Block Management Accounting: Complete Guide
A comprehensive guide to block management accounting, covering service charge accounts, reserve fund management, Section 21 cost summaries, year-end statements, and RICS compliance. Understanding the financial obligations of managing a block of flats is essential for freeholders, leaseholders, and resident management companies.
What Is Block Management Accounting?
Block management accounting refers to the specialist financial management required when administering a block of flats or leasehold development. It encompasses every aspect of financial record-keeping, from collecting service charges and managing reserve funds to producing certified year-end accounts and complying with statutory obligations under the Landlord and Tenant Act 1985.
Unlike standard property management accounting, block management accounting involves handling client money - funds that belong to leaseholders and must be held in designated trust accounts. The managing agent acts as a custodian of these funds and has both legal and professional duties to manage them responsibly and transparently.
Proper financial management is a cornerstone of effective block management. Without accurate, timely, and compliant accounting, disputes between leaseholders and managing agents are far more likely to arise, and the long-term maintenance of the building may suffer.
Key Elements of Block Management Accounting
- Collection and allocation of service charges from leaseholders
- Preparation and management of annual service charge budgets
- Administration of reserve funds and sinking funds
- Production of Section 21 certified cost summaries
- Client money handling in compliance with RICS regulations
- Year-end account preparation and leaseholder reporting
- Management of insurance premiums and ground rent collection
- Reconciliation of actual expenditure against budgeted costs
Service Charge Accounts and Budgets
The service charge budget is the financial foundation of every managed block. Each year, the managing agent or resident management company must prepare a detailed budget estimating the costs of running and maintaining the building for the forthcoming period. This budget forms the basis for the service charge demands issued to each leaseholder.
A well-prepared service charge budget should be realistic, transparent, and based on reliable cost information. Common budget headings include buildings insurance, communal cleaning, gardening and grounds maintenance, lift maintenance, fire safety compliance, and the management fee.
At the end of each accounting period, the managing agent must reconcile actual expenditure against the estimated costs in the budget. Where actual costs exceed the budget, a balancing charge may be required. Where costs are lower than estimated, leaseholders should receive a credit carried forward to the next period. For a full overview of how service charges work, see our service charge guide.
Best Practice for Service Charge Budgeting
- Base budgets on historical expenditure and current contractor quotes
- Include a reasonable contingency for unexpected costs
- Itemise all budget headings clearly for leaseholder transparency
- Issue service charge demands in accordance with lease terms
- Reconcile actual costs against budgets promptly at year end
- Communicate any significant budget variances to leaseholders
Reserve Funds and Sinking Funds
A reserve fund, sometimes called a sinking fund, is a dedicated pot of money set aside to cover future major works and planned maintenance in a block of flats. Without an adequate reserve fund, leaseholders may face large, unexpected special levy demands when significant repairs are needed, such as roof replacement, external redecoration, or lift refurbishment.
The RICS Service Charge Residential Management Code strongly recommends that managing agents maintain a properly funded reserve, informed by a planned maintenance programme that identifies the likely cost and timing of future works. The recommended level of the reserve fund will depend on the age, condition, and specification of the building.
Under Section 42 of the Landlord and Tenant Act 1987, contributions to a reserve fund are held on trust for the contributing leaseholders. This means the funds must be kept in a designated trust account, separate from the managing agent's own money. Any interest earned on the fund should be credited to the reserve.
For a detailed exploration of reserve fund best practice, see our reserve fund guide.
Reserve Fund Management Principles
- Establish a planned maintenance programme to inform reserve fund levels
- Hold reserve funds in a designated trust account under Section 42
- Ring-fence reserve contributions separately from day-to-day service charges
- Place funds in an interest-bearing account where possible
- Report reserve fund balances and movements in year-end accounts
- Review reserve fund adequacy annually alongside the service charge budget
Section 21 Cost Summaries
Section 21 of the Landlord and Tenant Act 1985 imposes a statutory obligation on landlords and managing agents to provide leaseholders with a certified summary of costs for each accounting period. This is one of the most important transparency requirements in block management accounting, and failure to comply can have serious consequences.
The Section 21 summary must be certified by a qualified accountant who is independent of the landlord and managing agent. The accountant must confirm whether the summary is a fair representation of the costs incurred and whether it is sufficiently supported by accounts, receipts, and other documents. The summary must be provided to leaseholders within six months of the end of the accounting period, or within one month of a written request.
For more detail on the legal framework, see our guides to the Landlord and Tenant Act 1985 and service charge law.
Section 21 Compliance Checklist
- Prepare the cost summary promptly after the accounting period ends
- Engage a qualified and independent accountant to certify the summary
- Ensure the summary covers all service charge expenditure for the period
- Issue the certified summary within six months of the year end
- Respond to leaseholder requests for the summary within one month
- Retain supporting documentation for leaseholder inspection under Section 22
Client Money Protection
Client money protection is a critical aspect of block management accounting. When a managing agent collects service charges, reserve fund contributions, insurance premiums, and ground rent from leaseholders, these funds are client money - they belong to the leaseholders and the freeholder, not to the managing agent.
