Your service charges are defined by the legal documentation relating to your property that you entered in to at the time of purchase. Service Charges are payable by the leasehold or freehold owner of the property to cover the cost of services for the maintenance and running of the building and communal areas.
What does the Service Charge cover?
These will include costs towards items such as cleaning, gardening, site staff, mechanical plant maintenance (such as lifts), fire safety equipment, insurances, general repairs and maintenance, accounting, company secretarial services and our fee for the management.
The proportion of the charge payable by each leasehold or freehold owner is set out within the terms of the lease or transfer documentation. The lease may also outline whether the charge should be collected in advance or in arrears along with due dates. Where the lease allows, a budget will be produced projecting the anticipated expenditure for an upcoming financial period. This will include fixed contracted costs such as communal cleaning, along with provisions for variable costs such as communal electricity or reactive maintenance.
At the end of each financial period, service charge accounts will be prepared which detail the expenditure incurred and the collection of service charges. These are either certified or audited externally. If at this point there is any variation between the annual service charge budget and actual expenditure, leasehold or freehold owners will either receive a balancing credit in the case of a surplus, or an additional request to cover the deficit in the case of a deficit.
Who sets the service charges?
As the agent appointed to manage the property, Crabtree will prepare the initial and subsequent budgets for the service charges. These budgets are in turn agreed with the directors of the RMC/RTM company. The RMC (Resident Management Company) or RTM Company (Right To Manage Company) is the statutory entity that was set up at inception of the property to administer the affairs of the property. This entity has a board of directors that represent the interests of the freehold or leasehold owners on the property. This same management company reviews the accounts and liaise with us as the agent in the smooth running of the property.
Sometimes, there is no such company in place and our client is the owner of the freehold. In these cases, this same management function of the RMC/RTM Company is taken on by the freeholder.
Service charge budgets explained
A budget is an educated estimate of the forthcoming year’s expenditure. The budget figures for each forthcoming service charge year are based upon what has or is expected to be spent during the current year. This is done by analysing the expenditure within the current year and reviewing expenditure required for the forthcoming year.
Please bear in mind that this is not always spread equally across all properties and is determined by the lease. The apportionment’s can vary for reasons such as the number of bedrooms your property has, or even the floor space. Once the service charge is due, a notice of this which is legally called a demand will be sent to you for payment. The legal documentation will state on demand but, in most cases and where the documentation allows, we offer a Direct Debit facility to spread payments across the year to assist you in spreading such costs.
The reserve/sinking fund is a provision for future cyclical works such as redecoration or for the specific replacement of mechanical equipment such as a lift. The creation of a reserve fund is best practice to spread such costs across the time of ownership but it is not mandatory. The lease may specify whether such a fund is to be created.
The building or grounds will need to have insurance in place to protect the RMC or RTM and the residents from accidents that may occur and to ensure statutory requirements are met, such as engineering policy for a lift. Building insurances may be payable and included in the service charges or may be arranged and billed directly by the Freeholder as a separate charge.
On a leasehold property, ground rent is the amount paid by the owner of the leasehold to the freeholder (or superior leaseholder) as determined by the lease. Ground rent is usually a fixed annual payment and will be collected either by the freeholder directly or through a designated 3rd party agency, which may be Crabtree on behalf of your Freeholder. In many leases the fixed amount increases at regular intervals as specified within its terms.
From time to time, you may require additional services from us or there may be additional administrative costs incurred, such as information required by your solicitor to help sell your property, additional documentation you may need from us or in the case that third parties have to be engaged on behalf of your management company to recover service charge costs that are unpaid. There may be other charges levied by the freeholder on leasehold properties which you may have to bear. Such costs might include permission to make amendments to the usage of your freehold property. These are set and levied by the freeholder.