How a Service Charge Budget Is Built, Line by Line

A service charge budget is an estimate, prepared before the service charge year starts, of what it will cost to run the building for that year. It is built by listing every cost the lease permits the landlord to recover, pricing each line from contracts, meter readings, quotations and a maintenance plan, adding any reserve contribution the lease allows, then dividing the total using the proportions in the leases. Very little of that is discretion: the lease decides what can go in, and statute decides how much can be collected in advance.

What a Budget Is, and What It Is Not

Section 18 of the Landlord and Tenant Act 1985 defines a service charge as an amount payable by the tenant of a dwelling for services, repairs, maintenance, improvements or insurance, or the landlord’s costs of management, where the whole or part of it varies with the relevant costs. Section 18(2) confirms that relevant costs include estimated costs, and section 18(3) that costs include overheads. Estimating forward is normal.

Two tests sit on top. Section 19(1) admits relevant costs only to the extent they are reasonably incurred and where the works or services are of a reasonable standard. Section 19(2) governs money collected before costs are incurred, which is what a budget does: no greater amount than is reasonable is payable in advance.

The Secretary of State approves a code of management practice under section 87 of the Leasehold Reform, Housing and Urban Development Act 1993. For England that is now the fourth edition of the RICS service charge residential management code, approved by an Order in force from 7 April 2026, and section 87(7) makes an approved code admissible in evidence. It says you must not purposely underestimate or overestimate costs, that a slight overestimate is prudent while the budget should still come as close to the final accounts as possible, and that an explained contingency allowance is appropriate.

A budget is a working estimate with a reconciliation behind it, not a bill for a fixed sum. What the year actually cost is settled afterwards in the year end service charge accounts.

Start with the Lease, Not the Spreadsheet

Before any figure is typed, answer the recoverability question line by line: does the lease let the landlord charge for this? A cost outside the landlord’s covenants and outside the service charge machinery cannot be rescued by being reasonable. If your board has not done it recently, work through the clauses that actually drive the charge before the budget meeting.

Three things do most of the work. The landlord’s repairing and service obligations set the outer limit of what may be spent. The recovery clause and its schedules say how the total is split, and whether there is more than one schedule, for instance a block schedule and an estate schedule. Any reserve fund power decides whether you may collect for the future at all, and the code is blunt here: where the lease says the landlord must set up a fund, it must be done.

If there is no reserve power, money cannot simply be collected anyway. Section 35 of the Landlord and Tenant Act 1987 lets a party to a long lease apply to the tribunal to vary it where it fails to make satisfactory provision, including proportions that do not add up to the whole of the expenditure. The tribunal has a discretion, so nothing is automatic.

Repairs and Maintenance

Split this in two. Planned and cyclical work comes off a costed maintenance plan: redecoration cycles, roof coverings, gutters, plant renewals. Reactive repairs are a judgement informed by three years of actual spend on this building, not a round number. The approved code expects every building to have a costed long term planned preventative maintenance plan reflecting its age and condition.

One category stays out. Where a building is a relevant building under section 117 of the Building Safety Act 2022, meaning self-contained, in England, with at least two dwellings, and at least 11 metres high or at least 5 storeys, Schedule 8 restricts what can be charged to a qualifying lease. Section 117(3) takes a building outside that definition where the freehold is leaseholder owned or the right to collective enfranchisement has been exercised, so check the ownership first. Paragraph 8 provides that no service charge is payable under a qualifying lease for cladding remediation, and paragraph 9 blocks charges for legal or other professional services relating to liability for a relevant defect.

Insurance

Buildings insurance is usually the largest fixed line and the least elastic. The lease says who insures, what risks must be covered and whose costs are recoverable. Budget from the renewal terms or the broker’s projection rather than last year’s figure, because a revised reinstatement assessment or a claim moves it sharply.

Remuneration needs its own line in the explanatory notes. The approved code says leaseholders should be told annually of any commission or other income received in connection with the property. Parliament has gone further without switching it on: sections 59 and 60 of the Leasehold and Freehold Reform Act 2024 would bar excluded insurance costs from a variable service charge and add a duty to provide insurance information. Neither is in force.

Utilities, Cleaning and Grounds

Communal electricity covers lighting, lifts, pumps, door entry and smoke control equipment. Communal heating or hot water, where it exists, is usually the most volatile line in the budget and should be built from consumption data and the contracted unit rate, with standing charges shown separately.

Cleaning and grounds maintenance are contract lines, only as good as the specification behind them. State the visit frequency and scope in the notes, because that is what residents compare against what they see. A contract running more than 12 months can be a qualifying long term agreement, which brings the £100 test below.

Compliance and Safety

These are the lines a board cannot vote down. They are duties on the responsible person or the employer. The frequencies below are for England.

One caution. The five year electrical interval comes from the approved code, not from the Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020, which apply to specified tenancies rather than to communal parts of a leasehold block. A compliance calendar should not be copied across from private rented stock, or from Wales or Scotland.

Management and Professional Fees

The approved code is specific. A managing agent’s charges must be reasonable and proportionate to the tasks involved and pre-agreed with the client where the tasks are known. Management costs should not be recovered as a percentage of service costs unless the lease prescribes it, because percentage fees are potentially a disincentive to delivering value for money. That is the working test for what a management fee should cover.

