What does a service charge actually pay for?

Two limits apply at once. The lease is the first: if it does not permit recovery of a cost, that cost cannot be charged however reasonable it is. The Landlord and Tenant Act 1985 is the second: even where the lease permits it, the amount must be reasonably incurred and the work of a reasonable standard. Almost every service charge dispute is really about one of those two tests.

Step by step

1. Read the service charge clauses in the lease first.They define the recoverable heads of expenditure and the apportionment — by floor area, by rateable value, by equal shares, or by a fixed percentage. The apportionment cannot normally be changed without agreement or a tribunal application.
2. Separate the categories in the statement.Typically: repairs and maintenance of structure and common parts, cleaning and gardening, lifts, communal lighting and heating, door entry and fire systems, buildings insurance, management fees, accountancy and company costs, and contributions to a reserve or sinking fund.
3. Check what is not recoverable.Improvements as opposed to repairs, unless the lease expressly allows them. Costs relating to parts of the building outside your service charge schedule. And costs incurred more than eighteen months before a demand, unless you were notified in writing within that period that they had been incurred and would be charged.
4. Understand the reserve fund.Money collected in advance for future major works such as roofs, lifts and external redecoration. Where the lease allows one, it smooths large bills; where it does not, major works arrive as a single demand. A property with no reserve fund and an ageing roof is a known future cost.
5. Look at the management fee and the insurance separately.Management fees are usually quoted per unit per year and are a common source of disquiet. Buildings insurance commission paid to a freeholder or agent has been the subject of regulatory attention and must now be disclosed in more detail than it once was.
6. Use your right to inspect.Leaseholders may request a written summary of costs and then inspect the supporting invoices and receipts within a set period. That is a statutory right, not a favour, and requesting it is the standard first step when something looks wrong.
7. Check the demand is valid.A service charge demand must state the landlord's name and address, and must be accompanied by the prescribed summary of rights and obligations. A demand that omits either can be withheld until it is corrected — this is a technical point but a real one.
8. Ask about the accounts, not just the demand.Most leases require annual certified accounts. Compare the budget to the actual spend, and check whether a surplus was credited or a deficit carried forward. Year-on-year comparison is the quickest way to spot something unusual.
9. Get free advice before escalating.The Leasehold Advisory Service is free and government-funded and deals with exactly these questions. Recognised tenants' associations have additional rights, including to be consulted on the appointment of managing agents.

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