“The service charge on my two-bed flat is way more compared to my friend’s one in the building next door: Why?”
At POD, we are often asked why the service charge to a particular customer is different to that of a seemingly comparable property elsewhere. Whilst it might seem like an easy comparison, unfortunately, you are not comparing ‘apples with apples.’
Even when two buildings look similar from the outside, the way service charges are calculated can differ quite significantly. Here’s why.
Understanding Service Charges
In a block of flats, the landlord, usually via the managing agent, will ensure the communal areas of the building are serviced, maintained and kept in working condition. These costs are then shared between homeowners and recovered through a “service charge”.
The costs you pay toward and how the costs are apportioned is set out in your lease. Some costs might remain similar regardless of size (we’ll refer to these as fixed, even though they can alter over time), others are variable.
To help us demonstrate the impact on service charges to each flat owner, let’s look at two seemingly similar buildings – one with 18 flats in it and the other with 60 flats.
Variable Costs
As mentioned, some costs associated with upkeep will vary because of the size and complexity of the building. For example, insurance costs will be higher as the rebuild cost is more, internal cleaning costs will be higher where there is more use, window cleaning has to be carried out via abseiling when it is over three stories high (compared to using a ‘pole’ system), there will be additional building safety costs relating to the taller building given it exceeds 18m high, and works to the external aspects of the building will also be more because the building is larger and more complex to repair.
Using the above example and to illustrate this, these might be:
Despite higher total variable costs in the taller building, they’re spread over more flats.
Fixed Costs
Conversely, some costs will remain fixed no matter what the size of the building. Using the same buildings in the illustration, we can assume both buildings have one lift serving all floors, one fire alarm panel covering the common parts, the landscaped grounds belonging to each building are the same size and complexity, there is only one water tank supplying all flats and there is one caretaker employed to provide a degree of security and receive parcels for residents.
The cost of these, in terms of supply or maintenance, are the same for both buildings and to illustrate this, they might be:
Some expenses stay the same regardless of how many flats are in a building - but that means the fewer the flats, the more each has to contribute.
Impact to Service Charge
The total service charge is then made up of both variable and fixed costs. We have assumed that each flat pays exactly the same to share of costs, split according to the number of flats in the building, meaning:
As you can see, the total variable costs at the larger building are considerably more in both total, and per flat. However, because the fixed costs are the same at both buildings, because they are shared amongst less flats, the cost per flat is considerably more at the smaller building, resulting in the overall service charge cost being 13% more despite them being, on paper, the same size. That’s because fixed costs are split between fewer people.
In Conclusion
While the above example simplifies things, in reality, service charge calculations can be quite complex. Costs depend on:
How the building is constructed, i.e. materials used or height
The lease and what costs it states you contribute toward
The apportionment methodology adopted, i.e. equal split, by size etc.
What others may or may not contribute toward
Where the building is located
How utilities are delivered to each individual property i.e. shared or individually metered
On-site staff, the times they work, and the salaries paid
The age of the building
Future planned works
It should also be noted that service charges are not an ‘absolute’, meaning they are subject to change - not just from building to building but from year to year, given they are impacted by factors such as inflation and changes in legislation.
Ultimately, the service charge must be reasonable and reflect the actual costs you must contribute toward and receive the benefit of. To get a true understanding of where there are differences, you’d have to dig into the details and at POD, we aim to provide complete transparency around how these costs have been calculated. We’ll always aim to explain and ensure you’re only paying what’s fair.
For more perspective, take a look at our recent blog on residential service charge.
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