Property Service Charge: How to Reduce it and Spend it better
Below is an introduction to our guide on reducing your service charges
for the full guide please click here.
The difference between service charge and ground rent:
Service charge
This is usually an unlimited liability on the property. Your charges will be calculated based on a percentage of the total costs for the building - a percentage that should be clearly detailed in your lease. The total spend is decided by the board or landlord controlling your building therefore, you may have little power to control this.
Ground rent
This is a yearly fixed payment to the landlord or freeholder of the building. This value will be stipulated clearly in your lease as well as the rights of the landlord to increase this year on year.
Changes in the industry that will affect your service charges:
There are three major pressures on the industry that are making changes – regulation, technology and flattening property prices.
Regulation
The government is looking at ways to improve the industry based on wide-spread customer dissatisfaction. These measures will likely be around encouraging more transparency in the industry and setting out minimum standards for specific services.
Technology
Automation of labour intensive jobs will have an effect on this industry –reducing costs and improving services. This is both around the leaseholder and managing agent dealings (e.g., communications, inspections and reporting) and internally within the managing agent businesses (e.g, accounting, contractor management and planning).
Changing property prices
As flat price increases are no longer guaranteed there will be an increased pressure on reducing property costs. This will encourage leaseholder to generally reduce costs and be more active in the management of their buildings.
The combined effect in the industry is to create more transparency, to standardise services and to increase movement of leaseholder-customers between managing agents.
How these changes can help you to reduce your fees and increase your services:
Reduce your service charges
There have been man well-documented cases of overcharging in the industry. Increased transparency should provide more control to leaseholders – allowing them to judge the validity of certain costs and make decisions on where money can be better spent.
Improve your services
Understanding the opportunities and experience of each managing agent is becoming easier. In addition, regulations will allow leaseholders will be able to guarantee a minimum service level - delivering specific services which are proven to improve specific buildings.
Increase your property value
It is becoming easier to optimise the service charges and service levels in your building in order to maximise the value. This will allow you to be more attractive to your target buyers. For example, by understanding the value that a porter may bring to your building vs the costs required to maintain this.
How these changes could lead to higher charges and reduced services:
The biggest risks of the trends are probably financial
Increased regulation can increase building costs and more services will be required to be bought. In addition, although new technology can increase the living standards in a building they will come at a cost.
Leaseholders can become demotivated and unaware
Increased regulation can demotivate leaseholders from getting involved and making decisions around their building. This is the single biggest issue that leads to poor management through overspending and poor planning. For example, when major works need to be paid for without a planned sinking fund – it can lead to costs of millions of pounds being called in quickly.
The biggest risks will come from increased costs
Increased control means that certain leaseholders may change the rules and environment in the building. This is both an opportunity and a risk to a building. For example, if those leaseholders in-charge do not represent the majority view or they do not understand how their actions can affect the living standards and costs in the building.
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