Occupier Guide Service Charge Ed3

8/12/2019 Occupier Guide Service Charge Ed3

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Service charges in

commercial propertyA guide for occupiers

rics.org/servicechargecode


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RICS April 2011

ISBN: 978-1-84219-679-3

Published by:

RICS

Parliament Square

London SW1P 3AD

United Kingdom

No responsibility for loss of damage

caused to any person acting or

refraining from action as a result of the

material included in this publication

can be accepted by the author,

publisher or RICS.

RICS Sustainability

02 Service charges in commercial property


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Introduction 04

Why do we need the Code? Aims and objectives of the Code

Limitations of the Code

Understanding service charges 05

Value for money and quality of services

Budgets and accounts 06

Cost headings

Management fees

Allocation and apportionment 07

Repairs to fabric, plant and equipment 08

Improvement and refurbishment

Environmental sustainability 08

Sinking/replacement and reserve funds 09

Dispute resolution 10

For more information 11

Contents

Service charges in commercial property 03


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The Royal Institution of Chartered Surveyors (RICS) has

published a Code of Practice for its members who areinvolved in all aspects of service charges for commercial

property. This Code of Practice is now generally accepted

by the property industry as setting best practice principles

for the management and administration of service charges

in commercial property.

This guide written specically for occupiers of commercial

property, gives an overview of the Code and will help you to

understand the following topics:

understanding service charges

budgets and accounts

allocation and apportionment

repairs to fabric, plant and equipment

environmental sustainability

sinking funds/replacement and reserve funds

dispute resolution.

This guide aims to raise awareness of the Code

among occupiers of commercial property and to

outline what to expect when discussing service

charges. It does NOT override the Code or lease

in any way.

Reading this guide will not equip you with enough detail

to conduct your own negotiations you should always

seek professional advice when taking on or renewing

an existing lease. This guide will help to ensure that

your advisers are working within the recommendations

of the Code as far as is practical.1

Why do we need the Code?The property professionals you deal with should always

act with professional care, diligence, integrity and objectivity.

However, service charges have been a frequent cause

of dispute between owners and occupiers. In many

cases, disputes arise because of poor communication

between all parties, therefore the Code places great

emphasis on the need for improved communications,

transparency and timeliness.

Although the Code is not mandatory, there are implications

for professionals who do not take best practice intoconsideration. For example, in cases of professional

negligence, the court is likely to take account of any

relevant guidance notes published by bodies such

as RICS when deciding whether or not a practitioneracted with reasonable competence. Practitioners who

do not follow recommended practice may have to

explain in court why they decided not to adopt the

recommended practice.

Aims and objectives of the Code

To improve general standards and promote best

practice, uniformity, fairness and transparency in

the management and administration of service

charges in commercial property.

To ensure timely issue of budgets and

year-end certicates.

To reduce the causes of disputes and give guidance

to resolving disputes where these do occur.

To provide guidance to solicitors, their clients (be they

owners or occupiers) and managers of service charges

in the negotiation, drafting, interpretation and operation

of leases in accordance with best practice.

Limitations of the Code

There may be some circumstances where the suggested

best practice in the Code cannot be applied. If this

happens, the practitioners should always explain to you

why this is the case and keep a record of their reasoning.

Whilst the Code cannot override existing leases,

there is a trend towards shorter lease terms

which means that renewals will become more

frequent and opportunities to apply best practice

will occur more often.

The Code was written with larger properties in

mind, so owners and occupiers should use common

sense when applying the Code to smaller properties

particularly in terms of cost-benefit issues.


Introduction

1In this guide, the term owner includes any person or company (e.g. a manager) who receives

or collects the service charge monies; the occupier is any person or company who pays the

service charge (e.g. a tenant)


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All businesses have to pay for propertyrelated overheads

or running costs. Typically, these costs include servicessuch as the provision of heating, lighting, cleaning,

security, and so on. Costs may also include works such

as maintenance, repair and replacement (where beyond

economic repair) of any fabric, plant, equipment and

materials. The test of whether you will be asked to pay

such costs is that they should be benecial and relevant to

the needs of the property, its owner, its occupiers

and their customers.

