Every apartment owner must pay a service charge. The service charge covers the costs of running the development of apartments. The service charge is paid to the Management Company which is a company set up specifically to manage the apartments. The owners of the apartments are the members of the company and appoint directors from among themselves to run the company and the apartment complex for the benefit of all the owners.
Each year the Management Company decides the budget for the year and agrees what services it intends to provide during that year. The service charge is used to pay for insuring the apartments, electricity in the common areas, cleaning, painting, cutting of grass and may also include the collection of refuse from the apartment complex. The service charge may also include the employing of a Managing Agent to look after the day to day running of the development.
A sinking fund should be set up to deal with heavy expenditure such as replacing carpets, electric gates or lifts and to pay for any unforeseen expenses that may arise in the future. It is extremely important that your management company collects the agreed service charge from each apartment owner to cover the day to day costs and to provide for the sinking fund.
If apartment owners fail to pay the service charge, the Management Company may not be able to provide even the most basic services. If an owner decides to sell their apartment, any outstanding service charge due to the Management Company will be paid out of the sale proceeds. Some apartment complexes charge interest on any outstanding service charge due to the Management Company.
If you are buying a new apartment, you should know that the service charge may be set low in the first year because it is easy to maintain a new apartment block but that each year the service charge may increase as demands for maintenance increases.
If you are buying a second hand apartment, your Solicitor will raise a number of queries with the Management Company regarding the service charge before you sign a Contract for Sale to proceed with the purchase of the apartment. You need to establish the level of service charge, whether the Management Company is being properly run and whether there is a sinking fund in place.