Why Residential Service Charges Rise & Other Questions Answered
Introduction
Have you ever read your service charge budget and wondered the reason for all the expenditure? This article aims to arm you with knowledge so you can understand some of the most common questions asked regarding service charges.
What is a Service Charge?
A service charge is the cost property owners pay to the landlord (usually via a managing agent) to cover their share of the costs of maintaining and managing the building or development, including communal areas.
It's important to note that leaseholders and freehold owners of houses are distinct, and in this blog, we will use the term ‘property owners’ as a catch-all to encompass both.
The lease (or in the case of houses, the deed/transfer document) details how your service charge is structured and what costs you contribute towards. Many things can affect the service charge, such as how the property is built, the amenities installed at the development and even the materials used.
The costs typically cover the following (depending on what is installed):
Utilities
Cleaning
Gardening and Landscaping
Reactive maintenance and general upkeep
Mechanical and electrical maintenance (e.g. lifts)
Amenity management and maintenance
Security systems
On site staff
Building insurance
This not an exhaustive list, and your lease or deed/transfer will provide you with detailed information on what your service charge covers.
Why Can Service Charges Rise?
The service charge is not a fixed cost and is only an estimate over a period of time, usually one year, of the likely running costs. From year-to-year those cost will change, and so inflation, increased scope and new legislation are likely to alter these costs.
While every effort is made to minimise, or even reduce, those costs, sometimes a rise in service charges can be a consequence of matters outside of the control of the property management company.
The Property Institute has researched these on behalf of concerned leaseholders and stakeholders. They are a professional body representing residential property managers in the UK, and one we at POD are proud of being members of. You can read their in-depth findings over the five-year period here.
Some of the main reasons for the rise in service charges, over and above normal inflationary increases, were:
Increases to building insurance premiums
Wholesale cost of utilities (gas, electricity etc.)
Professional fees associated with changes in legislation
These are just a few reasons why service charges have risen. It’s important to have a clear understanding of what a service charge consists of as misunderstandings often arise from price increases.
While the energy crisis has made rising utility prices less surprising, property owners may remain unaware of the factors driving up building insurance and professional fees, among other factors.
One of the most recent examples of this is due to the changes in safety legislation. Following the Grenfell Tower tragedy, the Building Safety Act 2022, the Fire Safety (England) Regulations 2022, and the Fire Safety Act 2021 were implemented, resulting in increased costs passed on through service charges to property owners.
The increases stem from costs tied to the enhanced safety measures mandated by the new legislation. Specific examples include:
Installation & management of fire boxes to all high-rise buildings
Fire door checks of both communal and individual property front doors
Residents to be informed with relevant fire safety information regularly, and for this to be managed
These necessary changes, prompted by the Grenfell Tower tragedy, will significantly enhance the safety of inhabitants and are undeniably a positive step forward.
Be sure to read your lease or deed/transfer carefully, as it details everything your service charge covers and how it will be utilised.
Why Don’t Managing Agents Profit From Service Charge Increases?
To understand why this is the case, you first must understand the difference between management fees and service charges.
The management fee is a specific cost forming part of the service charge that is paid directly to the managing agent to cover their costs in managing the property. These fees typically cover:
Arranging repairs and maintenance
Building safety and lease compliance
Preparing and distributing service charge budgets / accounts
Collecting and administering service charges and their bank accounts
Overseeing contractors
Providing management information to residents
The management fee is distinct from the costs of upkeep, are included within the estimate of costs and only make up a proportion of the overall service charge total.
A managing agent will only make a profit from the services they directly provide and therefore any increase in the overall service charge budget will be because of an increase in other costs. It should be noted that service charges will always reflect the actual cost leaseholders should pay toward, as defined in the lease (or deed/transfer document), and therefore the managing agent or landlord cannot keep any surplus if not all monies are spent. Equally, any shortfall must be recovered from those responsible for paying toward those costs (known as a service charge deficit).
The RICS, the regulating body POD belong to, mandates that our management fees remain a fixed price with no hidden markups. Additionally, service charges must be reasonable and reflect the true cost of upkeep and so the same applies to management fees. This means that regardless of whether someone’s individual service charge rises from, for example, £3,000 p.a. to £4,000 p.a., our management fee remains fixed (save as to any inflationary or pre agreed increase). Put simply, managing agents do not make profit from the increase in total service charge amount.