Together, these costs make up the service charge.

The service charge usually comprises the

direct cost of the services to the business,

often including a management fee payable

to the person or company who administers

the services.

As an occupier of commercial property, you are entrusting

a portion of your business overheads to an external

organisation. For this reason, the core principle of the

Code is that the service charge should be administered

on a not for prot, not for loss basis.

Owners must demonstrate a high degree of competence,

integrity, objectivity and transparency in dealing with the

service charge accounts.

In practice, this means that:

the property owner should obtain competitive quotations

for the various services and should select suppliers

based on a value-for-money assessment of the

services offered

the costs of the services should be transparentso that everyone involved is aware of how the costs

are made up

the owner must ensure that all costs have been

incurred in accordance with the lease

owners should hold service charge monies in one

or more separate bank accounts.

The Code specifically proposes that owners

should recognise their duty of care tooccupiers whose money they are spending

and that occupiers have a right to challenge

the service charges being levied.

Service charges can be advantageous to occupiers

for a number of reasons, but mainly because:

the costs are relatively xed, budgeted and known

in advance having a xed on account overhead helps

you to manage cash-ow and budgets

you do not need to devote staff time to procuringservices or dealing with problems of supply.

Nevertheless, service charges have often been a source

of dispute between owners and occupiers and that is why

the Code emphasises the need for good communications

and transparency among all parties. For example:

owners should actively communicate with occupiers

to ensure they are clear what services they can expect

to receive and how much they are required to pay

occupiers should be notied as soon as possibleif forecasts of costs need to be revised (known

as variance) or if there are unforeseen variances

occupiers should be notied as to which items

should NOT be included in service charge costs.

Value for money and quality of services

The quality of services will depend upon, and should

be appropriate to, the location, use and character

of the property.

Owners should procure quality service standardsto ensure that value for money is achieved at all times.

The aim is to achieve value for money and effective service

rather than simply trying to achieve the lowest price.

Owners should not prot from the provision or supply

of services. Save for charging a reasonable fee to

reect the costs of managing the services the amount

recoverable by an owner is limited to the actual costs

of supplying the services.

Understanding service charges


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Owners should provide you with:

an estimate (budget) for the likely service charge

for the year ahead, including an explanation of the

itemised costs (delivered no later than one month

before the start of the service charge year)

a statement setting out in detail the expenditure

incurred for the previous year (delivered as soon

as possible after the service charge year-end, but

certainly within four months).

Good communications are essential and owners should

make sure that the accounts clearly explain the reasons

why any actual costs were different from budget estimates.

In addition, owners should ensure the layout of accounts

is similar each year, so that everyone who reads them

can easily compare changes year-on-year.

If you wish to ask questions about the accounts

you should do so within a reasonable period

the Code suggests four months from the

date the certified accounts were issued.

If you do not agree with the accounts you may

want an independent review (for which you have

to pay) or you may require copies of documents

relating to certified accounts.

Cost headings

The overall service charge is made up of various costs

for a wide range of separate services. It is important tobe able to compare the charges and cost-effectiveness

of one property against another, or against an industry

standard, so the commercial property industry uses

Industry Standard Cost Headings.

The list covers all the common items that are likely

to appear in a service charge budget or accounts,

ranging from utilities such as gas and electricity

to management such as accounting fees and

site management resources (such as receptionists

and concierges).

Several companies publish analyses of service charges

which take an average of the service charges for similarproperties and therefore provide a guide against which

you can compare the service charge for your property.

However, property is not mass produced in similar

formats (as is a car, for example) and therefore each

property will have its own variations from the average.

Beating the benchmark does not necessarily prove

that the service charge is value for money or that

those services are delivered efciently.

Management fees

The fee for the management services should be

the reasonable price for the total cost of managing

the provision of the services at the location. To minimise

disagreements between owners and occupiers, all costs

should be transparent. In particular, budgets and accounts

should explicitly show:

the management fees; and

the cost of site-specic management and resourcing.

