Selling a flat with high service charges
A high service charge is a permanent reduction in the property's value, and buyers price it as one.
A service charge is a recurring cost that a buyer will pay for as long as they own the property, so it affects the price in a way that a one-off defect does not. A charge of £3,000 a year against a rent or a mortgage budget reduces what a buyer can afford, and therefore what they will pay.
The effect is not linear, and it is not small. Buyers, and particularly investor buyers, capitalise the charge: a £3,000 annual charge can reduce the price by tens of thousands of pounds.
What to establish and disclose
The buyer's solicitor will obtain the management pack, so there is nothing to be gained by withholding information. Disclosing early prevents a late renegotiation.
- The current annual charge and what it includes
- Three years of service charge accounts, showing the trend
- The reserve fund balance, because a building with no sinking fund will bill leaseholders for major works
- Any planned major works, and whether a section 20 consultation has started
- Any outstanding disputes, tribunal cases or litigation involving the freeholder
- Ground rent, and whether the review clause increases it periodically
How to market it
The charge will be discovered, so the approach is to present it in context rather than to hope it is not noticed. A £3,000 charge that covers a lift, a concierge and a well-maintained building is a different proposition from the same charge on a building with no amenities, and the listing should make that clear.
Provide the accounts and the budget with the listing where possible. A buyer who can see exactly what the money pays for is far less likely to discount for uncertainty than one who only sees a figure.
If the charge is genuinely unreasonable
Where the charge is high because the freeholder is inefficient or is taking a profit, the leaseholders have remedies: the right to challenge the reasonableness of the charge at the First-tier Tribunal, and the right to manage the building themselves.
Starting either process before marketing is a significant undertaking, but it can transform what the flat is worth. It is worth taking advice on the merits before accepting a heavily reduced price.
Common questions
- How much does a high service charge reduce a flat's value?
- Buyers capitalise the charge, so the effect is larger than the annual figure. A £3,000 annual charge can reduce the price by tens of thousands of pounds, particularly for investor buyers who are assessing the yield. The reduction depends on what the charge covers and on how it compares with similar buildings locally.
- Can I challenge an unreasonable service charge?
- Yes. Leaseholders can apply to the First-tier Tribunal to challenge whether a charge is reasonable, and can exercise the right to manage the building through a residents' management company. Both take time and require cooperation from other leaseholders, but either can materially change the value of the flat.