Why are service charges increasing?

We’ve all seen the headlines about increasing service charges and, in some of these headline cases, eye-watering increases in a very short space of time.

As a managing agent and the first party to get it in the neck when prices go up, we have seen increases in service charges, but not at the levels cited in some areas of the media. Where this does happen, it is usually down to factors covered in points 6 and 7 of this article.

So, if service charges are increasing, why is this?

1. Inflation and Rising Costs of Goods & Services

As inflation increases, so does the cost of, well, almost everything. In recent years, we have seen inflation increase, reaching a record high of 11.1% in October 2022. In addition to inflation, we have seen an increase in employers’ national insurance contributions from April 2025 and these costs will have to be collected through increases in the price of goods and services.

2. Stricter Building Safety Regulations

Government regulations, particularly around fire safety and cladding remediation, have made compliance more expensive. Even on the smallest buildings, managing agents must do more work to ensure compliance. One such example of many I could cite is the requirement to complete an annual inspection of all flat front doors.

3. Energy Price Increases

Communal energy costs for lighting and heating have increased in line with rising energy costs, but this was further exacerbated by market conditions unique to the leasehold market

Historically, brokers might have made a small margin on energy, and the cost of standing charges would be whatever rate the energy provider had quoted. This business model was severely dented when Covid hit. With much less energy being consumed, brokers and utilities companies found their margins squeezed, so they had to adapt accordingly.

This “adaptation” took the form of increased commissions on energy but, more poignantly, on the standing charge as this guarantees the brokers and utilities companies revenue irrespective of whether energy is used or not.

Then, on the converse, we saw the energy crisis of 2021 resulting in hugely elevated utility bills. Energy rates have since come down, but many brokers have retained prices over and above current market rates. These rates are a lot lower than during the peak of the energy crisis but still represent “hidden” profiteering by energy brokers and they get away with it as the leaseholder has no rights in law to demand details of commissions being retained by all parties to a communal utilities contract; They are at the mercy of several parties to a contract (managing agent, freeholder, broker) all with a vested interest (commissions) that isn’t necessarily in line with the leaseholders best interests (lowest possible utility bills).

4. Insurance Premium Hikes

Post Grenfell, many players in the leasehold insurance market reassessed risk and determined that premiums were too low. Many withdrew from the market, and those that were left began charging higher premiums. Also, we saw a big increase in building costs immediately after covid, with demand massively outstripping supply. As such, building re-instatement reports completed at this time saw sharp increases in the projected cost of building re-instatement. At Common Ground, most of these reinstatement reports were redone in 2024, and this situation has now normalised, with some of our clients now seeing premiums reduce.

5. Skilled Labour and Contractor Availability

This is an article in its own right but the reasons are legion, and you can take your pick from aging workforce, decline in apprenticeships: negative perception of construction, lack of digitization, Brexit and increased demand.

6. Lack of forward planning

Many developments have not planned for major projects such as external and internal re-decorations, roof works, repair of items with moving parts (gates, lifts, etc) and then need to hike service charges to collect these funds, often over several years.

7. Some large freeholders, developers and managing agents gaming the system

Some of the larger freeholders and managing agents are quite blatantly gaming the system. Tactics include

1. Being written into leases as a party.

The only way to remedy this is to get EVERY leaseholder to agree to a lease amendment. Where a managing agent is protected in this way, it is extremely difficult to motivate them to perform without the jeopardy of loss of contract. In addition, they can charge higher fees with no competition to drive these down.

1. Excessive commissions on insurance

Cosy relationships between brokers and those placing insurance policies on behalf of leaseholders (developers, freeholders, managing agents) often don’t declare the full extent of their commission (which is illegal), and, in some cases, hidden commissions might make up to 60% of the cost of a policy. If you believe you might be a victim of this, there is a class action in progress on this very issue. Please see https://leaseholderaction.com/

• Developers creating artificially low service charges

A high service charge is an obstacle to selling a flat, so developers often undercook the service charge in years 1 and 2. Managing agents, being dangled the carrot of a lucrative management contract, are often all too keen to play along. Even worse than this, many developers pressure managing agents into using service charges for snagging, and those agents often comply, fearing that the management contracts will dry up if they don’t.

Conclusions

Whilst some of the reasons for increases are beyond the control of managing agents and the leasehold management industry, the government and industry could do more to assist. These include, but are not limited to

• Compelling developments to plan for major projects through condition reports that require regularly updating, also to include proposed works being re-costed with each update (say every five years).
• Ban managing agents from being parties to lease agreements (and commonhold agreements when this comes in).
• Compel developers to create realistic budgets for new builds that includes reserve planning for known long term maintenance items such as internal and external redecoration.
• Regulation of managing agents to ensure that only competent property experts are allowed to manage leasehold developments.