Quick summary
Service charges in a share of freehold building are governed by the lease, not by what feels fair. The lease sets out what can be recovered, how the cost is split between flats, and when demands can be made. Statute then limits it further: costs must be reasonably incurred, works must be of a reasonable standard, and consultation is required above certain thresholds. Read the clause before the argument.
Service charge disagreements in small buildings have a particular texture. They are rarely about the money. They are about the ground floor flat paying a quarter of a roof they will never stand on, and whether that is right.
The answer is almost always sitting in a clause that nobody has looked at since they bought.
The three things the lease decides
What can be charged for. There will be a list, or a definition of "Services", or a schedule. If something is not in it, or not fairly within a sweeping-up clause, it generally cannot be recovered through the service charge. This catches people out with improvements, as opposed to repairs.
How it is split. Sometimes an equal share. Sometimes by floor area or rateable value. Sometimes a fixed percentage per flat, written in the lease decades ago and now slightly wrong. Whatever it says is what applies, even if the flats have since been extended.
When it can be demanded. Payment dates, whether there is an on-account demand and a balancing charge, and whether a reserve fund is permitted. A reserve fund the lease does not authorise is a common and expensive mistake.
What statute adds on top
Even where the lease permits a charge, the law limits it. In broad terms:
- Costs must have been reasonably incurred, and works carried out to a reasonable standard.
- Section 20 consultation is required before qualifying works above the threshold, or a long-term agreement above the annual threshold, or recovery is capped at those limits.
- Demands must include the landlord's name and address and the prescribed summary of rights and obligations, or they are not properly payable yet.
- There are time limits on recovering costs incurred more than 18 months before a demand, unless notice was given.
None of this stops a legitimate charge. It does mean that the process matters as much as the number.
The questions worth asking your lease
Before the next board meeting, get answers to these from the actual document:
- What exactly is included in the definition of the services or the maintained property?
- What is my flat's percentage, and is the same percentage in every lease in the building?
- Do the percentages across all flats add up to 100?
- Is a reserve or sinking fund expressly permitted?
- Who is responsible for the windows, the balconies and the front door? These are the three that are never obvious.
- What is the mechanism if a leaseholder simply does not pay?
Do question three properly. In older buildings the shares frequently total 97 or 104 per cent, and the shortfall has to come from somewhere.
Why this lands on the company
In a share of freehold building the company is the landlord, which means the directors are the ones sending the demands and the ones who have to justify them. That is a real duty rather than an administrative one, and it sits alongside the rest of what directors take on. We wrote about that in a plain-English guide to directors' duties, and about the related question of whether a director can be paid.
Frequently asked questions
Can a share of freehold company charge whatever it likes for service charges?
No. The lease sets what is recoverable and how it is apportioned, and statute requires costs to be reasonably incurred and works to be of a reasonable standard, with consultation above the qualifying thresholds. A charge outside the lease is not payable simply because the directors agreed it.
What if the service charge percentages in the leases do not add up to 100?
It happens more often than you would expect, usually in converted houses where leases were granted at different times. The shortfall cannot simply be redistributed by decision of the board. It normally needs either agreement between all leaseholders or a formal variation, so take advice before doing anything about it.
Do we have to consult before major works?
Section 20 consultation is required for qualifying works above the statutory threshold per leaseholder, and for long-term agreements above the annual threshold. Skipping it does not make the works unlawful, but it caps what can be recovered at those limits, which usually costs far more than the consultation would have.