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What is a service charge and what does it have to do with my house?

I’ve just bought a house and I’ve got to pay a yearly service charge. What gives?

A yearly service charge will usually relate to the maintenance of common areas. If you have bought a house in a development, it may have common grass/green areas. An apartment will have common areas such as a car park, lifts, hallways etc. These common areas are used by everyone and must be kept clean and maintained for the benefit of all residents in the development.

But I don’t even use that patch of grass in front of Number 17.

It doesn’t matter. If the covenants are in your deeds, the management company will make sure that everyone pays a proportional amount to cover the maintenance, insurance, and cleaning of the common areas. You may also be expected to pay a portion of the electricity, water etc.

A what company now?

Management company. Unless there is a contractual relationship with a third-party, such as Greenbelt Group Limited, there will most likely be a management company.

[At least, you should hope there is a management company. Sometimes things go awry leading to issues with the ownership of the common areas.]

You will own a share of the management company, along with everyone else in the development/apartment. Wasn’t this explained to you when you signed the contract?

A management company is set up by the developer and once the final house/apartment has been sold ownership of the common areas are transferred to the company. If the company has been set up correctly each purchaser of a house/apartment will own one share in the management company. You are responsible for the yearly service charges which are calculated on a pro-rata basis to cover expenditures anticipated by the company. As a share holder you will have voting rights on how the money is spent but some things (general maintenance, cleaning etc) must to done to keep the common areas to a minimum standard. Not happy with the current state of affairs? Management company paying too much for bin collection services? Think the accountant is bilking the management company? Turn up at the AGM and create a stink about it.

Wait I’m going to be forced to participate now?

Not necessarily but if you want to change the way things are done then you must attend the AGM. Where things progress from there will be mandated by the company’s articles of association and memorandum.

Great. I’m going to propose we concrete over the grass in the development and get rid of the expense.

Not so fast. Your title deeds, to which the management company is a party, probably covenant that the green common areas are necessary for planning compliance and must be maintained. There are likely covenants requiring the management company to maintain these areas and recover the costs from all the shareholders. You sure this wasn’t brought up when you signed the contract?

More of these horrible covenant things. Bleugh.

Ah. So you were paying attention to your solicitor, at least part of the time. Yes, more covenants, but the idea behind them is to make sure specific regulations are complied with. Covenants also ensure a measure of fairness between all shareholders.

The covenants allow each resident in the apartment /development recourse if someone isn’t maintaining their own property or isn’t paying their share of the management company service charge. You individually or the management company can even take a non-payer/non-complier to court or wait until the unscrupulous party tries to sell the property and create problems for the non-payer at this later stage.

You said about turning up and voting at the AGM. What if I just don’t bother and let someone else worry about it?

Well, that is your right. All that’s needed to form a quorum at the AGM is two shareholders. It’s in your interest to turn up to since these two shareholders can make whatever decisions are in their best interests, then pass them in the name of the management company. Didn’t you wonder why the guy in apartment 2’s brother was taking out the communal bins for an extortionate amount?

I didn’t think about it, to be honest.

Many people don’t and that’s often where problems arise.

Management companies require a small commitment of time and effort on the part of the shareholders to run the company. When run correctly management companies allow multiple households to manage common areas in as frictionless a way as possible. It is therefore imperative that a purchaser thinks about the long-term implications of owning a property which has the benefit of common areas, these areas being maintained by a management company.

Come to think about it I think my management company may be bankrupt…

Oh boy…

 

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