The Property Management Accountants Guide to Service Charges
Service charge accounts — a unique accounting requirement for people like yourself working within property management. It isn’t the most straightforward function to take on, especially when managing an ever-growing portfolio and time is of the essence.
You also need to ensure you’re meeting all the legal requirements to meet specific deadlines. A lot think about, we know. That’s why we’ve written this article — to talk you through the critical factors when managing service charge accounts for your business.
- Legal Requirements for Service Charge Accounts
- Compliance Requirements for Service Charge Accounts
- The Core Principles of Managing Service Charges
- How the Right Software Can Make Your Job Easier
Legal Requirements for Service Charge Accounts
Several Acts have been passed over the last few decades that apply to service charges as they’re one of the main areas for dispute between leaseholders and landlords.
Understanding these Acts is essential so you can be sure you’re always meeting legal requirements. To help you gain more insight into what each of them means, here’s a breakdown of various pieces of legislation that relate to service charge accounts:
Landlord and Tenants Act 1985
Within the Act, a clear definition is provided of what a service charge is, with several requirements included in it as well. A service charge can be defined as:
“A service charge covers a range of factors, including services repair, maintenance, improvements, insurance and landlord costs of management.”
The Act also states that service charges are only payable to a reasonable extent. This protects leaseholders from landlords, managing agents or residential property management companies spending too much on services or works.
It’s also important to note that if any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge reflects the costs incurred.
To learn more about the Act in detail and other requirements to be aware of, keep this guidance close by.
Landlord and Tenants Act 1987
As part of this Act, leaseholders have the right to assess whether your business is compliant when managing service charges. This means you must follow certain procedures and frameworks that we’ll iron out later in the article.
If the leaseholder believes you aren’t being compliant, they have a right to withhold payments until the matter is resolved in a court of law. The Act also states that service charge holders must be held in a trust and service charges must be held in a designated account. The legislation is available to read in detail here.
Compliance Requirements for Service Charge Accounts
RICS Service Charge Standards are mandatory for all RICS professionals. These standards were developed to secure transparent, upfront and fair costs to tenants.
Housing Act 1996
In most cases, leaseholders will pay their service charges and no issues will arise. However, this Act states that a landlord can’t exercise a right of re-entry for failure to pay a service charge unless the service charge is finally determined by (or on appeal from) a leasehold valuation tribunal or a court.
The Act also gives recognised resident’s a right to appoint a surveyor the investigate a service charge before the matter goes to court. Check out the full legislation to make sure you’re in the know about the different aspects covered here.
As well as knowing about these different types of legislation related to service charges, there are also some core principles you should follow when carrying out your duties.
The Core Principles of Managing Service Charges
When managing service charge accounts, there are several core principles you should follow to ensure you meet legal requirements and uphold a strong brand reputation. Some core principles include:
Following Your Duty of Care
As the person responsible for certifying service charge accounts, it’s important to recognise that you have a duty of care to occupiers to act with professionalism, diligence and integrity. To ensure this is always the case, put some clear policies in place explaining how the service charge will be managed once the relationship begins.
Managing the Service Costs
To avoid disputes, all costs should be transparent to ensure everyone involved knows how the costs are made up. Best practice recommends that services are procured at an appropriate value and all costs are benchmarked.
It’s also best practice to issue service charge accounts within four months of the year end for Commercial property and six months of the year end for residential property. It is important to ensure that any balancing charges are issued promptly.Service charges should also be prepared on an accrual basis. This means the account statement should also include the costs that were incurred but not paid.
The amount paid by the tenant to your business as service charges should be held in a ring-fenced bank account. This doesn’t mean each property needs a separate bank account. However, the funds for each property must be separately identifiable to avoid any breaches of trust.
Meeting legal requirements and following important best practices — we know there’s a lot to think about. This is also made more difficult because many accountants still manually manage their service charge accounts, eating away at time and holding them back from making business-critical decisions. But that doesn’t have to be the case.
How the Right Software Can Make Your Job Easier
In today’s world, technology can remove many of the burdens we’ve had to put up with in our jobs. Things aren’t any different for accountants managing service charge accounts.
Having the right software at your disposal can make taking on this function much more straightforward in several ways. Here’s how:
Streamline Your Service Charge Processes
The right software gives you the power to simplify and automate service charge budgeting, reconciliation and reporting. This is made possible by allowing you to specify service charge schedules to automatically apportion expenditure to the relevant tenants and ensure sufficient funds are collected to cover the service charge costs, such as general property maintenance, repairs and insurance.
Automate Your Arrears Chasing
Keep track of payments and quickly pinpoint overdue funds in good time. The right software will provide you with arrears notice templates to send reminders to tenants with overdue invoices. This frees up your time to work on more important tasks and ensure the growth of your business heads in the right direction.
Digital Payments and Statements
Through various integrations, you can make your and your tenants' lives easier by enabling online payments through Bacs and direct debits. This reduces collection times and errors, giving you back the valuable time you need.
Seamlessly Run Budgets and Forecasts
With an all-in-one platform, you can be rest assured that you’re always working from a single source of truth and have the ability to create plans and revise budgets in a safe space. Less time manually inputting data to spreadsheets and more time doing what you’re passionate about.
So, there you have it — an insightful guide to managing service charges and a breakdown of some reasons you should consider investing in software to support you in the future. But with so many different software options available, how do you know which one is right for you?
Start Finding a Solution That Meets Your Needs With Our Comparison Guide
The investment is high and it’s crucial you choose a solution that’s right for your business. That’s why we’ve created a comparison guide that aims to help you weigh all the options available before making a decision.
Inside it, we compare a range of popular software options, delving into a range of factors including price, ease of integration, ease of use and the most important features. To download your copy, hit the link below.