This article explores what service charges are and what they cover for private buy-to-let landlords who own leasehold rental properties.
10/07/2026By Sunil Chander · Co-Founder
This article explores what service charges are and what they cover for private buy-to-let landlords who own leasehold rental properties.
For landlords who own leasehold properties, service charges are an unavoidable and often significant part of the financial picture. Whether you are letting a flat in a purpose-built block or a converted Victorian terrace, the service charge sits between you and the cost of maintaining a building you do not entirely control. Understanding what those charges cover, how they are calculated and what your rights are in relation to them is essential for managing a leasehold rental property effectively and protecting the profitability of your investment.
What leasehold service charges cover
A leasehold service charge is a payment made by leaseholders to the freeholder or their managing agent to cover the costs of maintaining and managing the building and its shared areas. The precise scope is determined by the individual lease, but leaseholders typically contribute to routine building maintenance and repairs; the upkeep of shared facilities, such as lifts, door entry systems and fire safety equipment; communal cleaning; communal electricity; management fees for the landlord's or managing agent's administrative work; and buildings insurance for the whole block.
Charges must be reasonable under the Landlord and Tenant Act 1985 and leaseholders have the right to challenge costs they consider excessive at the First-tier Tribunal (Property Chamber). As a buy-to-let landlord, you are the leaseholder in this arrangement, which means the service charge comes out of your pocket rather than your tenant's and must be factored into your investment calculations from the outset.
The sinking fund: planning for major expenditure
Alongside the regular service charge, many leasehold buildings operate a sinking fund, sometimes called a reserve fund. As the Leasehold Advisory Service explains, this is money set aside to cover the cost of expensive work carried out only every few years, such as repainting the exterior, replacing the roof or overhauling a lift. Contributions are collected through the service charge and held in a separate interest-bearing account on trust for leaseholders, a legal requirement under Section 42 of the Landlord and Tenant Act 1987.
The purpose of a well-managed sinking fund is to spread the cost of major works across time and across all generations of leaseholders who benefit from the building, rather than landing a large one-off bill on whoever happens to own a flat when the roof needs replacing. Contributions should ideally be set following a professional reserve fund study that assesses the age and condition of all major building components and estimates when each will need significant repair or replacement.
Not all leases provide for a sinking fund. Your lease must specifically permit contributions before they can be collected. Any money paid in is not refundable when you sell the property, though a healthy balance is viewed positively by buyers and their solicitors and adds to the investment's overall value. A building with little or no sinking fund relative to its age and condition carries a meaningfully higher risk of unexpected costs and should be priced accordingly before purchase.
Major works and the Section 20 consultation requirement
When significant works are required that exceed a certain cost threshold, the law imposes a formal consultation process before those costs can be recovered from leaseholders. This is the major works Section 20 process, governed by Section 20 of the Landlord and Tenant Act 1985 as amended by the Commonhold and Leasehold Reform Act 2002.
If the cost of qualifying works will exceed £250 for any one leaseholder, the freeholder must consult leaseholders before works begin. The process involves three formal stages: a Notice of Intention describing the proposed works and inviting observations, a Notice of Estimates providing at least two contractor quotes, and, where the lowest estimate is not chosen, a Notice of Award of Contract explaining the decision. Each stage allows leaseholders at least 30 days to respond.
The consequences of failing to follow Section 20 correctly are severe. If a freeholder does not comply, their cost recovery from leaseholders is capped at just £250 per leaseholder, regardless of the actual expenditure, with the shortfall falling to the freeholder unless dispensation is granted by the First-tier Tribunal. For a buy-to-let landlord, Section 20 demands can arrive with relatively little warning and represent a significant one-off cost. Bills of several thousand pounds per flat are not unusual in older or poorly maintained blocks. Staying engaged with consultation notices and raising observations where appropriate is an important part of managing a leasehold investment responsibly.
The leasehold buildings insurance charge
Under most leases, the freeholder or their managing agent arranges buildings insurance for the whole block, with the cost passed to leaseholders through the service charge. This arrangement has historically been a significant source of concern. Research by the Financial Conduct Authority found that commissions paid to freeholders and managing agents from insurance brokers were often at least 30% of the total premium, and in some cases exceeded 50%, with limited evidence of benefit to leaseholders footing the bill. A subsequent FCA report in 2023 found that such remuneration had risen 40% between 2019 and 2022.
The Leasehold and Freehold Reform Act 2024 addresses this directly by banning insurance commissions from being recovered through the service charge. In their place, a transparent permitted insurance fee system is being introduced, whereby freeholders and managing agents may charge only for genuine, demonstrable work undertaken in arranging or managing the insurance. Where a prohibited commission is charged, the First-tier Tribunal has jurisdiction to order its return and to award damages of one to three times the commission amount. Implementation requires secondary legislation, with regulations being phased in through 2025 and 2026.
