For Lessees

The Service Charge Cycle

Budgeting – planning for the year ahead

Each financial year begins with the preparation of a budget. The budget is a forecast of what the building is expected to spend over the coming year. It covers items such as insurance, cleaning, gardening, electricity for communal areas, lift servicing, and professional fees.

The figures are drawn from previous years’ expenditure, current contracts, and any known or anticipated works. Importantly, the budget is a plan, not evidence of spend. At this stage the costs have not yet been incurred, so there are no receipts or invoices to produce. The purpose is to ensure the building is financially prepared for the year to come.

Service Charge Demands – collecting contributions in advance

Once the budget has been set, service charge demands are issued to leaseholders in accordance with the terms of the lease. The lease will usually require payment in advance, most often in two instalments (half-yearly), although some leases specify different arrangements such as in one instalment (annually), or in 4 instalments (quarterly). Payment of the service charge is always demanded in line with the terms of the lease.

These payments create a service charge fund from which the manager can pay suppliers and contractors as invoices fall due during the year. This avoids any interruption to services and ensures the building is managed effectively.

Service Charge Accounts – reporting actual expenditure

At the end of the financial year, formal service charge accounts are prepared. These accounts show the actual expenditure incurred during the year, compared against the budgeted figures.

The accounts are usually independently certified or audited, depending on the requirements of the lease.

Balancing Charge or Balancing Credit – settling the difference

Because a budget is a forecast, the actual costs almost never match the budget exactly. This means the service charge accounts will normally show either:

A surplus (balancing credit): If leaseholders collectively paid more than was needed, there is a surplus in the account. What happens to this surplus depends on the lease:
- - Sometimes it is transferred into the reserve fund, to help cover future major works.
  - Sometimes it is carried forward as a credit, reducing your next service charge demand.
  - In rare cases, the lease may provide for a refund directly back to leaseholders.
A deficit (balancing charge): If the budgeted payments were insufficient to meet the actual costs, a balancing charge is raised. This is an additional demand issued to leaseholders to ensure the account breaks even. The balancing charge is usually payable in 30 days, again in accordance with the lease, so that the shortfall is covered and contractors and suppliers remain fully paid.

The Section 20 Consultation Process and Major Works

From time to time, your building may require significant repairs or improvements – often referred to as major works. Where the cost to any leaseholder will exceed £250, the law requires the landlord or managing agent to carry out a formal consultation process under Section 20 of the Landlord and Tenant Act 1985.

How the process works

Including major works in the budget
The anticipated cost of major works is normally included within the annual service charge budget. This allows contributions to be collected from leaseholders in advance, ensuring sufficient funds are available when the time comes to carry out the works.
Consultation before spending
The Section 20 process must be completed before any major works costs are committed or spent. However, it is important to note that the law does not prevent us from collecting service charge contributions in advance. What it does require is that we complete the consultation before entering into a contract or paying for the works.
Why collecting funds first is important
If we were to run the Section 20 consultation before collecting contributions, we would still be unable to commence works until the necessary funds were received from all leaseholders. This could result in lengthy delays. In some cases, if too much time passed, we might even need to repeat the entire consultation process before the works could proceed.

In summary

We can collect money for major works through the service charge budget before the Section 20 process is complete.
We cannot spend that money or start the works until the consultation has been completed.
Collecting in advance avoids delays, ensures the building has the funds required, and prevents the need for the Section 20 process to be repeated.

What is the Section 20 consultation process?

Section 20 of the Landlord and Tenant Act 1985 requires landlords to consult leaseholders when major works are proposed that will cost any one leaseholder more than £250, or when entering a long-term contract worth more than £100 per leaseholder per year. The process ensures transparency and gives leaseholders a chance to comment.

Why do you ask for money before works have started?

We are allowed to collect contributions in advance through the service charge budget. However, we cannot spend the money or start works until the Section 20 consultation has been completed. Collecting in advance avoids delays once consultation ends.

What happens if leaseholders disagree with the proposed works?

Leaseholders can raise observations during the consultation, and these must be properly considered. However, if the works are necessary and reasonable, the landlord is entitled to proceed, even if some leaseholders object.

How are contractors chosen?

Tenders are usually invited from trusted contractors. Leaseholders are invited to nominate contractors at the start of the Section 20 process, and these nominations will be considered where appropriate. Final selection is based on cost, quality, and ability to deliver the works properly.

What happens if the cost of works ends up higher than first estimated?

The initial budget is an estimate. If tenders or actual costs exceed this, leaseholders may face a balancing charge. However, the consultation ensures leaseholders are made aware of the scope and estimated costs before works begin.

