How it works, your rights and responsibilities

Service charges are payments by the homeowner to the Landlord/Management Company for all the services provided. These will include maintenance and repairs, insurance of the building/estate and, in some cases, provision of central heating, lifts, caretaking, lighting and cleaning of common areas etc. Usually the charges will also include the costs of management, either by the Landlord or by a professional Managing Agent.

Service charges can vary from year to year; they can go up or down without any limit other than that they are reasonable. Details of what can (and cannot) be charged by the Landlord/Management Company and the proportion of the charge to be paid by the individual homeowner will all be set out in the lease/TP1.

The Landlord/Management Company arranges provision of the services. The homeowner pays for them. All costs must be met by the homeowners; the Landlord/Management Company will generally make no financial contribution. Most modern leases/TP1 allow for the Landlord/Management Company to collect service charges in advance, repaying any surplus or collecting any shortfall at the end of the year.

The Landlord/Management Company can only recover those costs which are reasonable. Homeowners have powerful rights to challenge service charges they feel are unreasonable at the First Tier Property Tribunal (previously the FIRST-TIER TRIBUNAL (PROPERTY CHAMBER)).

When considering the purchase of a leasehold apartment or house, it is important to find out, for personal budgetary purposes, what the current and future service charges are likely to be. Also, check if there is a reserve fund, and what plans are there for major works that could affect the service charge in the next few years after your purchase.

It is the homeowner’s obligation to pay the service charges and ground rent promptly under the terms of the lease/TP1. If they are not paid and the landlord is able to show that the charges are reasonable, then he can begin forfeiture proceedings. If approved by a court, this can lead to the landlord repossessing the apartment. However, under the Commonhold and Leasehold Reform Act 2002, the right of the landlord will be restricted.

Each year, agents are required to provide you with a Service Charge Budget. This budget is devised by the Management Company/Agent/Landlord to allow the development to demand reasonable Service Charges. The budgets are devised by comparing actual expenditure and estimated future expenditure. This budget would normally include a provision for future reserve funds to allow the Management Company to deal with the obligations as set out within the lease/TP1. This may include external decoration, internal decoration, roof refurbishment and other costly expenses likely to be incurred by your development.

If your Company overspends and has a need to recover the additional costs, your lease/TP1 and legislation allows the overspend to be paid by you by means of a levy. Some sites have a very precise budget and additional levies are often required.

Similarly, significant under spends can also be credited to the lessees.

The lease/TP1 will normally require the Landlord or Management Company to take out adequate insurance for the building and the common parts, and will give him or her the right to recover the cost of the premium through the service charges. This policy will not normally cover the possessions of individual homeowners.

If you own a flat or apartment, it is more than likely that the Service Charges include your Buildings Insurance Premiums. The Landlord or Management Company administers such policies, and the premiums paid for by your service charge fees. The buildings policy does not cover your own contents. It will typically cover the bricks and mortar, the roof and supporting walls. It is necessary to maintain the buildings in a good workman like manner to help reduce the need for insurance claims.

There is a need to complete regular Buildings Insurance Valuation or (Reinstatement Cost Assessment). This is an assessment of how much it would cost to rebuild the property based on total loss, including situations of a fire or collapse and enables you or your landlord to insure it for the correct amount.

An accurate cost assessment is important to ensure your building asset is insured for the correct amount, avoiding situations of under and over insurance. If your property is undervalued, insurance payments may not adequately cover the cost of rebuilding.
Likewise, if the building is overvalued, your insurance premiums will be higher than they need to be.

This includes visiting the property, taking measurements to calculate the floor area, and surveying the type of construction and fittings in accordance with RICS recommendations. Surveyors must accurately measure and assess construction in order to calculate the building’s reinstatement cost using current building cost indices and making a detailed assessment of other important factors including, demolition, site clearance, specialist features, site topography and fees.

RICS recommends that full reinstatement cost assessment is undertaken every three years and whenever there are significant changes to the buildings such as construction of extensions. Some professional landlords (freeholders) also insist on valuation every 3 years, others 3 to 5 years. Many clients who do not have a landlord, and where they own or have the freehold within their management company do not often see a benefit in paying for a survey when no one is asking them for the same. The assessment becomes more complicated when specialist buildings are involved. Surveyors need to be able to assess traditional buildings and new builds though an experience of appraising listed buildings or specialist structures will often be required.

