What are Service Charges?
Service charges usually cover a variety of expenditures that are incurred with the running of a building; the 'services' such as heating, staffing, cleaning, utilities and other such items, as well as the costs that arise as 'works' which include maintenance and repairs of communal equipment and replacement of items (where beyond economic repair). Service Charges are operated on a 'Not for profit, Not for loss' basis.
What is a Service Charge schedule?
Each building or site (collection of connecting buildings) has a different mix of tenants with differing requirements. A common example of this would be floors of offices above retail units. Service Charges are therefore normally split into different 'schedules'.
The purpose of a schedule is to ensure that tenants only pay for items to which they receive benefit, for example (in the above scenario) the office tenants may access to a lift which the retail tenants do not. Because of this the retail tenants would not contribute to any schedule that includes lift costs. In highly complicated buildings there can be any number of schedules.
What is a Sinking/Reserve fund?
For any property there are likely to be occasional one-off costs for replacing major items of equipment (for example, a lift), or for periodic works such as external redecorations. Instead of charging for these costs solely in the year in which the works take place – which would mean you might suddenly be faced with a much larger service charge bill for one year – the lease sometimes allows the cost to be spread over a number of years by collecting an annual contribution to a separate fund, predominantly one of the two described below.
A sinking fund is used to build up money to pay for repair and replacement of costly items for example lifts, air conditioning or large plant facilaties. A reserve fund is used by the owner to lessen the impact of unequal expenditure across a number of years. For example, money could be set aside over several years in a reserve fund in anticipation of internal redecorations in order to avoid a disproportionately large one off service charge year when these redecorations are undertaken.