If you own a flat or rent a commercial property in the UK, you might have heard some talk about new rules for “service charge.” For homeowners across the UK, these annual fees have been a huge source of frustration.
The bills were often packed with vague terms and complicated numbers. It felt impossible to know where your money actually went.
Well, get ready for a major change. The rules are finally being rewritten!
This article breaks down everything about the new rules for service charge accounting in the UK
You’ll get to know:
- What Exactly Is Service Charge?
- New Rules For Service Charge Accounting In UK
- Key Changes for Both Commercial & Residential Sectors,
- And Much More!
Let’s get into it !
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What Is A Service Charge?
A service charge is the amount of money a leaseholder or flat owner pays to the landlord (or managing agent) to cover the costs of running, maintaining, insuring, and repairing the common parts of their building and estate.
What’s the Background of the Leasehold and Freehold Reform Act 2024?
For years the UK’s leasehold system has been pretty unfair. And a lot of homeowners have been caught up in it. We’re talking about millions of people who own their flat. But not the land it sits on. Leaving them stuck with things like:
- Rising costs: Hefty bills for ground rent & maintenance work they couldn’t control.
- Lack of transparency: No one really knew where the money they paid was going.
- A raw deal: Selling their home could be a nightmare and extending a lease was often complicated and expensive.
The Leasehold and Freehold Reform Act 2024 was basically introduced to address long standing issues within the leasehold system. And give greater rights and protections to leaseholders and freehold homeowners on private estates.
New Rules for Service Charge Accounting in UK 2025
The Leasehold and Freehold Reform Act 2024 is bringing in some major changes to how service charges work. This all aimed at making things fairer for leaseholders.
Here’s a breakdown of what’s coming.
1. Rules For Transparency And Demands
The days of confusing service charge bills are over. The new rules for service charge in accounting are aim to standardise communication from landlords and managing agents:
- Landlords will have to use a specific, uniform format for all service charge demands. If they don’t, any clauses in the lease about late payments become unenforceable.
- The old “18-month rule” is being tightened. If a landlord wants to recover costs that are over 18 months old, they must first send a new, prescribed future demand notice. This ensures homeowners are not hit with unexpected bills for historical work.
- Leaseholders will have an enhanced right to ask for more detailed information. This includes invoices, contracts, and an explanation of how spending decisions were made. The right to request this information will cover up to the last six years.
- Fixed service charge payers get a fair shake, too. They now have the same legal right to challenge their costs as those who pay variable charges.
2. Fairer Costs And Legal Action
The new rules are also rebalancing the power dynamic in disputes over service charges and managing costs:
- Hidden commissions that freeholders or managing agents collect from building insurance will be abolished. These are being replaced by transparent, fair “permitted insurance fees.”
- The system for recovering legal fees will change completely. Landlords can no longer automatically pass their legal costs from tribunal cases onto leaseholders via the service charge. Instead, the landlord must convince the tribunal that recovering these costs is “just and equitable”.
- If you successfully challenge your landlord at a tribunal, you may now be able to recover your own legal costs.
- The same strong protections and challenge routes are being extended to freehold homeowners on private estates who pay estate management charges.
3. New Accounting And Reporting Standards
Landlords and managing agents will need to follow a stricter schedule and format for their accounting:
- The Act requires landlords to provide leaseholders with an annual report detailing expenditure and the building’s financial health.
- For larger residential buildings (with four or more dwellings), the annual accounts will need to be accompanied by a written report from a qualified accountant.
- The written annual statement of account must be sent to leaseholders within six months of the end of the financial year.
- Landlords must provide a budget for the upcoming year in a standard format. And it must accompany the initial service charge demand.
When Will the New Rules Start Service Charge Accountants?
The Leasehold and Freehold Reform Act became law in 2024, but the service charge sections need detailed regulations to take effect. Those are being worked on now. The government ran a consultation on the draft regulations over summer 2025, which closed in late September 2025. We expect pieces of it to be phased in, with the most significant service charge reforms (such as new accounting and disclosure rules) likely commencing in stages throughout 2026.