The code lists core services normally expected within the agreed fee: issuing demands, preparing statements and chasing arrears, producing budgets and administering the funds, certifying and circulating accounts, administering insurance where instructed, and engaging and supervising contractors and site staff. Anything outside that should be a separate charge, not absorbed into the fee line.

Keep other professional costs separate and visible: the accountant’s fee for the year end accounts, recoverable company secretarial costs, and fire or safety consultancy. Surveyors’ fees on a major works project belong to that project, not the general budget.

The Reserve Fund Contribution

A reserve smooths the cost of ownership so that whoever owns a flat in the year the roof fails does not carry it alone. The code adds the constraints that matter: a reserve should not subsidise day to day expenditure, fund routine maintenance, or cover non payment by leaseholders or the landlord.

The level should be informed by that plan, and on complicated developments by a stock condition survey and life cycle costing. Contributions should be reviewed annually as part of the budget process, and the plan and projected contributions made available to leaseholders on request and to prospective purchasers on resale. There is no statutory percentage, which is why how much a block should hold is always building specific.

What is collected is not the landlord’s money. Section 42 of the Landlord and Tenant Act 1987 holds service charge contributions, and any investments and income representing them, on trust as a single fund or in separate funds, to meet the costs they were collected for and otherwise for the contributing tenants. Money held for one building must not be used for another.

Apportionment: From Block Total to Your Percentage

Apportionment turns the block figure into an individual demand, and it follows the lease. The approved code states the rule plainly: unless the lease provides for the apportionment to be varied, the leaseholder is not liable for any higher proportion of the costs incurred. If your lease says 2.5 per cent, your share of a £60,000 budget is £1,500, whether or not your flat is larger than the neighbour paying the same.

Two refinements recur. With multiple schedules, a cost is charged only to the flats in that schedule, so a lift line may fall on some flats and not others. And where the lease sets a fair and reasonable share to be determined by the landlord or its surveyor, that determination is not the leaseholder’s agreement, and the rationale must be defensible to the tribunal.

Section 20 and the Two Thresholds That Shape a Budget

Consultation is a budgeting constraint, not just a procedure. Under section 20 of the 1985 Act, a leaseholder’s contribution is limited to the appropriate amount unless the consultation requirements have been complied with or dispensed with by the tribunal under section 20ZA(1). The amounts sit in the Service Charges (Consultation Requirements) (England) Regulations 2003.

So two checks run alongside the figures. Any works line costing more than £250 to a single leaseholder needs its consultation programmed into the year, with time for the notice stages. Any contract you intend to sign for more than 12 months needs testing against the £100 figure, which a modest cleaning or lift contract reaches in a small block. Getting either wrong caps recovery at £250 or £100 unless the tribunal dispenses.

Timing, the 18 Month Rule, and What Changes From 2027

The approved code expects the budget shortly before the start of the service charge year, with explanatory notes and a major works plan covering anticipated works over the next three years, longer for larger blocks and estates. It should be approved by the landlord, or by the managing agent where the contract delegates that authority, before any on account charges are demanded, and the first demand should carry the budget and enough information to show how the proportion was calculated. Year end accounts follow within six months of the year end, or sooner if the lease requires.

Section 20B sets the outer limit on lateness. Where relevant costs were incurred more than 18 months before the demand is served, the leaseholder is not liable for the part of the charge reflecting them, unless within that 18 months they were notified in writing that the costs had been incurred and that they would be required to contribute. That is why a deficit carried forward needs a section 20B(2) notice behind it.

Sections 53 to 58 of the Leasehold and Freehold Reform Act 2024 will change how all this is presented, but none of them is in force. In its response to the consultation on strengthening leaseholder protections over charges and services, government confirmed the initial demand will be accompanied by an annual budget including a comparison with the previous accounting period’s expenditure, and that a separate annual report will cover the health and condition of the building, plans for forthcoming major works, and a declaration of relevant relationships between the landlord and third parties. The package is to be laid as at least five statutory instruments, leaseholders will start to see changes during 2027, and government plans to give private landlords 12 months’ notice of these measures and social landlords 24 months. Presenting your budget that way now is the cheapest preparation for the 2027 service charge reforms.

What to Check Before You Approve the Budget

• Every line traces to a landlord obligation and a recovery clause, and you can point to both.
• Each figure has evidence behind it: a contract, a renewal quotation, meter history, or the maintenance plan.
• Any works line above £250 per leaseholder, and any new contract beyond 12 months above £100 per leaseholder per accounting period, has consultation planned in.
• The reserve contribution is justified by the maintenance plan and has been reviewed this year, not rolled forward.
• Apportionment matches the leases, and each schedule charges the right costs to the right flats.
• Explanatory notes say what changed against last year and why, including any commission or other income received.
• The budget is approved and issued before the year starts, with the first demand attached to it.

If a line still does not add up, it can be tested. Section 27A of the 1985 Act lets either party ask the tribunal to determine whether a service charge is payable, by whom, to whom, how much, when and how, and it applies equally to costs not yet incurred. Payment is not agreement, so a board weighing a challenge at tribunal is not shut out by having paid on account.

If your board wants a second opinion on next year’s figures, ask a managing agent to walk you through a draft budget against the lease, and ask how their own fee is set and whether they take anything from contractors or insurers. Plymouth Block Management works on a fixed management fee agreed in advance, takes no commission on contractor invoices, and holds client money in named Lloyds accounts, one per managed property, with interest retained by the client.

Common Questions

Five points that come up whenever a budget is circulated.