Owners should take care to ensure that the

management fee associated with the service

charge is just that. This fee should not include

the cost of managing other (non-service charge)

aspects of the property.

The total price for the management fee should be

a fixed fee for a reasonable period (e.g. three years).

In the past, it was common to link the management fee to

the total price of services. This meant that the greater the

cost of services the more management fee had to be paid

a source of many disagreements. The Code requires the

management fee to be on a xed-price basis and should

not be linked to a percentage of expenditure.

Budgets and accounts


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Where there are several businesses occupying one property

the costs for services need to be shared. It is likely that

each separate occupier will have different needs so it is

common for each occupier to pay a proportion of the total

service charge for the property.

The proportion could be calculated using a number

of methods but the aim should always be to ensure that

occupiers bear a proportion of the total costs that is fair

and reasonable and reects the availability, benet and

use of the services. The method and details of theformula used to calculate your share should be clearly

communicated to you by the managers and it is essential

that this matrix is reasonable and can be seen to be fair

to all occupiers of the property.

The various items that are covered by the service charge

will be listed in an expenditure schedule.

You should be given a copy of both the

apportionment matrix and the expenditure

schedule together with a clear and easy-to-follow

commentary on how the expenditure is allocated

between the schedules and how those schedules

are apportioned between relevant occupiers.

Any services that are used by some occupiers but not

others should be excluded from the main schedule and

only allocated to a separate schedule which is apportioned

among the relevant occupiers.

The apportionment system means that owners will

usually be able to recover all the expenditure on

operational services through the service charge.

However, sometimes this may not be possible.

The owner is responsible for the service charges

attributed to unlet properties and for any specific

concessions granted to individual occupiers. These

charges should not be passed to existing occupiers.

The owner will need to bear a fair proportion of

the costs attributed to their own use of the property

(e.g. where an on-site management office is used

as the owners regional office) and also for any

concessions granted to individual occupiers.

The apportionment matrix should be reviewed regularly

to ensure that it is still fair after any changes to the

occupation or use of the property. And, as with all other

aspects of service charges, changes should be explained

and shared with everyone concerned.

Owners may need to charge supervisory fees where other

professionals (e.g. HR teams or building surveyors) areinvolved. However, these fees should not be simply

added to the overall management fee. Instead, they

should be allocated to the cost category most

appropriate to the particular work being supervised.

The detail may not seem important to you because you

will simply look at the total bill. However, it has beenintroduced to ensure that the management costs are

transparent. It also makes it easier to benchmark the cost

of management, knowing there are no hidden extras.

Allocation and apportionment


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Service charges should usually be limited to the recovery

of the reasonable costs of maintenance, repair andreplacement (usually where beyond economic repair)

of the fabric, plant, equipment and materials necessary

for the propertys operation.

Service charge costs will not generally include:

any initial costs (including the cost of leasing of

equipment) incurred in relation to the original design

and construction of the fabric, plant or equipment

any setting up costs that are reasonably to be

considered part of the original development costof the property

improvement costs above the costs of normal

maintenance, repair or replacement

future redevelopment costs.

Service charge costs may include improvements or

enhancement of the fabric, plant or equipment where

such expenditure can be justied. Managers should

provide the facts and gures to support and justifysuch a proposal.

Improvement and refurbishment

Who should pay for improvements or replacementof equipment, introduction of new technology and

refurbishment of the premises, and so on, is complex,

and will vary from lease to lease. For example, installing a

closed-circuit television (CCTV) system might be expensive

but could reduce the costs of manned security services.

The general rule is that initial provision is funded by

the owner. To reduce the potential for dispute, all such

proposals should be discussed and negotiated in a

transparent manner and on the basis of cost-benet.

Sometimes the costs of such works can be recouped

from the sinking fund or by using a reserve fund to

spread the cost over more than one year.

Repairs to fabric, plant and machinery

Owners and occupiers should be aware of the

environmental impact of their respective operationsand adopt a cooperative and collaborative approach

in recognising and managing the environmental impact of

the occupation and management of commercial premises.