RICS-regulated managing agents must comply with the RICS Client Money Handling Rules, which require that all client money is held in designated client bank accounts, entirely separate from the agent's own business accounts. This ring-fencing protects leaseholders' funds in the event of the agent's insolvency. The accounts must be clearly labelled as client accounts, and the bank must acknowledge that the funds are held on trust.
Regular bank reconciliations must be performed, and RICS requires an annual accountant's report on client money handling. For further information about how service charge funds should be managed, visit our service charge management page.
Client Money Protection Requirements
- Hold all client funds in designated client bank accounts
- Ensure complete separation of client money from the agent's own funds
- Obtain bank acknowledgement that funds are held on trust
- Perform regular bank reconciliations of all client accounts
- Commission an annual accountant's report on client money handling
- Maintain client money protection insurance where required
- Keep detailed records of all client money transactions
Year-End Accounts and Transparency
Year-end accounts are the primary financial reporting tool in block management accounting. They provide leaseholders with a complete picture of the income received and expenditure incurred during the accounting period. Well-prepared year-end accounts build trust between the managing agent and the leaseholders and are essential for demonstrating that service charge monies have been spent properly and in accordance with the lease.
Year-end accounts should include a detailed breakdown of all service charge expenditure by category, a comparison of actual costs against the budget, the opening and closing reserve fund balance, details of any balancing charges or credits due, and a statement of arrears where appropriate. The accounts should be prepared on an accruals basis to ensure that all costs relating to the period are included, regardless of when they were paid.
Leaseholders have a statutory right under Section 22 of the Landlord and Tenant Act 1985 to inspect the accounts and supporting documentation. Transparency is not just good practice - it is a legal requirement. For guidance on the audit and review process, see our service charge audit guide.
What Year-End Accounts Should Include
- Detailed income and expenditure statement by service charge heading
- Comparison of actual expenditure against the approved budget
- Opening and closing balances for all funds held
- Reserve fund movements including contributions and withdrawals
- Statement of leaseholder arrears and prepayments
- Notes explaining any significant variances or unusual items
- Accountant's certification as required under Section 21
Frequently Asked Questions About Block Management Accounting
What is a Section 21 summary of costs?
A Section 21 summary of costs is a statutory document required under the Landlord and Tenant Act 1985. It provides leaseholders with a certified summary of the service charge expenditure for the accounting period. The summary must be prepared by a qualified accountant who confirms whether the accounts are sufficiently supported by receipts and represent a fair summary of the costs incurred. Managing agents must supply this summary within six months of the end of the accounting period, or within one month of a written request from a leaseholder.
Do service charge accounts need to be audited?
Service charge accounts do not always require a full audit, but they do require certification by a qualified accountant as part of the Section 21 summary process. The level of examination depends on the size of the development and the terms of the lease. For larger blocks or where the lease specifies it, a full audit may be required. Even where a full audit is not mandatory, best practice and RICS guidance recommend independent examination of accounts to ensure transparency and accuracy for leaseholders.
How should reserve funds be held?
Reserve funds, also known as sinking funds, should be held in a designated trust account that is separate from the managing agent's own funds and from day-to-day service charge accounts. Under Section 42 of the Landlord and Tenant Act 1987, contributions to reserve funds are held on trust for the contributing leaseholders. The funds should ideally be placed in an interest-bearing account, and any interest earned should be credited to the fund. RICS guidance requires that these funds are ring-fenced and cannot be used for any purpose other than the intended major works or long-term maintenance.
What is client money protection in block management?
Client money protection refers to the safeguarding of funds held by a managing agent on behalf of leaseholders and freeholders. RICS-regulated firms must comply with strict client money handling rules, which require that all service charge monies, reserve funds, and other client funds are held in designated client accounts, completely separate from the agent's own business accounts. This protects leaseholders' money in the event that the managing agent becomes insolvent. Regular reconciliation and independent auditing of client accounts are also required.
Can leaseholders inspect the service charge accounts?
Yes, leaseholders have a statutory right under Section 22 of the Landlord and Tenant Act 1985 to inspect the accounts, receipts, and other documents supporting the service charge summary. After receiving a Section 21 summary, leaseholders may request in writing to inspect the supporting documentation. The landlord or managing agent must then make the documents available for inspection within one month, and must allow the leaseholder to take copies. Failure to comply is a criminal offence and undermines the transparency that proper block management accounting should provide.
What accounting standards apply to block management?
Block management accounting should follow the RICS Service Charge Residential Management Code and relevant guidance notes. While service charge accounts are not required to comply with full UK GAAP or FRS 102, they must present a true and fair view of income and expenditure. Accounts should be prepared on an accruals basis, clearly showing budgeted versus actual costs, and must comply with the terms of the lease. RICS-regulated firms must also adhere to RICS client money handling rules and ensure that all financial reporting meets the standards expected of a competent and professional managing agent.
Need Help With Block Management Accounting?
Our experienced team provides transparent, RICS-compliant block management accounting services. From service charge budgets and reserve fund management to Section 21 cost summaries and year-end accounts, we handle every aspect of the financial management of your block.