What Should I Lookout For When Evaluating My Service Charge?
Due to the nature of property management, many essential tasks are carried out behind the scenes. These tasks often include responsibilities such as managing contracts, ensuring legal compliance, and maintaining timely payments to suppliers. All of these contribute to the smooth operation of services. Transparency, such as access to clear, detailed financial information, and value for money - ensuring high-quality services in proportion to the price - are also important factors. All of these contribute to the smooth operation of services which we explore below:
Unseen Efforts
A sizable chunk of a managing agent’s responsibilities is to work behind the scenes to ensure there is minimal disruption to the inhabitants. Because of this, you may not notice these efforts directly, but you certainly benefit from them.
Consider a resident returning home from work:
A resident uses their fob key, and the car park gates glide open. They then pass the neatly trimmed hedges and clean pathways. After, they step into a lift, which hums softly as it ascends. Lastly, they unlock their door effortlessly.
This mundane, routine experience exemplifies the work of a successful managing agent, who operates behind the scenes to ensure residents’ lives remain uninterrupted.
If you take a closer look at this scenario, the managing agent is the one responsible for:
The fob key working as intended
The car park gates opening smoothly (and not trapping anyone in the mechanism)
The grounds and communal areas being well-maintained
The lift functioning properly (and all emergency systems working)
The lights turning on automatically (with backup systems tested for compliance)
However, this is just a small window of what goes on behind the scenes.
To avoid disturbance, at POD, we work behind the scenes to meet the building’s specific requirements. This means that routine activities such as checks, maintenance, and general upkeep can often go unnoticed by owners and tenants.
Although you may not see the daily operations covered by your service charge, important processes and detailed reports are tracked, monitored, and analysed via our systems. Some activities are continually occurring, such as arranging risk assessments, placing of insurance, upkeep of amenities and more, depending on your site.
Trust and Transparency
Trust between property owners and managing agents is paramount. Inhabitants desire a sense of safety and security, knowing assistance is available should an issue arise. The building itself should be kept tidy and well-maintained with prompt responses to address the needs of it. Similarly, managing agents rely on the property owners to report issues promptly and to adhere to the lease or deed/transfer. Effective communication is key to realising this trust. Inexpensive managing agents may not have the expertise to manage the building, be unaware of compliance requirements or not adequately resource their back-office functions, which can result in longer periods for issues to be resolved.
Equally, a lack of communication can lead to uncertainty and confusion among property owners.
At POD, we pride ourselves in our clear and upfront communication and are committed to keeping our clients and customers well-informed. One way in which we do this is by holding presentations; these outline how your money is spent and provide a chance to gain feedback from our customers and are often held in familiar communal areas in the case of informing residents.
We also make sure we undertake our work ethically. Some managing agents may attempt to conceal additional costs to make their management fees appear more attractive. This practice not only undermines trust but can also result in unexpected expenses. At POD, we are vehemently opposed to this kind of practice, and we do not take any commission or kickbacks of any kind.
Conclusion
Understanding what your service charge covers and how it adds value can be challenging. We are committed to providing clarity over what you pay toward, how your monies are spent and making sure we keep you safe – this is your home after all.
With a portfolio-wide Happiness Rating of 91%, and a 4.4-star Trustpilot rating, POD are well-prepared to address any inquiries with professionalism and expertise. Should you have any, please refer to the next section below.
I Still Have Questions!
We understand service charges can be confusing, which is why we have assembled an easy to digest, jargon-free FAQ you can read here:
Our FAQ page contains a list of commonly asked questions answered succinctly. Should you have any further questions or thoughts regarding your service charge with POD, please contact support@podmanagement.co.uk.
Need a Managing Agent With Full Transparency?
Understanding service charges can be daunting, but it comes naturally to us at POD. Contact us below for a free consultation:
● Fill out our business enquiry form
● Email us at relationships@podmanagement.co.uk
● Call us on 0333 577 6656
We look forward to hearing from you.