Some simpler changes (like new demand forms or annual report formats) might arrive first, with other rules (like caps on insurance charges) following once the regulations are finalised.
By contrast, the RICS commercial code (2nd Edition) is already published and will apply as a mandatory professional standard for RICS-regulated firms for any commercial service charge accounting period starting after 31 December 2025.
In any case, it’s wise to start preparing now. Even before all rules are law, using clear budgets, keeping good records, and separating service charge funds are best practice.
How Must Service Charge Money Be Held?
Service charge money paid by leaseholders must be held in a legally separate bank or building society account, kept “in trust” for them. Landlords cannot use this money for their own purposes, and it is protected if they face financial issues. Any interest earned on these funds must be credited back to the trust fund.
Audit, Certification, Or Accountant’s Report Which One Do You Need?
The type of financial report required depends on the building’s size and the nature of the service charge.
- Accountant certification: For residential buildings with four or more properties, landlords must provide a written report from a qualified accountant. This report certifies that the service charge accounts is a “faithful representation” of the building’s finances.
- Standards for review: The specific standards for these accountant reports will be set out in regulations.
- Cost recovery: Landlords can pass the cost of obtaining this report on to leaseholders, provided it is fair and reasonable.
How Will Deficits, Loans, And Overdrafts Be Managed?
The new rules will make the handling of financial shortfalls clearer for leaseholders.
The new standardised accounts will include a statement detailing any service charge collection deficits.
New regulations will address how costs are recovered when a major work is delayed. For instance, regulations will outline valid reasons for changing the demand date.
There are government proposals (currently under review following the July 2025 consultation) to make reserve funds mandatory in all new long residential leases. For existing leases, a reserve fund could be created if supported by a majority of qualifying leaseholders.
What Do The New Accountancy Definitions Mean For Landlords And Agents?
- New definitions and reporting requirements prevent landlords from hiding costs in vague categories, which improves clarity.
- The use of standardised demands and reports ensures that all financial information is presented consistently, reducing confusion and improving comparability.
- The changes push landlords and agents towards greater transparency, especially regarding the breakdown of costs, insurance, and the management of reserve funds.
Standardising Service Charge Demands, What Does It Mean For Leaseholders?
The goal of standardising service charge demands is to put leaseholders on a more equal footing with landlords and managing agents.
- Easier to understand: Leaseholders will no longer need to decipher confusing demands. A standardised format makes the information accessible.
- Budget visibility: Demands must include an annual budget, giving leaseholders a clear picture of expected costs for the year ahead.
- Empowering challenge: With clearer, more accessible information, leaseholders will be better equipped to challenge unreasonable service charges at the First-tier Tribunal.
- Enforceable consequences: If a landlord fails to use the correct standardised format, they will be unable to enforce any lease provisions relating to non-payment.
Information Requests: A New Leaseholder Right
The Act strengthens leaseholders’ rights to access information about service charges and building management. Leaseholders are entitled to request:
- Full policy details, including the cost breakdown of the insurance.
- Detailed information, such as contracts and invoices supporting service charges.
- A breakdown of any “permitted fees”, including those related to insurance.
- Disclosure of any commissions, even if they are not charged to the leaseholder.
- A budget for the upcoming year, which must be provided with the standard-form service charge demand.
- The annual service charge report for larger buildings.
Freeholder Insurance Commission: What’s Changing?
The Act prohibits freeholders and agents from recovering insurance commissions through service charges, aiming to end the practice of profiting from arranging insurance. Instead, transparent, itemised “permitted insurance fees” for specific services like claims handling or premium administration are introduced.
These fees must be reasonable, clearly disclosed, and subject to scrutiny, with landlords required to provide insurance documents and cost breakdowns to leaseholders within a set timeframe.
Note that permitted fees are subject to 20% VAT, which is higher than the 12% Insurance Premium Tax (IPT) on premiums, potentially increasing overall costs.
