Transcript
8/12/2019 Occupier Guide Service Charge Ed3
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Service charges in
commercial propertyA guide for occupiers
rics.org/servicechargecode
8/12/2019 Occupier Guide Service Charge Ed3
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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.
04 Service charges in commercial property
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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Service charges in commercial property 05
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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06 Service charges in commercial property
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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Service charges in commercial property 07
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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08 Service charges in commercial property
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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Service charges in commercial property 09
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
edrs@rics.org
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
rics.org/servicechargecode
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
contactrics@rics.org
or call the RICS Contact Centre
0870 333 1600
For more information
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