What service charge accounts are

If you own a leasehold flat, your lease will almost always require you to pay a share of the cost of running the building. That share is the service charge. Service charge accounts are the record of how that money came in and how it went out over the year.

The key point is who the money belongs to. Under section 42 of the Landlord and Tenant Act 1987, service charge contributions are held on trust. The landlord or management company holds them to pay for the things the charges cover, and for the benefit of the leaseholders who paid in. That is why the accounts show income and expenditure rather than profit, and why the funds should be kept in a separate bank account away from the landlord's or agent's own money.

A typical set of accounts includes:

• Income and expenditure: what was collected, what was spent, and the surplus or deficit against the budget.
• Balance sheet: cash held for the building, arrears owed by leaseholders, and bills still to be paid.
• Notes: the accounting policies used and movements on any reserve or sinking fund.

The costs themselves are the usual running costs of a block: buildings insurance, cleaning and gardening, communal electricity, repairs, lift maintenance, managing agent fees, and contributions to a reserve fund for larger work later on.

How the service charge year works

Most blocks run on a yearly cycle, though your lease sets the exact dates.

1. The budget

Before the year starts, the landlord or agent estimates what the building will cost to run. That service charge budget is split between the flats using the proportions in each lease.

2. Demands on account

Leaseholders are billed during the year, usually quarterly or twice a year, based on the budget. These are payments on account, not a final bill.

3. Year end reconciliation

After the year closes, actual spending is compared with the budget. If costs came in higher, leaseholders receive a balancing charge. If they came in lower, the surplus is credited back or carried forward, depending on what the lease says. This reconciliation is the heart of the annual accounts, and it is the figure most worth checking.

Some leases also require the accounts to be audited or certified by an accountant every year. Others do not. Read the service charge clauses in your own lease before assuming either way.

What a valid service charge demand must include

A demand can be correct on the numbers and still not be payable yet. Three rules matter most.

The landlord's name and address. Under section 47 of the Landlord and Tenant Act 1987, a demand must give the landlord's name and address, and an address in England and Wales for notices if the landlord is based elsewhere. Until that information is provided, the service charge part of the demand is treated as not due.

The summary of rights and obligations. Every demand must come with the statutory summary of leaseholders' rights and obligations. If it does not, section 21B of the Landlord and Tenant Act 1985 lets you withhold payment until it is served.

The 18 month rule. Costs incurred more than 18 months before they are demanded cannot be recovered, unless you were told in writing within those 18 months that the costs had been incurred and you would have to contribute. The rule is in section 20B of the Landlord and Tenant Act 1985, and our guide to Section 20 notices covers how it works alongside consultation on major works.

How a demand has to be delivered depends mainly on the lease. If the lease says post, the landlord must post it. Email is only safe where the lease allows it or you have agreed to it in writing.

Your right to a summary under section 21

Search for section 21 and most results will be about evictions. That is Section 21 of the Housing Act 1988, the no fault eviction notice ended by the Renters' Rights Act. The section 21 that matters for service charges is in the Landlord and Tenant Act 1985, and it is a leaseholder's right to information.

What you can ask for

Under section 21 of the 1985 Act, you can ask in writing for a summary of the costs that make up your service charge for the last accounting year, or the last 12 months if accounts are not kept by year. The summary should show how the costs relate to what you were charged and which bills have been paid.

The deadlines

The landlord must provide the summary within one month of your request, or within six months of the end of the accounting period, whichever is later. Where the costs relate to more than four flats, the summary must be certified by a qualified, independent accountant as a fair summary.

Inspecting the paperwork

Section 22 lets you go further. Within six months of receiving the summary, you can ask to inspect the accounts, receipts and other documents behind it. The landlord must make them available within one month of your request, for two months, and you can take copies.

Failing to comply is a criminal offence, with a fine of up to 2,500 pounds on conviction, according to the Leasehold Advisory Service. In practice, a written request that quotes the section is usually enough to get the documents moving.

Reserve funds and sinking funds

Many blocks build up a reserve fund, sometimes called a sinking fund, for large jobs that come round every few years: a new roof, lift replacement, external redecoration. Paying in steadily avoids a single large bill when the work falls due.

A landlord can only collect for a reserve if the lease allows it. Where it does, the money is held on the same trust as the rest of the service charge and should appear in the accounts as its own balance, with movements shown in the notes.

If you are buying a flat, the reserve balance and the planned works are worth asking about before exchange. A healthy reserve means fewer surprise demands. A thin one alongside an old roof usually means a large bill is coming, and possibly a Section 20 consultation with it.

Service charges when you let your flat

If you let out a leasehold flat, the service charge stays your cost as the leaseholder. It does not pass to your tenant or guests, so it sits against your rental income every year alongside ground rent.

That makes the accounts worth reading closely. A rising budget, a thin reserve or a large balancing charge all come straight off your return. A flat that looks strong on gross rent can look very different once the service charge is taken off.

If you are thinking about short lets, check two things first. The lease may restrict how the flat can be used, and planning rules can apply depending on where it is, which our guide to holiday let planning permission covers. If you share the freehold with your neighbours, share of freehold explains how decisions about the building get made.

If short lets make sense for your flat, Houst offers full Airbnb management, and the income calculator gives you an estimate before you commit to anything.

What is changing

Two changes affect service charges, and only one of them is in force.

A new RICS code, in force now. A new edition of the RICS Service Charge Residential Management Code was approved for England from 7 April 2026, replacing the version approved in 2016. It is the approved code of practice for landlords and managing agents of residential blocks in England. The approval order is on legislation.gov.uk.

Service charge reform, not yet in force. The Leasehold and Freehold Reform Act 2024 will bring in standard format demands, an annual report for leaseholders, and accounts signed off by a qualified professional. According to the Leasehold Advisory Service, regulations are expected later in 2026 and leaseholders should start to see changes during 2027. Until then, the current rules above still apply.

This guide is general information, not legal or tax advice. Speak to a qualified adviser about your situation.