Service Charge Audit: Complete Guide for Leaseholders
Learn how to audit your service charge accounts, understand your rights under the Landlord and Tenant Act 1985, and ensure your managing agent is spending your money properly.
What Is a Service Charge Audit?
A service charge audit is a detailed examination of the accounts, invoices, and financial records that underpin the service charges paid by leaseholders. It is one of the most effective ways for leaseholders to ensure that their money is being spent properly and that costs are reasonable.
Whether you live in a small block of flats or a large residential development, understanding how your service charge funds are collected and spent is essential. An audit allows you to verify that the managing agent or landlord has fulfilled their obligations and that the charges levied correspond to actual expenditure.
Why Leaseholders Need Service Charge Audits
Many leaseholders pay thousands of pounds each year in service charges without ever checking how the money is spent. A service charge audit provides transparency and accountability. It can reveal overcharging, duplicate payments, unapproved expenditure, and poor financial management.
- Confirms that service charge expenditure matches the costs outlined in the annual budget
- Identifies any unreasonable charges or costs not permitted under the lease
- Ensures reserve fund contributions are held separately and used appropriately
- Provides evidence if you need to challenge service charges at a tribunal
For a complete overview of how service charges work, see our service charge guide.
Your Right to Inspect Service Charge Accounts
Leaseholders in England and Wales have a statutory right to inspect the accounts and documents that support their service charges. This right is set out in Section 22 of the Landlord and Tenant Act 1985 , which requires landlords and managing agents to provide a summary of relevant costs when requested by a leaseholder.
This right is fundamental to the audit process. Without access to the underlying financial records, leaseholders cannot verify whether service charge demands are accurate and reasonable.
How to Make a Section 22 Request
To exercise your right to inspect service charge accounts, you should write to your landlord or managing agent requesting a written summary of costs. This request should be made in writing, and it is advisable to send it by recorded delivery so you have proof of receipt.
- Write to the landlord or managing agent requesting a written summary of costs under Section 22
- The landlord must respond within one month of the request or six months after the end of the accounting period
- After receiving the summary, you can request to inspect the original invoices and receipts
- For buildings with more than four dwellings, the summary must be certified by a qualified accountant
Failure by the landlord to comply with a Section 22 request is a criminal offence and can also be used as grounds to withhold payment of service charges until the information is provided.
Read more about the legislation in our Landlord and Tenant Act 1985 guide and our comprehensive service charge law guide.
How to Conduct a Service Charge Audit
Conducting a service charge audit requires a methodical approach. Whether you are reviewing the accounts yourself or working with a professional auditor, the process follows a similar set of steps designed to identify discrepancies, unreasonable costs, and financial mismanagement.
Step-by-Step Audit Process
The following steps outline a thorough approach to auditing your service charge accounts:
- Request the annual cost summary under Section 22 of the Landlord and Tenant Act 1985 and obtain copies of the certified accounts
- Compare the budget against actual expenditure to identify any significant variances that have not been explained
- Examine individual invoices to confirm they relate to genuine work carried out at the property and are addressed to the correct entity
- Check for reasonableness by comparing costs with market rates for similar services in your area
- Verify reserve fund balances to ensure contributions are held in a separate account and interest is being credited
- Review insurance costs to confirm the building is adequately insured and commissions are disclosed
- Check the Section 20 consultation process for any major works expenditure exceeding the statutory threshold
Requesting Cost Summaries and Invoices
Once you have the annual cost summary, you are entitled to inspect the invoices, receipts, and other documents that support the figures. The managing agent must make these available within one month of your written request. You may take copies of any documents you need, and no unreasonable fee may be charged for this.
Pay particular attention to management fees, insurance premiums, cleaning and gardening contracts, and any major works expenditure. These are the areas where overcharging is most commonly found.
For guidance on how budgets should be structured, see our service charge budget guide.
Appointing a Professional Auditor
While leaseholders can review their service charge accounts themselves, there are situations where appointing a professional auditor or qualified accountant is advisable. A professional brings expertise in forensic accounting, knowledge of leasehold legislation, and the ability to identify issues that may not be obvious to a layperson.
When to Use a Qualified Accountant
Consider appointing a professional auditor in the following circumstances:
- The service charge accounts are complex, with multiple cost centres, contractors, and significant annual expenditure
- You suspect financial irregularities such as undisclosed commissions, inflated invoices, or misallocation of funds
- You are preparing a case for the First-tier Tribunal and need expert evidence to support your application
- The managing agent has been unresponsive to requests for information or has failed to provide certified accounts
What a Professional Auditor Checks
A qualified accountant conducting a service charge audit will typically examine:
- Whether all expenditure is recoverable under the lease and properly apportioned among leaseholders
- That reserve fund monies are held in trust and accounted for separately
- Compliance with Section 20 consultation requirements for qualifying works and long-term agreements
- The accuracy of the year-end accounts and any balancing charges applied to leaseholders
Typical Costs of a Professional Audit
The cost of a professional service charge audit varies depending on the size and complexity of the accounts. For a small block of flats, fees typically range from £500 to £1,500. Larger developments with significant annual expenditure may incur audit fees of £2,000 to £5,000 or more. These costs are usually shared among the leaseholders who commission the audit.
