Residential Service Charge accounts

If you are a residential tenant paying a variable service charge what should you expect from your landlord and when should you expect to receive it?

Where a number of let properties share a communal area, such as in the case of a block of flats, the costs of running these communal areas (such as repairs, maintenance, security, insurance and utilities) are usually shared by paying a service charge at a pre agreed ratio between tenants (variable rate) or at a predetermined amount (fixed rate).

Variable rate service charges are normally managed by a property management company who arrange for the expenditure to be made and collect the service charges from which they are paid. They are collected normally at a fixed monthly/quarterly rate with a ‘correction’ once the total expenditure is known. This correction can result in a refund or a further payment being due.

Accounting for these variable service charges usually follows the best practice set out by a joint working group of accounting and surveying bodies and the Association of Residential Managing Agents (ARMA).

This best practice includes:

• All leasees should receive an annual statement, within six months of the year end.
•  This statement should be prepared in accordance with the Lease, on an accruals basis and should include a Balance Sheet and an Income and Expenditure account.
• The annual statement should be examined by an independent accountant.

It is always best to check the Lease for any additional requirements. For instance some leases require that the service charge accounts are audited. Others may set a different timetable or format of the accounts.

Also, if the service charge statement is prepared on behalf of a Residents’ Management Company or a Right to Manage Company then this needs to be filed, in addition to the usual accounts at Companies House.

And for the landlords out there, do not forget that variable service charge fees are held in trust for the tenants and hence any service charge bank balances are not part of your assets when preparing your own accounts.