Service charge funds for leasehold blocks and variable rent charges for freehold houses must be collected and held in a designated client account to ensure legal compliance, financial transparency, and protection of residents’ money. This practice is guided by the principles in the Landlord and Tenant Act 1985, Trust Accounting rules, and industry best practice, including The Property Institute (TPI) and Royal Institute of Chartered Surveyors (RICS) guidance. The use of these accounts will incur bank charges.
Key Reasons for Holding Service Charges in a Designated Client Account
- Legal Compliance
- Funds collected for service charges and variable rent must be treated as trust money, held separately from the managing agent’s own finances.
- Section 42 of the Landlord and Tenant Act 1987 requires these funds to be held in trust, safeguarding them for their intended purpose: maintaining and managing the building or estate.
- Transparency and Accountability
- A designated client account allows clear, traceable financial records for each development or estate.
- Protection of Residents’ Money
- If the managing agent or freeholder becomes insolvent, funds in a designated client account are protected and cannot be claimed by creditors.
- This ensures that money remains available to maintain communal areas, pay contractors, or respond to emergencies.
- Ease of Reconciliation and Reporting
- Keeping funds in separate accounts simplifies budgeting, year-end accounting
- It supports accurate calculation of balances, interest (if applicable), and service charge adjustments.
- Best Practice and Professional Standards
- Recognised professional bodies such as TPI and RICS require client money to be held in designated client accounts with safeguards like:
- Dual signatories
- Annual audits
- Client Money Protection (CMP) schemes
- Recognised professional bodies such as TPI and RICS require client money to be held in designated client accounts with safeguards like:
What is a Designated Client Account?
A designated client account is a bank account held in trust specifically for one development or estate, clearly labelled with the name of that property or client. This differs from other types a general client account which may hold funds for multiple clients or other types of bank accounts such as a business account or personal account.
In Summary
Holding service charge and variable rent funds in a designated client account:
- Complies with the law
- Protects leaseholders and freeholders financially
- Enhances trust and transparency
- Meets professional and regulatory standards