If the audit reveals issues that need to be formally challenged, visit our service charge dispute guide for next steps.
Challenging Costs Found During an Audit
If your service charge audit reveals unreasonable charges, unauthorised expenditure, or financial mismanagement, you have the right to challenge these costs. The primary legal route for doing so is through the First-tier Tribunal (Property Chamber).
The First-tier Tribunal Route
Under Section 27A of the Landlord and Tenant Act 1985, any party to a lease may apply to the First-tier Tribunal for a determination on whether a service charge is payable and, if so, the amount. This is the most common route for leaseholders who wish to challenge costs identified during an audit.
- Section 27A applications can challenge both past and future service charges
- The Tribunal considers whether costs are reasonably incurred and whether work is carried out to a reasonable standard
- Application fees are modest, typically £100 to £300, and each party usually bears their own costs
- Audit findings and supporting documentation form key evidence in Tribunal proceedings
Steps Before Making a Tribunal Application
Before applying to the Tribunal, consider the following steps to attempt to resolve the dispute informally:
- Write to the managing agent or landlord setting out the specific charges you are challenging and the reasons why
- Allow a reasonable period for a response, typically 14 to 28 days
- Consider using a recognised mediation service if the matter cannot be resolved through correspondence
- Gather all audit evidence, correspondence, and supporting documents before submitting your application
For detailed information about the Tribunal process, see our First-tier Tribunal guide.
Role of the Managing Agent in Service Charge Audits
The managing agent plays a central role in the service charge audit process. They are responsible for collecting service charges, managing expenditure, maintaining financial records, and providing accounts to leaseholders. Their cooperation and transparency are essential for an effective audit.
Transparency Obligations
A competent managing agent should operate with full transparency. This means:
- Providing annual certified accounts to all leaseholders within the timeframe specified in the lease
- Responding promptly to Section 22 requests and making supporting documents available for inspection
- Disclosing any commissions or related-party transactions that may affect the impartiality of their financial decisions
- Holding service charge funds in designated client accounts, separate from their own business funds
Best Practices for Managing Agents
The best managing agents proactively support the audit process and view it as an opportunity to demonstrate good financial stewardship. Best practices include:
- Maintaining clear and accurate financial records throughout the accounting period, not just at year-end
- Providing detailed breakdowns of service charge expenditure rather than aggregated totals
- Obtaining competitive quotations for all significant contracts and sharing these with leaseholders
- Engaging a qualified independent accountant to certify the accounts annually
Learn more about what to expect from a professional managing agent in our block management guide.
Frequently Asked Questions About Service Charge Audits
What is a Section 22 request for service charge accounts?
A Section 22 request refers to Section 22 of the Landlord and Tenant Act 1985, which gives leaseholders the right to request a written summary of the costs that make up their service charge. The landlord or managing agent must provide this summary within one month of the request, or within six months of the end of the accounting period, whichever is later. The summary must be certified by a qualified accountant if there are more than four dwellings in the building.
Can leaseholders appoint their own auditor?
Yes, leaseholders can appoint their own independent auditor or qualified accountant to review the service charge accounts. This is separate from the statutory audit that may be required under the lease terms. Leaseholders often appoint their own auditor when they have concerns about how service charge funds are being managed or when they suspect overcharging. The cost of an independent audit is borne by the leaseholders who commission it, not the service charge fund.
How often should service charges be audited?
Service charge accounts should ideally be audited annually, coinciding with the end of each accounting period. Many leases require the landlord or managing agent to provide certified accounts within a set timeframe, typically six months after the year-end. Even where the lease does not mandate a formal audit, leaseholders should review their accounts regularly to ensure costs remain reasonable and funds are being properly managed.
What happens if the audit reveals overcharging?
If a service charge audit reveals overcharging, leaseholders can first raise the issue with the landlord or managing agent and request a credit or refund. If the matter is not resolved informally, leaseholders can apply to the First-tier Tribunal (Property Chamber) under Section 27A of the Landlord and Tenant Act 1985 for a determination on whether the charges are reasonable. The Tribunal can order that charges be reduced or refunded if they are found to be unreasonable.
Are managing agents required to provide receipts?
Yes, under Section 22 of the Landlord and Tenant Act 1985, once a leaseholder has received a summary of costs, they have the right to inspect the underlying accounts, receipts, and other supporting documents. The landlord or managing agent must make these available for inspection within one month of the request being made. Leaseholders may also take copies of these documents, and the landlord cannot charge an unreasonable fee for providing them.
How long does a service charge audit take?
The length of a service charge audit depends on the size of the building, the complexity of the accounts, and the volume of expenditure. For a small block with straightforward costs, an audit might take one to two weeks. For larger developments with multiple contractors and significant expenditure, a thorough audit could take four to six weeks. If a professional auditor is appointed, their timeline will also depend on their current workload and how quickly the managing agent provides the requested documentation.
Need Help With a Service Charge Audit?
Our experienced block management team can help you understand your service charge accounts, identify overcharging, and ensure your managing agent is meeting their obligations. Contact us today for expert advice.