service charges are divided into three categories:

• Day-to-day costs: This includes communal area cleaning, insurance costs and wages for staff.
• Cyclical expenses: Tasks that come up infrequently but are still regular, like drainage maintenance and decoration costs.
• Reserve funds: Kept in reserve to pay for larger, costlier repairs that may arise unexpectedly.

A lease or tenancy agreement should clearly state how service charges are split up between residents. This can be a simple, equal division, or there can be more complex calculations based on the sizes of the relevant flats.

Need assistance with service charge accounts?

Service charge accounts are an essential – but often overlooked – part of being a landlord. If you need help with yours, we’d be happy to help. All you need to do is get in touch and find out how we can help you.