What is changing: The Leasehold and Freehold Reform Act 2024
The Leasehold and Freehold Reform Act 2024, which received Royal Assent in May 2024, introduces a broad programme of reforms to service charge administration. A government consultation closed in September 2025, with changes expected to be phased in from 2026.
Key changes include:
A standardised, prescribed format for all service charge demands
An expanded right for leaseholders to request detailed supporting information, including invoices, contracts and spending explanations covering up to the previous six years
The removal of the presumption that leaseholders must pay their landlord's legal costs when challenging charges at tribunal
For buildings with four or more dwellings, landlords will be required to provide annual statements certified by a qualified accountant. The consultation is also seeking views on reforming the Section 20 major works process to give leaseholders better advance notice of significant expenditure.
Conclusion
Leasehold service charges are a structural feature of buy-to-let investment in flatted properties, and understanding how they work is essential for any landlord in this part of the market. Annual charges, sinking fund contributions, major works Section 20 demands, and the leasehold buildings insurance charge all carry the potential to affect your returns materially, and each comes with its own legal framework and rights of challenge.
The reforms under the 2024 Act are bringing greater transparency to a system that has historically favoured freeholders, and staying informed as those changes are implemented will be increasingly important for landlords managing leasehold properties in the years ahead.
FAQs
Q. What are leasehold service charges?
A. Leasehold service charges are payments made by leaseholders to the freeholder or their managing agent to cover the costs of maintaining the building and its shared areas. As a buy-to-let landlord who owns a leasehold property, you are the leaseholder and are responsible for paying the service charge.
Q. What is typically included in a landlord service charge?
A. A standard service charge will usually cover routine maintenance and repairs to communal areas; upkeep of shared facilities, such as lifts and fire safety equipment; communal cleaning and electricity; the management fee for the landlord's or managing agent's administrative work; and buildings insurance for the whole block.
Q. What is a sinking fund for a leasehold building?
A. A sinking fund is money collected from leaseholders over time and held in trust to fund major future expenditure on the building. Not all buildings have one. Your lease must specifically permit contributions before they can be charged. The Leasehold Advisory Service provides detailed guidance on how they work.
Q. What happens if the sinking fund is insufficient for major works?
A. If the sinking fund does not cover the full cost of required works, the freeholder can raise a one-off demand from leaseholders. If that demand exceeds £250 per leaseholder, the Section 20 consultation process must be followed before costs can be recovered.
Q. What is the Section 20 major works process?
A. Section 20 of the Landlord and Tenant Act 1985 requires freeholders to formally consult leaseholders before carrying out works costing any single leaseholder more than £250. If the process is not followed correctly, cost recovery is capped at £250 per leaseholder regardless of the actual expenditure.
Q. Can I challenge a service charge I believe is unreasonable?
A. Yes, service charges must be reasonable under the Landlord and Tenant Act 1985 and leaseholders can apply to the First-tier Tribunal (Property Chamber) to challenge costs they consider excessive. The Leasehold Advisory Service provides free and independent guidance and is the recommended first point of contact.
Q. Why has the leasehold buildings insurance charge been controversial?
A. Freeholders and managing agents have historically received significant commissions from insurance brokers when arranging buildings insurance, with those costs passed to leaseholders through their service charge. The FCA found commissions were often 30% or more of the total premium. The Leasehold and Freehold Reform Act 2024 bans these commissions and replaces them with a transparent permitted fee system.
Q. What are the key service charge reforms under the Leasehold and Freehold Reform Act 2024?
A. Key reforms include standardised service charge demand formats, expanded leaseholder rights to request financial information, annual accountant-certified statements for buildings with four or more dwellings, removal of the presumption that leaseholders pay landlord legal costs when challenging charges, and a ban on insurance commissions. Most provisions are being phased in from 2026.
Q. Are sinking fund contributions refundable when I sell my leasehold property?
A. No. Contributions paid into a sinking fund are not returned on sale. However, a healthy balance adds value to the property and gives prospective buyers confidence that the building is being managed proactively.
Q. Where can I get independent advice on leasehold service charge disputes?
A. The Leasehold Advisory Service is a government-funded organisation providing free, independent advice to residential leaseholders on service charges, major works, sinking funds and tribunal applications. It is the recommended first point of contact for any leaseholder facing a dispute or seeking to understand their rights.
About the author
Sunil Chander
Co-Founder
Sunil oversees operations and compliance at Pauzible, drawing on his extensive experience as the founder and CEO of Dawnbud Limited, a financial services consulting firm. His prior career included senior roles in investment banking at Smith New Court and NatWest. He holds an MBA from LBS, M Litt from Oxford and a PhD from Cambridge.