This is a very important topic. Rather like cars that need servicing or they will grind to a halt, buildings need to be cared for and looked after and whilst they won’t grind to a halt, they will fail in one way or another. The basic concept of a building is to keep the occupants warm and dry. To keep people warm and dry, buildings need to be watertightand have no gaps or holes. Unfortunately, a lack of building maintenance reduces the capability of the structure to be warm and water tight. Why?

A modern building is built with bricks, mortar and concrete etc. which whilst man made, do not always have straight lines, so extra materials have to be used to “fill in” or pack areas. It is these extra materials that can be susceptible to a lack of maintenance. A classic example is a shower tray. A shower tray abuts to a wall, but the seal is not tight, so mastic is used to form a water seal. Over a period of time, the seal will deteriorate and will need to be replaced, otherwise water will leak into what is below. In a block of apartments, this usually causes damage to the ceilings and contents of the apartment below due to no fault of their own. Water is extremely adept at finding every leak and crack, so once it is released, and escapes (from the shower tray in this case) it will run across beams, down through plaster with very little stopping it. Water damage is also extremely expensive to repair! A simple leak of water, will require a whole ceiling to be repainting costing hundreds of pounds, an undetected leak of water could cause untold thousands of pounds of damage.

Insurance will pay for some of the costs, but a claim on a buildings policy, rather like your car will serve only one purpose and that is to increase insurance premiums or to increase excesses. One person in a block of apartments, that does not maintain his shower tray, can cause constant leaks causing several claims per year. In addition, unknown leaks can cause wet and / or dry rot which spreads very quickly and very often this is not insured and to eliminate rot will run into thousands and thousands!

What else can go wrong? Flat roofs have a life cycle much shorter than a normal tiled roof, but are cheaper to install. However, they need to be constantly inspected (every year) and repair any defects or this will allow rain water into the building again causing water damage to the fabric of the building. On the external parts of the building, gutters are usually a weakness. In essence, their job is to carry away water, but if they are not regularly unblocked of leaves, decaying animals etc., the rain water cannot flow away and will leak into the fabric of the building. Finally, the exterior of a wall, needs regular inspection and repair whether its brickwork and the mortar needs checking or painted and re painting – saving money by a failure of maintaining a building is false economy and will only serve to cause damage to building, increase claims expenditure and pay more on excesses.

Everyone thinks insurance is a con! Just like everything else you purchase, if you know how to use it, it will work for you, if you don’t, it won’t! Buildings insurance does NOT insure everything! It cannot, but it does cover many things. It will cover “perils”. An example of a peril is fire, theft, escape of water and a sometimes accidental damage. For a claim to be valid, the cause of the damage has to be one of these perils –
so damage by a chip pan fire would be fire, damage by ingress of water due to storm would be storm, damage by ingress of water due to a flat roof failure is not a peril and would not be covered!

Making a claim is not that difficult. The first thing to calculate is how much is the damage. Obtain a quotation for the repair. Is it underneath the excess? if so then insurers will not pay the claim. If it’s just over the excess, is the claim really worth making? Once a value of claim is known, report this to your managing agent who will report to insurers with accompanying information such as the repair estimate. Dependent upon the size of the claim, the insurers may well require a loss adjuster to visit. A loss adjuster are the eyes and ears of the insurers, they are not there to reduce the claim, but to make sure the claim falls within the scope of the policy. Once the scope has been agreed, they will review the damage and make sure the damage is covered by the estimate of the works and report to insurers. Claims payments come from insurers and usually directly to contractors or to the managing agent.

In the event of a major loss, insurers will react a lot quicker. No estimates of repairs are required, loss adjusters and brokers will be on site usually within 24 hours and will take control of what happened, how it happened, is it covered? Once the cover is agreed, the key aspect is to get the repair underway as quick as possible and this again will be arranged with the agreement of the managing agent. If the incident is really serious, the other aspect to consider is alternative accommodation. Most residential property policies include cover for alternative accommodation and loss adjusters and brokers will work with individual residents to agree what is best for them during the repair period.