What is in a service charge budget? What are communal service charges? Why are leasehold flats so expensive? Why am I paying a service charge for a freehold house? We often get enquiries about the service charge costs for a development, and this is best explained by considering the budget which is used to calculate these charges. Here we will try to expand on the process and key terms in budgeting for a development.
Busy schedules
In many cases, a total budget can be made up of multiple schedules. These are simply different elements of the budget, in the same way you may divide your salary into different bank accounts for savings, bills and disposable income. A common example is a small estate with two separate blocks of flats. The chances are, there will be one schedule everyone pays into for gardening, grounds and car parks. Each building will then have a schedule just for that building, for things like insurance, electricity and cleaning. In this scenario, every flat is likely to pay into two of the three schedules i.e. the grounds for everyone, and for their specific building. They are unlikely to contribute to costs for the other building.
Line by line
Budgets normally follow a similar format, with ‘line items’ or headings running down the left hand side in a list. If you follow the line across, you will see the projected cost for the coming year, and perhaps the budget from the previous year compared to actual expenditure in that year. Common headings can include:
Property Owners Insurance - this normally includes buildings insurance for a block of flats, but may also have communal contents insurance and public liability cover, among other elements.
Directors & Officers Insurance - this is insurance to protect the Directors of the management company in case of damage or injury from a decision or action they have made.
Engineering Insurance - covers the cost of damage and parts from the failure of machinery, normally motors for lifts or vehicle gates, or water pumps. This is often incorporated with Engineering Inspections, which are statutory 6 monthly inspections required by LOLER to check lifting equipment (often more expensive than the insurance).
Gardening / Grounds Maintenance - the cost of general gardening which can include lawn mowing, hedge trimming and tree pruning / tree surgery.
Communal Cleaning - normally for blocks of flats, the price for cleaners to visit to dust, vacuum and clean the corridors and stairwells.
Lift Maintenance (contract and repairs) - most lifts will have some form of maintenance contract with specialist engineers to make routine service visits (anything from monthly to annually). Depending on that contract, there can also be call out fees to attend to breakdowns, as well as costs for ad hoc repairs.
Accountancy - most leases and transfer agreements require the company or freeholder to certify expenditure for the year, and generally an independent accountant will undertake a review of the invoices and cashflow to prepare year end accounts. This would be more expensive if a full audit is required. They may also provide dormant accounts for a management company for Companies House.
Management Fee - if your development has a professional managing agent, their charges will be included here. Many leases allow for freeholders to charge their own fee, if they undertake the management role themselves instead of appointing an agent.
Company Secretary - this includes various tasks for the management company, from providing a registered address and maintaining Companies House records to preparing and attending AGMs. This can be done by your managing agent or a separate entity.
Professional Fees - this covers various professional services such as surveyors (who may advise on structural issues or major works), solicitors fees (for legal advice, debt recovery or enforcement of covenants) or risk assessment fees (for things like Health & Safety Risk Assessments, Fire Risk Assessments, or more recently External Wall System surveys).
Utilities / Electricity / Heating - some developments may share communal features like a communal boiler for heating, or water for all the properties comes from a single meter. If not, most properties will need to contribute to communal electricity costs for things like radiators in the stairwells, lifts, corridor lighting, vehicle gates, or street lights on the estate.
Emergency Lights - emergency lights are designed to activate in the event of a fire or power cut, and illuminate escape routes. They must be checked and maintained and are often more costly due to the regular tests as well as the cost of the units themselves.
Reserve / Sinking Fund - if your lease or transfer agreement allows for a Reserve Fund, it means the manager can collect contributions for major works over several years instead of in the year the work is done. This is useful for major works, like replacing gate motors, pumps, lifts or even external decoration. It is often better to collect £1,000 from each flat over 5 years than to ask for £5,000 when a project is about to start, to allow residents to manage their own cashflow and avoid sudden large bills.
General Maintenance / Repairs - this is quite a broad heading, but covers all sorts of minor repairs from bricklaying, fencing and stair treads to filling holes in walls, replacing damaged doors and repairing lights or plug sockets.
Best guess
It is important to remember that, despite their training and experience, even property managers struggle to predict exactly what will happen over the next 12 months. A budget, or estimate, is exactly that – a best guess and prediction as to likely costs in the coming year. While you may disagree with individual items, the manager probably considers the wider site and is likely to slightly over-budget to be safe. After all, if they run out of money in the year then you risk services being suspended or repairs being delayed.
What should I do?
It is only natural to have questions if you're not sure what the numbers are for, and it can often add up to a large amount of money. If in doubt, it is best to reach out to your property manager to clarify what the costs are for and what work they expect to have undertaken. Remember, you might not agree with all the costs (it's much easier to get a cheap "one man band" for a single house than a large block of flats!) but the budget is a best guess, normally based on well established companies providing reliable services and guarantees, which often comes at a slightly higher price.
If you have any questions or concerns about either a budget we have sent you, or you are struggling to understand what another agent has sent but not explained for you, feel free to get in touch and we'll see if we can help.
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