The recent emergence of green leases in the UK may

be one way of addressing these issues. Green leases

are standard commercial property leases with a number

of voluntary and/or legally binding clauses pertaining

to cooperation with the aim of reducing energy andwater consumption and waste production.

Where leases are already in place, there may be value

in owners and occupiers entering into a non-legally

binding memorandum of understanding, which provides

a roadmap for cooperation between the parties on

improving the environmental performance of buildings.

Environmental sustainability


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Sinking/replacement and reserve funds

For any property there are likely to be occasional

one-off costs for replacing major items of equipment(e.g. a heating system), or for periodic works such

as external redecoration. Instead of charging for these

costs when they arise which would mean you might

suddenly be faced with a much larger service charge

bill for one year it is common practice to spread the

cost over a number of years by collecting an annual

contribution to a separate fund.

A sinking (or replacement) fund is used by the owner

to build up money to pay for repair and replacement

of major items of plant and equipment.

A reserve fund is used by the owner to cushion the

impact of unequal expenditure across a number of

years. For example, money could be set aside over

more than one year in a reserve fund to spread the

cost of redecorations over a manageable timeframe.

The monies collected for either a sinking or reserve

fund should be placed in an interest-bearing

account held in trust for the occupiers and crucially separate from the owners monies.

The owner should make the payments due from

any empty premises on the property.

The owner should give you a clear explanation of the way

the contributions to the fund are calculated and should

take care to provide a reasonable estimate of likely future

expenditure, rather than simply collecting monies for

unidentied future items.

Sinking and reserve funds are less common these

days, despite their advantages, because of the

extra administration costs and tax issues involved.


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In the past, poorly managed service charges often caused

disputes between owners and occupiers, ranging fromwhether or not the lease permits a service to be provided,

whether the expenditure itself is value for money or even

matters of apportionment. The Code aims to cut the level

of disputes. Inevitably, though, disagreements will arise

from time to time.

You have a right to reasonably challenge the

propriety of expenditure on services, although

you will need to bear the costs of the challenge,

unless other arrangements have already beenagreed (e.g. by court determination).

Alternative Dispute Resolution (ADR) has been introduced

because the courts are increasingly encouraging people

to resolve all sorts of disputes from divorce to service

charges without the need to go to trial.

The courts are determined to encourage everyone

to use ADR and, in fact, may ask for evidence that

it was properly considered. Furthermore, you may

be penalised in costs if you do not give proper

consideration to using ADR, even if you win at trial.

It is worth noting that if you have a dispute over service

charges it may also affect other occupiers of the property.

This means that it can be helpful to deal with related

disputes from more than one occupier at the same time.

RICS Dispute Resolution Service (DRS) is a two-stage

dispute resolution process that includes mediation andexpert determination. The DRS has access to a service

charges panel of trained and experienced service charge

practitioners to help resolve such disputes.

For further information contact:

RICS Dispute Resolution Service

Westwood Way

Coventry CV4 8JE

t +44 (0)20 7334 3806

[email protected]

Dispute resolution



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For more information

We hope this guide is useful to you.

If youd like to know more about service charges

or view the RICS Service Charge Code visit our website


The City of London Law Society and Practical Law Company

have both drawn up service charge lease provisions which

have been specically designed to comply with the principles

and provisions of this Code. These are available as downloads

from the following links:

Service Charge Provisions for an Ofce Building:

http://www.citysolicitors.org.uk/FileServer.aspx?oID=976&lID=0

Service Charge Provisions for a Shopping Centre:

http://www.citysolicitors.org.uk/FileServer.aspx?oID=975&lID=0

http://property.practicallaw.com/6-505-4928

For general guidance on leasing business premises please visit

leasingbusinesspremises.co.uk

If you want to receive independent, impartial advice from

a qualied RICS member with good local knowledge, contact us:

ricsfirms.com

alternatively email

[email protected]

or call the RICS Contact Centre

0870 333 1600

For more information



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Documents

Occupier Guide Service Charge Ed3