Service Charge Accounting
Service charge money is held on statutory trust for leaseholders. That single fact governs how it must be banked, accounted for and reported — and it is the area where self-managed blocks and cheap agents most often fall down.
Get service charge accounting sorted
Tell us the block, unit count, financial year end and how far behind the accounts are. We'll quote to bring them current and keep them there.
The annual cycle
| Stage | Timing | What must happen |
|---|---|---|
| Budget | 2–3 months before year start | Line-by-line estimate, reserve contribution, board approval, issued with an explanation |
| Demands | Per the lease, usually half-yearly or quarterly | Correct amount, correct dates, plus the summary of rights and obligations — without it the charge is not payable |
| Collection and arrears | Continuous | Reminders, formal demand, then escalation; arrears reported to the board monthly |
| Year-end accounts | Within the lease deadline, commonly 6 months | Income and expenditure, balance sheet, reserve fund position, certified as the lease requires |
| Balancing charge or credit | With or after the accounts | Deficit demanded or surplus credited, with the working shown |
Statutory trust and client accounts
Section 42 of the Landlord and Tenant Act 1987 places service charge contributions in trust for the contributing leaseholders. They must be held in a designated client account, separately from the agent's or the company's own money, and used only for the purposes the lease permits.
In practice this means a separate bank account per block wherever possible, no cross-subsidy between blocks, reserve funds identified separately in the accounts, and interest credited to the fund rather than retained.
Demands that are actually enforceable
- The demand must contain the landlord's name and address (s.47/s.48 LTA 1987)
- It must be accompanied by the summary of tenants' rights and obligations, or it is not payable until it is
- It must reflect the apportionment in the lease, not a convenient equal split
- Charges demanded more than 18 months after they were incurred are generally irrecoverable unless notice was given (s.20B LTA 1985)
- Ground rent requires a separate, prescribed-form demand — it is not part of the service charge
Arrears recovery that works
Arrears are corrosive because the shortfall falls on the leaseholders who did pay. The sequence that recovers money without destroying relationships is consistent and unemotional: reminder at 14 days, formal letter at 30, a payment plan offered where circumstances warrant it, then solicitor's letter before action.
Beyond that, the routes are a county court money claim, or an application to the First-tier Tribunal for a determination that the charge is payable — which is what you need before forfeiture can be considered. Forfeiture is a last resort and requires a determination or admission first.
Bringing late accounts current
We are regularly instructed on blocks two or three years behind. The work is reconstruction: bank statements, invoices, demand history and arrears reconciled from source, then a clean set of accounts and a defensible arrears position. Once current, the block goes onto a fixed annual timetable with the draft to the board before it reaches leaseholders.
Frequently asked questions
Do service charge accounts have to be audited?
For most blocks a full statutory audit is not required. What the lease usually requires is certification by an accountant, and the standard for that work is set out in the ICAEW/ARMA Tech 03 guidance. Some leases do require an audit — the lease governs.
How long does a landlord have to demand a service charge?
Section 20B of the Landlord and Tenant Act 1985 means costs incurred more than 18 months before the demand are generally not recoverable, unless the leaseholder was notified in writing within that 18 months that the costs had been incurred and would be demanded.
Can leaseholders see the service charge accounts and invoices?
Yes. Leaseholders can request a written summary of costs and, having received it, can require facilities to inspect the supporting invoices and receipts. Refusing is both a breach and the fastest way to a tribunal application.
What is a reserve or sinking fund?
Money collected in advance for future major works, held on the same statutory trust. It should be identified separately in the accounts and, ideally, justified by a planned preventative maintenance schedule so leaseholders can see what they are contributing towards.
What happens to service charge money if the managing agent changes?
It belongs to the leaseholders, not the agent. On handover the outgoing agent must transfer the balances, the arrears position and the accounting records. Delays here are common and are the main reason handovers need to be actively managed.