Understanding leasehold and shared ownership service charges 

Navigating the world of leasehold and shared ownership properties can be complex, especially when it comes to understanding service charges. These charges are essential for the maintenance and management of your building. But what exactly are service charges, how they are calculated, and what you can do if you are concerned about the amount you are being charged?

When you first planned to own your own home, whether as a freehold, leasehold or shared ownership flat, your first consideration was probably the purchase price and the cost of your mortgage. It is easy to overlook the ongoing and recuring costs associated with maintaining your home, and which become your responsibility the moment you collect the keys.

According to research by UK estate agents, the average cost of maintaining a home in the UK is between 1% and 4% of the value of the home. Of course, the actual cost for maintenance will depend on great many factors, not least the age of the property and the wear and tear associated with living in it. However, the average UK home had a value of almost £300,000 in 2023, which means homeowners should expect to spend a minimum of almost £3,000 per annum simply to keep their home in good condition.

For people with leasehold ownership, either outright as or as a shared owner, the landlord or building management company has a duty to provide the services necessary to maintain and repair the property and to purchase the specialist insurance to cover the risks of certain types of damage and liability.  An agreed portion of the costs are then charged back to the leaseholders as a service charge.

What this means for Reside’s leasehold residents

Service charges are the contribution that each leaseholder and shared owner pays to their landlord or management company to cover the costs incurred by the landlord in fulfilling their duty to maintain the building and communal areas.

These charges cover a range of services, including:

• Maintenance and repairs: This includes routine maintenance, emergency repairs, routine building safety checks and maintenance and sometimes improvements to the building’s structure and communal areas where the lease provides for these to be rechargeable. If a landlord has provided a non-routine repair service to an individual leaseholder or shared owner, then it is common for leases to also provide for these costs to be recharged back to the individual leaseholder as a charge on top of the service charge.
• Utilities and services: Costs for communal heating, lighting, and water supply. This might also include the costs of maintaining or repairing communal equipment like lifts, pumps and security systems.
• Insurance: Building insurance to cover the structure of the building: There has been considerable discussion in recent years about the state of the buildings’ insurance market. The insurance sector works on the basis of pooled risks, which helps to reduce the typical premium for most types of risk or liability. However, because of a number of significant events affecting residential buildings, including construction, safety regulations, climate events and remediation, some underwriters have withdrawn from the sector and the availability of re-insurance capacity is less than in previous years. The effect of this is made it harder to find suitable insurance cover and also made the premiums more expensive. The situation has been especially difficult for local authorities, many of which have had certain types of insurance cover withdrawn at short notice. LBBD is one of the local authorities that in 2023 had some of its policies cancelled. It was able to find suitable alternative insurance cover, but this was more expensive. The factors affecting the insurance sector mean that there is no guarantee this situation will not recur in the future.
• Management fees: If the lease allows it, then the service charge can include a sum representing a fee for the landlord’s management time, including administration and staffing. If there is a management company, then the fees of that company can be included.
  

How are service charges calculated?

As you would expect, there are strict rules to protect consumers from sharp practices and unscrupulous landlords. These rules determine how the service charge is calculated and which costs can be included. The starting point is what is set out in the lease document signed when you moved in. The law says that service charges must be fair, transparent and reasonable.

Budgeting for the year ahead

Service charges can vary significantly from year to year, depending on the actual costs incurred by the landlord. Typically, in the same way that a freehold owner might set their budget for the year ahead, leasehold landlords will estimate the costs for the upcoming year and charge leaseholders accordingly. At the end of the year, they provide a statement of actual costs. If the actual costs exceed the estimates, leaseholders may have to pay the difference, known as a “balancing charge.” Conversely, if the costs are lower, the overpayment is usually credited to the next year’s charges.

B&D Reside’s role in setting service charges

Currently, the council provides the landlord services for most of the homes provided by B&D Reside. There are some exceptions, such as where Reside has been trialling Evo as a dedicated repairs provider. However, most of the charges relate to services provided by the council and its contractors. The council’s costs for providing those services are then apportioned according to the number of properties that are serviced and in accordance with what is set out in the lease.

What can you do if you are concerned about the service charge for your home?

If you are unhappy with the service charge for your home,  then you have the right to ask for a detailed breakdown of costs. Follow the contact details set out in your service charge letter. If you are still not satisfied and believe that the service charge is unreasonable then you have the legal right to challenge them. This is available to you even after you have paid them. There is more advice on this topic in the useful links section below.

Be prepared to plan ahead

Understanding the costs of maintaining and insuring your home is crucial for managing your finances as a leaseholder or shared owner. It is always a good idea to make sure you understand what your lease says about the costs of maintaining your home and find out more from the links below.

B&D Reside will always support residents who want to get a better understanding of the services provided and the costs associated with them. We believe residents have a right to feel in control of their home and its maintenance.

More information 

If you need further assistance or specific advice, independent organisations like the Leasehold Advisory Service can provide valuable support and guidance. 

Government advice:

https://www.gov.uk/leasehold-property/service-charges-and-other-expenses

Service charges guidance: 

https://www.lease-advice.org/fact-sheet/service-charges/

Guide to leasehold charges: https://hoa.org.uk/advice/guides-for-homeowners/i-am-buying/leaseholders-charges-what-to-know-before-you-buy/