Service Charge Accounts: Everything You Need to Know

3rd Apr 2025
Transparency is always important when discussing the challenges associated with property management. This strategy will help to protect owners and leaseholders alike. One common example can be seen in statements commonly known as service charge accounts. Let's take a closer look at these documents, and what type of information they contain. What is a Service Charge Account? It is wise to provide a brief definition before moving on to discuss the finer points. Service charge accounting involves the process of creating a statement that offers a detailed breakdown of any expenses related to property service charges. So, what are service charges? Property service charges are paid by owners and/or managers. They are associated with the costs associated with common maintenance responsibilities. The primary intention is to provide an additional level of accountability in terms of how money is being spent, how much tenants are required to pay, and where the funds themselves are directed. Note that leaseholders and owners both have access to these service charge summaries. What Expenses are Included Within Service Charges? It should first be noted that the exact types of service charges can vary depending on the property in question. For instance, a standalone home may be associated with different expenses when compared to a block of rental apartments. However, here are some typical examples (1): Cleaning communal areas Property maintenance Landscaping On-site lighting Security (such as two-way videophones) or lock upgrades Ensuring the safety of lifts Inspections Managerial fees All of these will be itemised within a service charge account so that the expenses are made completely clear. Who is Obligated to Prepare a Service Charge Account? Property owners and managers are primarily responsible for preparing these accounts. However, there are also times when service charge documentation may be outsourced to a third party. This is preferable for those who are concerned about obtaining an entirely objective point of view, and third-party accounts offer an additional level of objectivity. Service charge accounts may be prepared quarterly, every six months, or annually. This depends on the property itself, and any local regulations that could exist. Are Tenants Required to Pay the Costs Found Within a Service Charge Account? The costs stipulated within a service charge account will normally be paid by tenants (or leaseholders). However, it is important to note that these are not hidden fees. They are generally outlined within an existing lease or rental agreement. If the charges are not clarified, it is the right of the tenant to ask for the appropriate documentation. The exact payment plan can likewise vary. There may be times when service charges are automatically included within a monthly statement as a portion of the rent. Other plans may require the tenant to pay a one-time sum when the service charge is produced (such as at the end of the fiscal year). Note that in most cases, all tenants living within a specific property (such as an apartment complex) will be obliged to pay the same fee. In other words, the charges are broken down equally between every renter. How are Service Charge Costs Calculated? The majority of service charge accounts represent estimates of the costs associated with the following payment period (such as quarterly statements, or every 12 months). This arises from the fact that it is not possible to precisely predict what expenses may arise in the near future. So, a service charge account instead represents a summary of anticipated expenditures (2). Tenants have the right to ask for a breakdown of these expenses if they feel that they are being overcharged. They are also not obligated to pay more than was initially outlined within their lease agreement. The Notion of "Reasonable" Charges Considering the information highlighted above, some readers may be rightfully curious to know which charges are deemed reasonable. This is an important question, and the best way is to examine the details of the lease agreement. As mentioned previously, these should contain a summary of all service charges, and explain the responsibilities of the tenant. What happens if a certain charge seems extraneous, or otherwise superfluous? In this case, it is wise to seek third-party advice. These experts will be able to determine if the fees associated with a specific service are legally transparent, as well as if the leaseholder is being overcharged. What is the Difference Between a Service Charge Account and an Expense Account? This is an important question, as these two terms are frequently confused with one another. Here is a quick breakdown of the primary difference (3): Service charge accounts are intended to track the funds paid by tenants for the services provided by a management company. Expense accounts are designed to summarise the expenses incurred by the management firm providing services to the property (such as maintenance, utilities upgrades, and insurance policies). While both of these are associated with common property services, each one serves its own purpose in terms of accountability. Can Service Charge Accounts Apply to Commercial Properties? Although service charges are often discussed in terms of residential locations, there are times when they can equally apply to commercial locations. Of course, the services themselves are likely to differ. Examples include (but are not limited to) waste collection, third-party cleaning services, parking lot maintenance, and after-hours security personnel. In any of these cases, it is the responsibility of the property owner to clarify all charges with the leaseholder. Will Service Charges Increase Over Time? Similar to other expenditures, service charge accounts may increase. This depends on variables such as the fees charged by any third-party maintenance firms, rental prices, energy costs, and broader concerns (including inflation or interest rate hikes). However, note that leases associated with fixed service charge accounts will not be required to pay more than was initially stipulated in the agreement (a predetermined percentage or fee). In the event of cost hikes, these will be adjusted when the lease is renewed. As always, it is important to ensure that these terms and conditions are completely clear to avoid any confusion. Can Service Charges Differ Within a Single Block of Flats? There can be instances when those renting larger flats may be obligated to pay higher service charges. In other situations, all tenants within a single building are simply provided with a flat service charge fee (such as five per cent of their total monthly rent). Please keep in mind that this was only a basic overview of service charge accounts, and their underlying mechanics. If you have additional questions, take the time to speak with your landlord, or a property management company. This is the best way to guarantee that nothing is left to chance. Sources: https://www.onehousing.co.uk/resident-services/resident-information/information-for-renters/your-service-charges-explained https://www.lease-advice.org/faq/how-should-my-service-charge-be-calculated/3 https://www.ukpropertyaccountants.co.uk/service-charge-accounts-vs-expense-accounts-understanding-the-difference/