Landlords’ Costs In Tribunal Proceedings, The New Rule
The new rules completely change who pays for legal battles. Landlords can no longer automatically force leaseholders to cover their legal bills when a service charge is challenged. Instead, the landlord now has to get the tribunal’s permission just to try and recover those costs.
This is a huge win!
It dramatically lowers the financial risk for you as a homeowner, which likely means we’ll see more tribunal cases now.
Plus, you get a new right that if you successfully challenge the charges, you may now be able to claim your own legal costs back from the landlord.
How Do The New Rules Affect Commercial Property?
While primarily focused on residential properties, the Act does affect some mixed-use buildings. If your block has a mix of flats and shops, the rules are changing to make it easier for homeowners to take control. The limit on the amount of commercial space is being raised from 25% to a generous 50%.
This means many more mixed-use buildings are now eligible for residents to collectively take over the management (through processes like the Right to Manage).
However if a property is purely commercial like an office block or shopping center, the specific service charge rules in this new Act simply do not apply.
Keep in mind that the professional body for surveyors, RICS, is currently working to update its own Service Charge Code to make sure its industry guidance matches all these new legal requirements.
Focus on Mandatory Time Limits and Deadlines
The RICS Service Charges in Commercial Property, 2nd Edition (effective 31 December 2025) sets strict deadlines for RICS-regulated professionals
| Document | Deadline |
|---|---|
| Service Charge Budgets | Must be issued at least one month before the start of the service charge year. This is a mandatory requirement for RICS-regulated firms in the commercial sector. |
| Year-End Accounts/Certificate | Must be provided within four months of the service charge year end. This is also a mandatory requirement for RICS-regulated firms in the commercial sector. |
Key Changes for Both Residential and Commercial Sectors
The rule now affects both parts of the property market. Here is a simple comparison of the main themes you need to remember:
| Area of Change | Residential (LFRA 2024) | Commercial (RICS 2025 Code) |
|---|---|---|
| Key Document | Standardised Demands, Mandatory Annual Report, Future Demand Notices | Timely Budgets, Year-End Accounts (Mandatory Timelines) |
| Financial Assurance | Accountant verification of detailed accounts required | Independent review (audit/report) required for year-end accounts |
| Insurance Charges | Commissions banned, only actual premium plus fair admin fee recoverable | Disclosure of insurance commissions and benefits required |
| Disputes | Scrapping the presumption that leaseholders pay landlord's legal costs. New rights to challenge fixed charges | Strong recommendation for Alternative Dispute Resolution (ADR) in new leases |
| Funds | Reserve funds and accounts details must be clearly reported | Reserve funds must be held in segregated bank accounts 'in trust' for tenants |
What Does This Mean for You?
If You are a Leaseholder or Tenant
This is a huge step in your favour.
- You will receive clearer and more standardised information right at the start of the year.
- You are better protected against sudden and huge bills with the ‘Future Demand Notice’.
- It will be much easier and safer to challenge unreasonable charges without fear of crippling legal costs.
- You have new rights to request documents and scrutinise how your money is being spent.
If You are a Landlord, Freeholder or Managing Agent
Compliance is now non-negotiable.
- Review Your Systems: Your internal accounting and reporting systems need an urgent upgrade. So you can meet the new standardised formats and strict deadlines.
- Compliance is Mandatory: For residential properties, these are legal requirements coming in late 2025/early 2026. For commercial properties, if you are RICS-regulated, the new Code is mandatory from 31 December 2025.
- Professional Training: Ensure your property management team is fully trained on the new standards. Particularly around financial disclosures and the new legal requirements for transparency.
The Bottom Line
Whether you’re a leaseholder, a commercial tenant, or a landlord, the message is clear be prepared for greater transparency. The old way of doing things is on its way out. While some details are still being finalised for the residential market, the overall direction is set.
Both landlords and tenants should get familiar with the new rules to avoid any nasty surprises down the road
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Disclaimer: All the information provided in this article on New Rules for Service Charge Accounting in UK 2025, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.