Year-End Service Charge Accounts Explained

Most leases work on a simple cycle. At the start of each service charge year the landlord or management company sets a budget and collects payments on account. At the end of the year, the actual costs are worked out and compared with what was collected. The year-end service charge accounts are where that comparison happens, and they are one of the most important documents a leaseholder receives.

What the year-end accounts show

A clear set of year-end accounts should include:

• The actual expenditure for the year, broken down by heading (cleaning, insurance, repairs, utilities, management, and so on)
• A comparison with the budget, with an explanation of significant differences
• The total collected from leaseholders on account
• Any balancing charge or credit due
• Contributions to and spending from the reserve fund, and the closing balance
• Any accountant's report or certificate the lease requires

Balancing charges and credits

If the actual costs for the year were higher than the amount collected on account, the lease will usually allow a balancing charge to be demanded from each leaseholder for their share of the difference. If costs were lower, there will be a balancing credit. Depending on the lease, a credit may be refunded, credited against the next year's charges or transferred to the reserve fund. The lease sets the rules, so it is always the starting point.

The 18-month rule (section 20B)

Section 20B of the Landlord and Tenant Act 1985 sets a time limit on demanding service charges. Leaseholders are only liable for costs that are demanded within 18 months of being incurred, unless, within those 18 months, the leaseholder was notified in writing that the costs had been incurred and would be demanded later through the service charge.

For a well-run building this is straightforward: prepare the year-end accounts promptly, issue any balancing charge quickly, and where a cost is likely to be demanded later (for example while a dispute with a contractor is resolved), send a section 20B notice within the 18 months. Late accounts put recovery at risk, so timely year-ends protect everyone.

What every demand must include

Any demand for service charges, including a balancing charge, must be accompanied by the prescribed summary of tenants' rights and obligations (section 21B of the 1985 Act). In England and in Wales the wording is set by separate regulations, and the Welsh summary is set out in Welsh and English. If the summary is missing, the leaseholder may withhold payment until it is provided.

Demands must also include the landlord's name and address, and leaseholders must be given an address in England and Wales at which notices can be served on the landlord (sections 47 and 48 of the Landlord and Tenant Act 1987). A good managing agent includes all of this as standard.

Your rights to information

Leaseholders have statutory rights to see how their money is spent:

• Summary of costs (section 21): a leaseholder can ask the landlord in writing for a summary of the costs making up the service charge for the last accounting year. It must be supplied within one month of the request, or within six months of the end of the accounting period, whichever is later. Where the service charges are payable by the leaseholders of more than four dwellings, the summary must be certified by a qualified accountant.
• Inspecting the documents (section 22): once the summary has been supplied, the leaseholder can ask to inspect the accounts, receipts and other supporting documents.

The Leasehold and Freehold Reform Act 2024 provides for new service charge transparency rules, including standard-form demands and annual reports. The government has said it will bring these in as quickly as possible; check current commencement before relying on them. Our guide to the 2024 leasehold reforms tracks what is in force.

A typical year-end timetable

1. The service charge year ends on the date set in the lease
2. The managing agent closes the books, accrues any costs incurred but awaiting invoices, and reconciles the bank and reserve fund accounts
3. The accounts are prepared and passed to the accountant for any certificate or report the lease requires
4. The board reviews the draft accounts and the explanation of variances
5. Final accounts are issued to leaseholders, with any balancing charge or credit and the statutory summary of rights

Issuing the accounts within a few months of the year end keeps everything well inside the 18-month window and gives leaseholders an up-to-date picture of their building's finances.

Accounts and the next budget

The year-end accounts are also the best guide to setting the next budget. Comparing actual costs with the budget line by line shows where estimates need adjusting, which contracts may be due for review and whether the reserve fund contributions are on track. Leaseholders appreciate seeing that link clearly explained, because it shows the budget is based on real costs.

Reading the accounts: a checklist

• Do the headings match the services the lease allows to be charged?
• Are large variances from the budget explained?
• Is the reserve fund balance shown, with movements during the year?
• Are management fees and any other fees shown clearly?
• Were the accounts issued promptly after the year end?
• Is your share calculated using the percentage or method in your lease?

If something looks wrong

Start by asking the managing agent for an explanation and the supporting invoices. Most questions are resolved quickly at this stage. If a disagreement remains, leaseholders in England can apply to the First-tier Tribunal (Property Chamber), and in Wales to the Residential Property Tribunal Wales, to decide whether a charge is payable and reasonable. Our guide to understanding service charges covers this in more detail.

At Westbridge, year-end accounts are prepared promptly, every variance is explained in plain English and leaseholders can see photos of the work their money paid for. See our service charge and accounts service, or get in touch for a free building review.