What Should Leaseholders Look for in Service Charge Accounts? A Guide for Managing Agents

Service charge accounts can raise a lot of questions for leaseholders. For managing agents, understanding those questions before they are asked can make AGMs easier, improve communication and help build greater trust with the people whose properties you manage.

In the latest episode of Qube Talk: Service Charge Accounting Insights, Ray Armand and CJ Ralfe turn the usual conversation around.

Rather than looking at service charge accounts purely from the perspective of an accountant or managing agent, they put themselves in the shoes of a leaseholder:

If you were handed a set of service charge accounts at an AGM, what would you look at first – and what questions would you ask?

It is a useful exercise for managing agents because leaseholders have more information available to them than ever before. They may arrive at an AGM having researched terminology, reviewed their accounts in detail or used AI tools to help them identify questions to ask.

Being prepared for those questions – and making the relevant information clear and accessible in the first place – can help managing agents demonstrate the value of the work they are doing.

Below, we explore some of the key areas discussed in the episode.

1. Start with the accountant's report

One of the first places a leaseholder can look when reviewing service charge accounts is the report provided by the accountant.

The report may draw attention to matters identified during the accountant's work, so it can provide an important starting point for understanding the accounts.

In the podcast, Ray and CJ discuss the difference between something being highlighted because of its monetary significance and a matter that may be important because of its nature.

For example, the accountant may be able to agree a property's bank balance to records generated by the managing agent's accounting system but may not be able to independently agree that individual balance directly to a separate bank statement where funds for multiple properties are held within a consolidated client bank account.

That does not automatically mean the bank balance is wrong.

Instead, it can indicate a limitation on how independently the balance could be verified.

For managing agents, the important lesson is that leaseholders may not understand the terminology used within an accountant's report. If something has been highlighted, be prepared to explain clearly what it means – and, equally importantly, what it does not mean.

2. Does the service charge account include a balance sheet?

The next important area is the balance sheet.

A set of service charge accounts consisting only of an income and expenditure statement may not give leaseholders the complete financial picture they are looking for.

The balance sheet can provide valuable information about the financial position of the development, including areas such as:

• cash and bank balances;

• amounts owed by leaseholders;

• other assets or liabilities; and

• reserve or sinking fund balances.

This becomes particularly important when a leaseholder asks a seemingly simple question such as:

"Where has all the money gone?"

The answer cannot necessarily be found by looking at expenditure alone.

3. Look closely at the bank balance

Cash is understandably one of the areas likely to attract a leaseholder's attention.

A leaseholder may want to know how much cash the development has available and how those funds are being held.

The episode discusses the distinction between having a separate bank account for an individual development and having funds held within a larger client account, with the managing agent's accounting records identifying how much belongs to each property.

Separate bank accounts can make the position easier to independently evidence because there is a bank statement relating specifically to that account.

This can become particularly relevant during a handover from one managing agent to another. Where funds are held together and separated through internal accounting records, establishing precisely what belongs to an individual development can potentially become an area of discussion or dispute.

For managing agents, transparency around how client funds are held and accounted for can therefore be extremely valuable.

4. Don't just ask how much cash there is – look at service charge debtors

A low bank balance does not necessarily tell the whole story.

One of the most useful points raised in the episode is the importance of looking at service charge debtors – the amounts that have been charged but remain outstanding.

Imagine a development is experiencing cash flow pressure while £50,000 of service charges remains unpaid.

A leaseholder who has paid their own service charges may reasonably ask why the development is short of cash. The debtor balance can help explain part of the answer.

Outstanding service charge arrears can have a real impact on a managing agent's ability to operate a development effectively.

For leaseholders and directors, useful questions may therefore include:

How much service charge is currently outstanding?

How old are those debts?

What action is being taken to recover them?

The wider point for managing agents is that cash flow should be viewed alongside amounts receivable. A bank balance in isolation does not necessarily provide a complete picture of a development's finances.

5. Compare actual service charge expenditure with the budget

Another valuable exercise is to compare the year's actual income and expenditure with the original service charge budget.

A good set of financial information should help the reader understand not simply what was spent, but how that expenditure compared with what was expected.

For example, if repairs and maintenance were significantly over budget, a leaseholder is likely to want to understand why.

Perhaps an unexpected repair was required.

Perhaps the scope of planned work changed.

Perhaps costs increased.

Whatever the reason, significant differences between budgeted and actual service charge expenditure are natural areas for questions.

Ray and CJ also discuss the benefit of including the budget comparison within the service charge accounts themselves.

Although leaseholders may already have received a copy of the original budget, terminology and expense groupings can sometimes differ between the budget and the year-end accounts. Including comparable figures alongside one another can therefore make the information significantly easier to understand.

For managing agents, providing a clear budget versus actual comparison can make discussions with leaseholders more productive and help explain how the development performed financially during the year.

6. Investigate significant overspends and unusual expenditure

Once leaseholders start comparing actual expenditure with the budget, large differences are likely to attract attention.

Repairs and maintenance are a good example because expenditure can vary considerably from one year to another.

An underspend may appear positive, although it can still be useful to understand why planned money was not spent.

An overspend is even more likely to generate questions.

Managing agents should therefore be prepared to explain significant expenditure clearly:

• What work was carried out?

• Why was it necessary?

• Was it planned or unexpected?

• How was the contractor selected?

• Was the expenditure covered by existing funds or reserves?

• Were any additional contributions required?

Clear supporting information can turn what might initially appear to be an unexplained overspend into a straightforward and understandable financial story.

