Beware of property service charges

Melanie Wright
Written by: Melanie Wright
Posted on: 6 May 2016

Property service charges can be a real pain in the pocket for leaseholders, with worrying new research showing that these fees are rising at an alarming rate.

Freeholders impose service charges to cover the cost of general property maintenance and repairs, insurance and, where applicable, things like heating, lifts, and the lighting and cleaning of communal areas. Service charges may also be used to establish a sinking fund for major renovations, such as replacing a roof.

They can be variable, which means that the amount you pay changes each year, or a flat rate which is usually determined by the number of bedrooms or the square footage of a property, so you’ll know exactly how much you’ll pay every year.

According to Direct Line for Business, a third of management companies have hiked service charges in the last two years, pushing the average cost of these charges to an eye-watering £1,863 a year.

This cost represents more than two months of the average monthly rental income received by landlords who let out their properties, which is currently £906.

If you’re buying a new build, then costs are even steeper. Properties coming onto the market this year have average annual charges of £2,777, which is 96% higher than the average for older properties.

A new build property in Lambeth, South London, is charging leaseholders an eye-watering £7 per square foot service charge. This means if you bought an 800 square foot flat, you’d be looking at hefty £5,600 charges. You’ll usually pay less if you’re further away from the centre of London. For example, one property coming onto the market this year in Croydon, part of outer South London, carries a service charge of £1.55 per square foot, making annual service charges for an 800 square foot flat a more reasonable £1,240 a year.

Service charges should be outlined in your lease, which you should check carefully before you buy any property, but bear in mind they won’t be the only fees you’ll have to pay. You’ll also have to factor in tax on these monies, as well as mortgage payments, management and agency fees and any ground rent fees, which currently average £371 a year for a new build property and £327 for properties built prior to 2016.

Service charges should be outlined in your lease, which you should check carefully before you buy any property

Nick Breton, head of Direct Line for Business says: “Service charges are often a hidden cost, which should be factored in when considering the affordability of a property. In some cases, service charges are uncapped and can escalate rapidly. Landlords need to take into account all associated costs when purchasing a property, such as service charges, ground rent and taxes that may impact their rental yield.”

Don’t assume that you will escape service charges if you buy a freehold property. If you’re buying on a private road or estate, you may find yourself liable for the upkeep of the road or surrounding gardens. One development in Guildford, Surrey, imposes a £900 annual charge on homeowners for any road repairs that might be required and for maintenance of communal gardens.

If you are concerned about service charges, it’s worth knowing that although the freeholder is within their rights to charge a ‘reasonable’ management fee, they cannot make a profit from these charges.

If you are a leaseholder or a shared owner you may be able to appeal the reasonableness or increase of service charges to a Tribunal. The UK government justice website has more information on this.

To find out more about how service charges work and what your rights are, visit the Leasehold Advisory Service. Housing charity Shelter also has useful information on service charges.

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