Service charges pay for everything a block needs that no single flat owns. Insurance, cleaning, lift servicing, repairs, reserves for the roof. The lease decides who pays what, and a stack of statutory rules decides how you must demand, hold and account for the money. Here is how the cycle works in practice.
The lease comes first
Every service charge question starts with the lease. It defines which costs are recoverable, how they are split between flats and when payments fall due. Apportionments might be fixed percentages, equal shares or something stranger inherited from the original developer. If the lease says a cost is not recoverable, no budget or goodwill makes it recoverable. Read the lease before you promise anything.
The annual cycle
Budget
Before the service charge year starts, you set a budget for the expected costs. A good budget is built line by line from real contracts and recent history, not last year plus a percentage. Many leases require on account demands to be based on a reasonable estimate, and a tribunal will test reasonableness against how the figure was built.
Demands
On account demands go out on the dates the lease sets, usually annually, twice yearly or quarterly. A demand must include the landlord's name and address under Section 47 of the Landlord and Tenant Act 1987, and it must be accompanied by the statutory summary of rights and obligations under Section 21B of the Landlord and Tenant Act 1985. Miss those requirements and the leaseholder can lawfully withhold payment until you put it right.
Year end
After the year closes, actual spend is compared with what was demanded. The lease dictates what happens to the difference. Balancing charges, credits to leaseholders or transfers to reserves. Accounts should be prepared promptly and certified where the lease requires it.
Rules that bite
- The 18 month rule. Under Section 20B of the Landlord and Tenant Act 1985, you cannot recover costs incurred more than 18 months before you demand them, unless you notified leaseholders in writing within the 18 months that the costs had been incurred and would be recovered. Late invoices from contractors are the classic trap.
- Statutory trust. Service charge money is trust money under Section 42 of the Landlord and Tenant Act 1987. It belongs to the leaseholders collectively, not to the landlord or agent, and should be held in designated client accounts.
- Reasonableness. Costs are only recoverable to the extent they are reasonably incurred and the works are of a reasonable standard. Leaseholders can challenge at the First tier Tribunal.
- Consultation. Major works and long term agreements trigger Section 20 consultation with its own notices and caps.
Reserve funds
Where the lease allows one, a reserve fund spreads the cost of big cyclical items across the years. Collecting £15,000 a year for a decade is kinder to leaseholders than one £150,000 demand when the roof finally gives up. Reserves are trust money like the rest, and spending them still has to satisfy the lease and, for qualifying works, Section 20.
Where software earns its keep
The mechanics above are bookkeeping, and bookkeeping is what computers are for. PropLink runs service charges on schedule level fund accounting. Budgets allocate across lease schedules, demands generate with the statutory documents attached, the year end balancing run settles to the penny, and every fund sits on a proper double entry ledger. The service charge accounting feature page shows how the cycle runs, and the reporting suite covers the accounts your accountant expects at year end.
Run the cycle on time, keep the statutory wording on every demand and treat the money as what it legally is, leaseholders money you are looking after. Everything else in block management gets easier when the service charge machine runs cleanly.