7. Consider whether Section 20 consultation may be relevant

The episode also discusses Section 20 consultation and major works – an important area for both managing agents and leaseholders.

As discussed by Ray and CJ, where relevant expenditure reaches the applicable threshold, leaseholders may reasonably want to understand whether the appropriate consultation process has been followed.

The basic principle discussed in the episode is that the threshold for qualifying works can effectively become significant very quickly, particularly on smaller developments, because the relevant amount is considered on a per-leaseholder basis.

For example, on a development with ten contributing leaseholders, expenditure of £2,500 could already represent £250 per leaseholder.

A leaseholder reviewing the accounts may therefore notice a significant item of expenditure and ask:

"Was a Section 20 consultation required for this work?"

The discussion also touches on longer-term agreements, such as certain cleaning, landscaping or other service contracts, where different Section 20 considerations can arise.

For managing agents, the takeaway is simple: significant expenditure is likely to attract scrutiny. Maintaining clear records around consultation, quotations and procurement can make those conversations much easier.

8. Review reserve funds and sinking funds carefully

Reserve funds and sinking funds are another important part of service charge accounting.

These funds allow money to be accumulated towards future expenditure rather than requiring leaseholders to meet the entire cost of major works when they arise.

Examples might include future expenditure on:

• roofs;

• roads;

• lifts;

• major building repairs; and

• other significant cyclical works.

However, simply seeing a healthy reserve fund balance does not necessarily tell a leaseholder everything they need to know.

On a complex development, the allocation of that reserve can be just as important as its overall value.

9. Reserve funds on multi-schedule developments need particular attention

This is especially relevant where a development contains different types of properties or multiple service charge schedules.

For example, one development might contain flats, terraced houses, garages, parking areas and communal estate facilities.

Different groups of leaseholders may contribute towards different services.

Residents of the flats might contribute towards a reserve for future lift expenditure, while a wider estate reserve might accumulate funds towards future road repairs.

If those contributions are simply combined into one overall reserve balance without sufficient supporting records, problems can arise.

Imagine £15,000 has been accumulated specifically towards future road repairs, while other money has been accumulated for future works to the flats.

If £20,000 of road repairs are then required, it is important to know which reserve funds genuinely relate to the roads. Looking only at the total reserve balance could create the impression that sufficient money exists when some of that money effectively relates to another service charge schedule.

Over many years, these allocations can become increasingly difficult to untangle if they have not been recorded clearly.

The result can be unfairness between different groups of leaseholders and potentially significant problems when major expenditure eventually arises.

For managing agents operating complex or multi-schedule developments, maintaining clear records of who contributed what, which service charge schedule the contribution relates to and what each reserve is intended to fund is therefore extremely important.

10. Ask whether cost allocations are fair and reasonable

Multi-schedule developments also raise another important question:

Are shared costs being allocated appropriately?

Not every expense can always be attributed directly to one particular property or group of leaseholders. Some expenditure may need to be divided using an appropriate percentage or other allocation method.

From a leaseholder's perspective, however, the allocation should make sense.

Someone living in a particular part of a development is naturally likely to scrutinise whether the costs charged to their service charge schedule relate appropriately to the services they receive.

Managing agents should therefore be able to understand and explain the basis on which shared costs have been allocated.

What are the key things to check in service charge accounts?

Bringing the discussion together, some of the main areas highlighted in this episode of

Qube Talk include:

1. Read the accountant's report and understand any matters highlighted.

2. Check that there is sufficient balance sheet information to understand the development's financial position.

3. Review the bank balance and understand how client funds are held.

4. Look at service charge debtors and arrears, rather than viewing cash in isolation.

5. Compare actual income and expenditure with the service charge budget.

6. Investigate significant overspends, underspends and unusual expenditure.

7. Consider Section 20 requirements where significant works or relevant contracts have been entered into.

8. Review reserve and sinking fund balances.

9. Check how reserve funds are allocated on multi-schedule developments.

10. Understand whether shared expenditure has been allocated appropriately between service charge schedules.

Why does this matter for managing agents?

The purpose of looking at service charge accounts through the eyes of a leaseholder is not simply to anticipate difficult questions.

It can help managing agents provide a better service.

If you know which figures are likely to attract attention, you can make sure explanations and supporting information are available before the AGM.

If you know that leaseholders may question a large repair, you can communicate what happened and why.

If debtor balances are affecting cash flow, you can explain the relationship between money owed and money available.

If a development has complicated reserve fund arrangements, you can make those allocations transparent rather than waiting for confusion to arise.

Ultimately, good service charge accounting is not just about producing accurate numbers. It is also about making those numbers understandable.

Managing agents may already be doing a considerable amount of work behind the scenes. Making that work visible and explaining it clearly can help leaseholders better understand the value being delivered.

Listen to Qube Talk: Service Charge Accounting Insights

Want to hear the full conversation?

In this episode of Qube Talk: Service Charge Accounting Insights, Ray Armand and CJ Ralfe put themselves in a leaseholder's shoes and discuss the areas they would focus on when presented with a set of service charge accounts.

It's a practical conversation for managing agents who want to anticipate leaseholder questions, improve financial communication and approach their next AGM with greater confidence.

🎧 Listen to the full episode here

Qube Talk: Service Charge Accounting Insights is a podcast for managing agents working in the UK residential block management sector. We explore service charge accounting, financial reporting and the practical issues managing agents encounter when looking after residential developments – with expert insights and real-world examples to help you manage with confidence.