What are leasehold management fees and service charges?

Key takeaways

• Service charges and leasehold management fees are charges that you may have to pay on top of your mortgage

• Service charges and leasehold management fees are common in leasehold properties

• They usually cover costs like the maintenance of the building, buildings insurance, and administrative fees

What are service charges?

Service charges are fees that you may have to pay on top of your mortgage for certain properties.

Some smaller properties, such as flats, tend to be sold on a leasehold rather than a freehold basis. This means that your mortgage buys a long-term lease on a property (usually upwards of 99 years), with a freeholder or landlord holding the freehold.

Owning a leasehold property means that you own the property, but not the land, whereas a freehold owner owns both the building and the land it stands on.

If your property is a leasehold, as well as your monthly mortgage and ground rent, you will also need to pay service charges. The money, which is taken in advance or paid monthly in addition to your mortgage, will be used to pay for costs including buildings insurance and any repairs required, such as fixing a roof or repainting communal areas.

Service charges might also include an additional payment towards a fund to cover the cost of more extensive work. It's a good idea to pay into such a pot, as it can prevent having to find large sums when major work is required.

How service charges are calculated

The method of calculation is set out in your lease. Common approaches include:

• Fixed percentage split: e.g., each flat pays 1/20th of total costs

• Unit/apportionment formula: larger flats pay more than smaller ones

• Actual costs basis: you pay a share of the actual expenditure each year

Regardless of method, charges must be “reasonable” under the Landlord and Tenant Act 1985. That means:

• The service must be necessary

• The cost must be fair

• Work must be completed to a reasonable standard

How charges are reviewed

Most landlords or managing agents review service charges annually by:

1. Budgeting for the upcoming year

2. Issuing a demand (usually quarterly or annually)

3. Reconciling actual expenditure at the year-end

Leaseholders should receive:

• A summary of costs

• Access to invoices or receipts on request

• Advance notice of major works

What are leasehold management fees?

A leasehold management fee is part of the service charge paid to the landlord or freeholder of a property. It’s designed to cover the costs of the manager or landlord of the building in which you have bought a property.

Fees will vary depending on the size of the property and how much work the manager or landlord plans to do on the property.

You can expect your fees to go towards paying for overheads such as office space, as well as their day-to-day work of collecting service fees, administering bank accounts, sorting out buildings insurance and inspecting the property when any major structural work is required.

Landlords with multiple properties may pay a management company to carry out these works, in which case the fees will be used by the latter to cover costs.

In short, management fees cover the administrative work required when spending service charges to maintain the building and cover its costs.

Are leasehold management fees the same as service charges?

Management fees tend to be a ring-fenced part of the service charge. As such, while you will pay a set fee each month, the money a landlord takes will be split between the costs of maintaining the building (the service charge) and the cost of managing the building (the management fee).

As a leaseholder, you have the legal right to see a breakdown of the service charge from your landlord. Landlords must also allow for the inspection of invoices and receipts and cannot refuse to give a summary to leaseholders.

While landlords are not legally obliged to share a budget for the year with leaseholders, a code of practice makes clear they should do so. This will provide an estimate, which can then be revised when actual costs are incurred.

Why do I have to pay a service charge?

A service charge must be paid so that the landlord or manager can maintain the building and ensure that it does not fall into disrepair. Because leasehold blocks of flats tend to be owned by lots of different people, a service charge means that the cost of any upkeep is split evenly, minimising any disputes.

At its most basic, such a charge means that communal areas will be kept in good condition and possibly cleaned if funds allow for it. An additional fee to cover the future cost of major works tends to be included and should mean that you don't have to pay extra if such repairs are needed.

Service charges are held in trust, meaning that the money is protected in case a landlord or management company goes into administration.

What services should be included in management fees?

Management fees cover a wide range of tasks carried out by the landlord. This includes:

• The collection of service charges

• Maintaining shared bank accounts on behalf of residents

• Property inspections

• Looking after records of tenants and leaseholders

• Speaking with tenants and resident associations

• Providing accounts for service charges

• Arranging for buildings insurance cover

What should service charges cover?

Service charges should include the following:

• Maintenance of all communal areas

• Looking after shared outdoor space

• Paying for repairs

• An excess fee so that enough money is accrued to cover major repairs

• The cost of buildings insurance (not including contents or damage cover in your own property)

Do I still need buildings insurance if I’m paying service charges?

You should refer to the terms of your lease to see if you need to purchase buildings insurance on top of any service charges you are paying. Buildings insurance protects properties from unexpected events, like a fire or flood. Often, the freeholder, landlord, or management company will arrange buildings insurance, but this isn’t always the case. You should always check what is included in your lease.

It's also worth noting that even if buildings insurance is covered within your service charge, this usually won’t cover damage within your own property, or the contents of your property. You may wish to consider purchasing additional insurance to make sure you are sufficiently covered.

Challenging or reducing fees

Leaseholders have several rights to question or challenge service charges and management fees.

1. Right to information

You can request:

• A breakdown of costs

• Copies of invoices

• Justification for chosen contractors

Managing agents are legally required to respond.

2. Consultation requirements (Section 20)

For major works costing over £250 per leaseholder, or long-term contracts over £100 per year, the landlord must carry out a Section 20 consultation.

If they fail to consult properly, they may only recover £250 per leaseholder, regardless of the actual cost.

3. First-tier tribunal (property chamber)

If informal queries don’t resolve your concerns, you can apply to the First-tier Tribunal (FTT) to decide:

• Whether service charges are reasonable

• Whether major works are necessary

• Whether management fees are fair

• Whether a landlord is performing their role properly

The tribunal is low-cost and designed for consumers, not just lawyers.

4. Right to manage (RTM)

Leaseholders in many buildings can legally take over management from the landlord and appoint their own managing agent, often reducing fees and improving transparency.

What happens if you don’t pay?

Falling behind on service charges can lead to serious consequences:

• Interest or late payment fees may be applied

• Debt recovery action and solicitor fees

• A county court judgment (CCJ) if unpaid

• In extreme cases, forfeiture proceedings - the landlord can start a process that could ultimately lead to loss of the lease (though this is rare and heavily regulated)

Mortgage lenders often insist arrears are cleared before allowing a sale or remortgage.

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