Most service charge problems are not fraud. They are a combination of poor record-keeping, sloppy budgeting, weak contractor management and badly drafted leases. The pattern is consistent and so are the fixes.
This guide is for leaseholders trying to make sense of a problem service charge, and for RTM and RMC directors trying to clean one up.
1. Year-end accounts produced years late
The most common single problem. The lease will normally require year-end service charge accounts within six months of the year end. In practice, blocks routinely run a year or two behind, with budgets recycled from prior years and no reconciliation of actual cost.
The consequence is that leaseholders cannot see what they paid for. The fix is mechanical: catch up the missing years one at a time, in order, with a qualified accountant. It is not glamorous work but it is the foundation of everything else.
2. Section 20B - the 18-month rule
Section 20B of the Landlord and Tenant Act 1985 prevents a landlord from recovering a cost more than 18 months after it was incurred, unless the leaseholders were notified within 18 months that the cost had been incurred and that it would be charged. Late accounts and lost invoices are the usual culprits.
If a charge is challenged on Section 20B grounds and the landlord cannot show timely notification, the cost is irrecoverable. This is one of the most important consumer protections in leasehold and is regularly overlooked.
3. No breakdown of major works
Leaseholders are entitled to a written summary of costs covered by their service charge, broken down by item. "Repairs - £14,200" is not a breakdown. "Repairs - communal cold water pump replacement, contractor A, invoice X - £4,300; communal lighting fault, contractor B, invoice Y - £680" is.
Section 22 of the 1985 Act lets leaseholders inspect the accounts, receipts and supporting documents behind a summary of relevant costs obtained under Section 21. Inspection is free; a reasonable charge may be made for copies. A reasonable agent will produce the paperwork on request without resistance.
4. Reserve fund mismanagement
Two opposite problems show up.
First, reserve funds collected for years but never spent, sitting in a low-interest account while leaseholders take service charge increases every year. The lease should specify what the reserve is for - if it is being collected without a stated purpose, it is hard to justify.
Second, no reserve fund at all, so every major works project triggers a one-off demand at short notice. The standard fix is a 10 to 20 year plan with an annual contribution sized to it.
5. Insurance commissions
Buildings insurance is often the single largest line in the budget. Some managing agents historically received undisclosed commission from insurers - a percentage of the premium - which inflated the cost without the leaseholders' knowledge.
The FCA's market study and tighter disclosure rules have improved this, but it remains worth asking, in writing, whether the agent receives any commission, share of premium or fee from the insurer, and how much.
6. Section 20 not followed
Where qualifying works exceed £250 per leaseholder and consultation was not carried out, the recoverable cost is capped at £250 per leaseholder. The landlord can apply for dispensation, but it is not automatic. This is the highest-value mistake an agent can make and one of the easiest to spot in retrospect.
7. Apportionment errors
The lease will specify how the total service charge is apportioned between flats - often equal shares, sometimes by floor area, sometimes by rateable value. Apportionment errors are surprisingly common, especially in mixed-use blocks or where leases were varied at different times.
If you suspect an apportionment error, get the leases checked side by side. The fix may require a Tribunal application to vary leases.
8. Charges that do not appear in the lease
The lease defines what is recoverable. If a charge is for something the lease does not allow - for example, a gym in a block where the lease only covers building maintenance - it is not recoverable, no matter how reasonable the cost. Leaseholders can challenge unrecoverable charges at the First-tier Tribunal.
9. Management fee disproportionate to scope
The same per-unit management fee can be entirely reasonable on a small, simple block and unreasonable on a large block with a basic service offering. Reasonableness is judged on the scope of services actually delivered. The Tribunal looks at this carefully.
10. How to actually fix a problem service charge
- Get a copy of the lease, the last three years' budgets and the last available year-end accounts
- Check apportionment against the lease
- Request invoices and supporting documents under Section 22 for any line that does not add up
- Check Section 20B compliance on any charge older than 18 months
- Confirm whether Section 20 was followed on any qualifying works
- Ask whether the agent receives insurance commission
- Where the answers are not satisfactory, escalate to the agent's redress scheme (PRS, TPO or PRO)
- If still unresolved, apply to the First-tier Tribunal for a determination of reasonableness under Section 27A
We take on problem service charges regularly
Many of the blocks we now manage came to us with two years of unproduced accounts and a service charge no one trusted. The path out is methodical. If you want a no-obligation review of your current service charge position, send it across.
Speak to our team about your block
We manage residential blocks and estates across Romford and East London. If this article raised a question about your specific situation, send it across - we will give you a straightforward, plain-English answer.
General guidance only, not legal advice. Service charge law is governed by the Landlord and Tenant Act 1985 and related legislation; obtain specific advice for your situation.