What are leasehold management fees and service charges?

Key takeaways

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

• Service charges and management fees are common in leasehold properties

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

• You can challenge them if you think they are unfair

What are service charges?

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

Some properties, such as flats, tend to be sold on a leasehold rather than a freehold basis.
This means that you own the right to occupy the property for the duration of the lease, while the freehold owner (freeholder or landlord) 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 (a fee for the land the property is built on), you will also need to pay service charges. The money, which is typically taken in advance, either annually, six-monthly or sometimes monthly covers costs including buildings insurance and any repairs required, such as fixing a roof or repainting communal areas.

Service charges might also include a contribution towards a sinking fund to cover the cost of more extensive work in future. This can help spread the cost, rather than 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: for example 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

When it is fully implemented, the new Leasehold and Freehold Reform Act 2024 in England and Wales will require landlords and managing agents to show clear service charge accounts and supporting paperwork each year. It will give leaseholders more rights to inspect these documents and to challenge unreasonable charges.

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 and is designed to cover the costs of managing the building. It may be paid to the freeholder, landlord or a managing agent appointed on their behalf.

It typically covers administrative and management tasks, such as arranging maintenance, handling finances, and overseeing the day-to-day running of the 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, handling finances, arranging maintenance inspecting the property when any major structural work is required.

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

In short, management fees cover the administration service charges and the work involved in managing and maintaining the building.

Are leasehold management fees the same as service charges?

Management fees tend to be a distinct part of the service charge. As such, the fee you pay will be split between the costs of maintaining the building (the service charge) and the cost of managing it (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 of expected costs, which can then be revised later to reflect the actual amount spent.

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. A fee to cover the future cost of major works also tends to be included, which goes into a sinking fund, meaning you shouldn’t have to pay extra if such repairs are needed. Tweaked for flow and clarity

Service charges should be held in trust, so that the money is protected, particularly in the case of a landlord or management company becoming insolvent.

What services should be included in management fees?

Management fees cover a wide range of tasks carried out by the landlord. These include:

• Collecting service charges

• Maintaining shared bank accounts on behalf of residents

• Inspecting the property

• Looking after records of tenants and leaseholders

• Speaking with tenants and resident associations

• Providing accounts for service charges

• Arranging for buildings insurance cover

• Coordinating routine repairs, including getting quotes and engaging contractors

What should service charges cover?

Service charges shouldcover the following costs:

• Maintaining all communal areas

• Looking after any shared outdoor space

• Paying for routine repairs

• Contributing to a sinking fund to cover major repairs

• Paying for 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 if they feel the costs are unreasonable, incorrectly calculated or not supported by proper documentation.

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, under the Landlord and Tenant Act 1985.

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

3. First-tier tribunal (property chamber)

In the first instance, you should raise any concerns with the landlord in writing. You can also seek advice from an organisation such as the Leasehold Advisory Service.

If this doesn’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 relatively low-cost and designed to be accessible for consumers, though a lawyer may be helpful in complex cases.

4. Right to manage (RTM)

Leaseholders have the right, under the Commonhold and Leasehold Reform Act 2002, to 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 charges remain unpaid after formal demands

• 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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Other useful guides:

What home insurance do I need for a flat?

What’s the difference between freehold and leasehold properties?