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Are you being served?
Sunday Times 29 May 2005
 
If service charges feel like licensed robbery, look to the managing agent, says ROSIE MILLARD

 
If your buy-to-let property is a flat in a block, the great thing is that you can split some of the bills for the running costs. The bad thing, however, is that those bills, in the form of service charges, can, like some sort of monster, sometimes rise up and assail you out of the blue.
       Service charges in a block usually include all or some of the following: heating (some buildings have a central boiler system that serves all the flats), building insurance, water, cleaning of communal areas, landscaping, lift maintenance, gym maintenance (if there is one), concierge (ditto), rubbish and waste management, and so forth. That is, the areas of common responsibility that all inhabitants of the block share.
       My two flats in east London carry an annual service charge of about £1,400 and £1,000 apiece, which is fair enough, but the charge clearly needs to be factored into my overall running costs. Service charges are usually borne by the landlord (as opposed to council tax, which is the tenant’s lookout).
       Of course, as with anything in the capitalist West, you usually get what you pay for. If you want your flat to have 24-hour security, concierge, pool and an in-house branch of Space NK, then prepare for it to appear on the bill. All right, I was joking about the Space NK, but you get the picture. Developer Ira Rapp, whose 60-flat development the Phillimores, in Kensington, includes service at quasi-hotel levels, charges about £5.50 per sq ft per year in service rates.
       In Putney, southwest London, the service charge on a Rapp development is £2.50 per sq ft, which works out at about £2,000 for a one-bed flat of about 800sq ft. “The biggest expense on service charges is staffing costs — 24-hour security is very expensive. As is insurance against terrorism,” says Rapp.
       Are his clients aware of the high costs of the service charge? “All our sales packs include a breakdown of the estimated service charges and, generally speaking, things are being made a lot clearer at the point of sale as to what is or isn’t included.”
       If the flash spec of your dream flat makes you worry about a gargantuan service charge, then it might be best to buy in a large building. Developer Donal Mulryan says he can keep the service charge earthbound at Skyline Central, in central Manchester, with its communal penthouse swimming pool, gym and porter, because he is putting up 250 apartments. This brings the cost down to £1.40 per sq ft per year. “The size gives us good headroom,” he says. By which he means, I think, that because he has built big, buyers will be able to afford the sexy extras such as the pool because there’ll be plenty of them to chip in.
       “We try to put in goodquality stuff, such as Otis lifts, or good-quality front steps, so that things don’t break down and require repairs. This means the only continuing charge is in the maintenance of the equipment.”
       Let’s hope so.
       “Oh my goodness, service charges,” says landlady Susan Browne, who owns five flats in Manchester. “For generations, it has been simply licensed robbery.” Browne considers that she has been paying charges to managing agents who have not been spending responsibly.
       “The central boiler blew up in one of my buildings,” she complains. “It should never have gone. The managing agents behaved appallingly. They didn’t foresee the problems and then made a botched repair job. It’s just as well the LVT has just come into existence.”
       This is the Leasehold Valuation Tribunal, which can be called in to moderate in cases where leaseholders are dissatisfied with the way the managing agent or freeholder is taking care of the building. One of Browne’s fellow landlords, Lex Lindle, who owns two flats in the building, decided to take action with regard to the £1,200 annual service charge.
 


 
 
RKO/The Kobal Collection
 
Owners now want higher levels of service for the charges they pay on their buy-to-lets

 
       Like Browne, she suffered the consequences when the boiler packed up. “Over the 16 years that they were managing the block, they did not maintain or service the hot water system,” says Lindle. “Consequently, it blew, costing £100,000 in repairs. We ended up with a temporary boiler and an oil container in the garden for a year, which I had to appeal to the local authority to remove.
       “It costs £500 at most to apply for an LVT,” she adds. “Because the management company had never spent our service charge properly, the whole place needs drastic redecoration, as well as a new heating system. One of my flats, which should be worth £300,000, has had £75,000 wiped from its value.”
       This is where joint freehold ownership of a block by all the leaseholders of the individual flats would have been handy. In those circumstances, you have the power to get together to appoint a managing agent.
       Lindle says: “Appoint somebody who is knowledgeable on any key works and has a clear plan of action, unlike our old company which did everything on an ad hoc arrangement.”
       “Everybody hates service charges,” says Lindle. “But since the arrival of the LVT and the Leasehold Reform Act, everybody can have much more of a say in the account. Like how much is being spent, and on what — decorating costs, for example. You can also spread out the costs and keep an eye on the tendering process.”
       Of course, being aware of this before you plunge in is a help. “Service charges are becoming more important,” says Andrew Jones, Knight Frank’s head of new homes for London and the southeast. “But there is a trade-off between putting in capital expenditure, such as high-spec lifts, or a lower capital entry value and a higher service charge. If you are buying a unit off-plan and the service charge is estimated at being about x, then you need to carefully multiply your square footage and take that into account of the overall cost.”
       Of course, the service charges on a buy-to-let can be offset against tax, but they could still make quite a dent in your profits.
       Does he have any ballpark figures? “It depends on the level of service you require. At the lower end of the spectrum, if you are much north of, say, £3.50 per sq ft, and it’s a basic refuse collection-and-concierge type of service you’re paying for, then people will start asking questions.
       “Something that is becoming more popular is annexing apartments to hotels. What is appealing with that concept is that you can have a menu of options and buy into certain levels of service. Laundry, cleaning, food — those sorts of thing don’t turn up on the service charge if you order them directly. You pay for them as you use them, and people now are looking for those levels of service.”
       You bet we are.