Definition
The legal definition of a service charge is an amount payable by a leaseholder/tenant in addition to ground rent, services, repairs, maintenance, improvements, insurance and cost of management. This will vary from year to year, according to the costs incurred. Service charge applies to the communal parts of the estate and leaseholders will incur this charge in addition to the maintenance of their flat. These payments may also include annual contributions to a reserve fund, which is service charge monies set aside to help with costly major works.
Paying Service Charge
Service charge payments are usually made in advance. In most cases, many leases will allow the landlord or managing company to give an estimate of the charge payable and demand payment in advance of the accounting year. Therefore, guaranteeing the landlord or management company has funds to handle the costs of providing services. The service charge ensures the management company or landlord has sufficient funds for effective management of the property.
Calculation
The terms of your lease will stipulate how your service charge payments are calculated. This will also show how the costs are shared between the leaseholder and landlord. You will not have to pay for any services that aren’t included in your lease. Some lease terms are often vague, such as repairs or maintenance to the building’s structure, but points such as legal and management costs, heating or garden maintenance should be specified.
What happens when Service Charge is not paid
If you don’t pay your service charge, it could lead to serious consequences for yourself and the building/property. If the funds for service charge become insufficient, it could lead to the services being reduced or maintenance not being carried out. This will then negatively affect the building’s insurance, shared areas and the property’s overall condition. Notably, it could result in legal action being taken against you including court proceedings and a county court judgement. This could affect credit ratings or prevent you from buying another leasehold. In some cases, it could prevent you from selling the leasehold if there are service charge payments still to pay. Finally, in the most serious cases, it could result in forfeiture of the lease.