What are leasehold management fees and service charges?
In the dark about leasehold management fees? What does your service charge pay for? Read on and we'll break it down.
What are leasehold management fees and service charges?
If you are a first time buyer, it pays to be aware that many smaller properties, such as flats, tend to be sold on a leasehold rather than freehold basis.
As a consequence, you will be using your mortgage to buy a long term lease on a property (usually upwards of 99 years), with a freeholder or landlord owning the freehold on the property.
This means that as well as your monthly mortgage payment and a ground rent payable to the landlord, you will also need to pay leasehold management fees and service charges.
This will cover the cost of things such as shared utilities, maintenance of the building, buildings insurance (not including contents cover) and the cost of staff or a managing agent.
What are leasehold management fees?
Leasehold management fees form part of a service charge and are 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 admin work required when spending service charges to maintain the building and cover its costs.
What are service charges?
Service charges differ significantly from management fees, as these go directly towards the upkeep of your building.
That means the money, which is taken in advance or paid monthly in addition to your mortgage, will be used to pay for buildings insurance, any repairs required, such as fixing a roof or repainting communal areas or the exterior of the property.
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 big work is required.
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 should 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 residents association
Providing accounts for service charges
Arranging for building insurance cover
What should service charges cover?
Service charges should cover the following:
Maintenance of all communal areas
Looking after shared outdoor space
Paying for repairs, whether minor or major
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)
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