How long does the Section 20 process usually take?

A typical Section 20 consultation takes around three to four months, though it can be longer if works are complex. Works cannot begin until the process has been completed and sufficient funds are in place.

Service Charges & Accounts

What does my service charge cover?

Your service charge pays for the running and maintenance of the building. Typical costs include cleaning, gardening, electricity for communal areas, insurance, lift and equipment servicing, day-to-day repairs, and management fees. The exact items depend on the terms of your lease.

Why do service charges vary from year to year?

Service charges are based on a budgeted forecast. Some years may require more work (for example, external decorations or roof repairs), while other years may have fewer major expenses. Utility prices, insurance premiums, and contractor costs can also change annually.

Can I see copies of invoices and receipts?

Invoices and receipts are not normally circulated with the annual accounts, but leaseholders have the right to inspect them. If you would like to see supporting documents, please contact us to arrange an appointment.

What is the difference between the budget and the annual accounts?

The budget is a forecast of future expenditure. It sets the contributions leaseholders must pay in advance. The accounts are prepared after the year ends and show the actual expenditure incurred.

What happens if some leaseholders do not pay their service charges on time?

The building must still be managed, so late or non-payment can put pressure on the service charge fund. In these cases, we pursue arrears in accordance with the lease and legal requirements to protect the interests of all leaseholders.

What is a reserve (or sinking) fund and how is it used?

A reserve (or sinking) fund is money set aside to cover major works in future years, such as roof replacement or external redecorations. This avoids large one-off demands and helps spread the cost fairly over time.

How are balancing charges and credits calculated?

At year-end, the actual expenditure is compared with the budgeted contributions. If less was spent, the surplus is dealt with as directed by the lease (carried forward, transferred to reserves, or rarely refunded). If more was spent, the shortfall is collected as a balancing charge.

Repairs & Maintenance

Who decides which repairs are carried out and when?

Day-to-day repairs are usually instructed by the managing agent as they arise. Larger repairs or improvements are subject to budgeting, consultation (where required), and lease terms. Urgent repairs are prioritised to protect the building and residents.

How can I report a repair or issue in the building?

Please contact us directly by phone or email to report repairs. For emergencies, a dedicated out-of-hours number is available. The sooner an issue is reported, the sooner it can be addressed.

Why are some repairs dealt with quickly while others take longer?

Urgent issues (such as a water leak or lift breakdown) are addressed immediately. Non-urgent repairs may require quotations, budget approval, or scheduling with contractors, which can take longer.

What is the difference between day-to-day maintenance and major works?

Day-to-day maintenance includes routine or minor repairs such as fixing a light or repairing a lock. Major works involve large-scale or planned projects, such as redecorating the exterior, replacing a roof, or upgrading communal systems.

Management & Communication

What exactly does the managing agent/block manager do?

We manage the building on behalf of the landlord or management company. Our role includes collecting service charges, arranging maintenance and repairs, ensuring compliance with leases and legislation, preparing budgets and accounts, and dealing with contractors.

How are decisions made about the building?

Decisions are guided by the lease and by the landlord, management company, or residents’ management company (if one exists). We provide professional advice and recommendations, but we act in accordance with the authority given under the lease and by our client.

How can I contact you in an emergency?

An emergency contact number is available outside office hours. This is for urgent issues such as floods, lift breakdowns, or fire alarm faults. Non-urgent matters should be reported during normal office hours.

How often will I receive updates about the building?

You will receive service charge demands, annual accounts, and consultation notices when required. We also provide newsletters or circulars where appropriate, and we are available to respond to individual queries.

Legal & Lease Matters

What rights and obligations do I have under my lease?

Your lease sets out your rights to use your property and the communal areas, as well as your obligations to pay service charges and comply with regulations. The landlord or management company is responsible for enforcing the lease for the benefit of all residents.

Who is responsible for repairs inside my flat versus in communal areas?

Generally, the leaseholder is responsible for repairs inside their flat, while the landlord/management company is responsible for the structure and communal areas. Your lease provides the specific detail.

What happens if I sell my flat — do I still owe any service charge balances?

Yes. Service charges are apportioned on completion of a sale, but until then the seller remains liable for all sums due. Solicitors normally deal with this adjustment between buyer and seller.

What happens if there is a dispute about service charges or works?

We aim to resolve disputes informally wherever possible. If agreement cannot be reached, leaseholders have the right to apply to the First-tier Tribunal (Property Chamber), which can make a binding decision.

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