SERVICE CHARGES An opportunity for commercial property occupiers to cut costs and save money INTRODUCTION As part of our day‐to‐day professional work dealing with the cost of service charges, we often come across a wide range of errors ranging from straightforward mathematical mistakes, to more subtle issues, such as overcharging. In one extreme case, CRC North managed to negotiate a reduction of more than £100,000 on a service charge account where a landlord tried to get a whole roof replaced at the cost of the tenant. When we investigated further, we found out that the poor state of the roof was due to an inherent defect, which was the responsibility of the landlord. We carried out a sample survey of occupiers and have found that many service charge payers do not fully understand their obligations, or have the specialist knowledge to challenge their bills. Many simply assume that the service charge bill is correct. As we have seen time and time again, this is not always the case. That’s why we’re setting out a “plain English” summary of landlord and tenant’s obligations, common reasons for overcharging and how to challenge excessive service charge costs. OBLIGATION TO PAY Your obligations to pay should be set out in your lease, but could be buried in the complex arrangements of legal clauses. Unless you are familiar with the legal terminology, it may be difficult to understand exactly what they are. For example, you may be on a Full Repairing and Insuring (FRI) lease with very little responsibility for any service charge costs, or you may be on an Internal Repairing only lease, contributing only for common parts such as walls, roofs, etc. Retailers in shopping malls may be responsible for access roads, car park maintenance, security and in some instances, marketing. It’s important to establish which costs you are liable for from the outset. YOUR SHARE The second task is to establish how much of the total cost is your responsibility. This again will be buried in the clauses of your lease. It may be based on the area of your unit as a percentage of the total. Alternatively, it may be a straight split, i.e. there are 10 units and each occupier pays a tenth equal share. There can also be more complicated arrangements, where costs may be shared by some but not all tenants. CRC North recently encountered an office block where the ground floor did not pay for any of the lifts, but did pay extra security costs because they had staff working at night.
THE ACTUAL SERVICE CHARGE COSTS Having reviewed and identified your obligations and share of the total cost, you can now examine the service charge account in more detail. This is where errors can start to appear. Our own survey suggests there are six areas of common concern ; 1. REPAIRS / IMPROVEMENTS A major problem can arise when landlords carry out repairs. Under most leases, the tenant will be responsible for repairs, but not improvements or inherent defects. If the landlord decides to renew the roof covering, replacing it with a more expensive material, that would be an improvement – meaning the landlord should pay the extra cost. Sometimes, however, it’s not that simple. In some cases, a repair may also be an improvement , which may be ‘reasonable’ however a landlord may decide on full replacement of say a boiler when a minor repair may suffice.
That’s where we can help.. 2. VALUE FOR MONEY This is an area where arguments can easily occur. A landlord may just keep appointing the same sub‐contractor to carry out works without checking if it is value for money. Why bother when you, the tenant, is paying the bill? A good landlord will have an established method of procurement for services ‐ getting annual quotations based on a proper specification judging which supplier offers value for money and level of service. He should then enter into a formal Service Level Agreement (SLA) setting out the level and cost of those services.
CRC North can offer comparable costs and we can quickly assess if costs are competitive or not. 3. LEVEL OF SERVICE Defining a level of service can often be contentious. Some tenants may want common parts cleaning every week, while others may be happy with once per month; the same goes for window cleaning.
This is an area for detailed discussion with the landlord or his agent. 4. SINKING FUND Some leases allow for the landlord to take money from the tenant and keep it in a separate account to cover the future cost of major works such as air conditioning, boilers, lifts, etc. The calculation and allocation of this sinking fund can be complicated depending on the exact terms and length of your individual lease. If your service charge does contain a sum for the sinking fund this needs careful examination. 5. MATHEMATICAL ERRORS Mistakes can happen, even in the age of computer spreadsheets, but it’s perhaps not surprising that errors are usually to the advantage of the landlord. Eagle eyes are needed to check the figures each and every time.
6. CERTIFICATION Don’t assume that just because your service charge comes with an impressive stamp of certification from an accountant, it is correct. The Certificate only confirms the individual amounts have been spent. It does not certify that the sums are correctly spent, allocated or shared between the tenants according to each lease. Do not be misled into thinking a certificate is a guarantee that the invoice is correct. DO YOU KNOW YOUR LANDLORD’S RESPONSIBILITIES? Your lease should normally include these details. Has the landlord agreed to provide certain services or an annual budget? How about a detailed breakdown of the service charge within a certain period after the year end? If a landlord has appointed chartered surveyors as managing agents, they will be bound by the rules and regulations of the RICS. DO YOU KNOW YOUR RIGHTS TO CHALLENGE/DISPUTE THE SERVICE CHARGE? Unless the lease is poorly worded, the tenant will normally have an opportunity to demand further information on the costs, expenditure and calculations of the service charge. This is the tenant’s opportunity to challenge, test and verify the service charge. It should normally be done within a certain timescale laid down in the lease, but if there are discrepancies or disputes over the service charge, the first course of action is a discussion and negotiation with the landlord or his agent. Unless the lease provides for disputes to be referred to an Arbitrator , the matter will go to the Courts to be decided. This is obviously a costly and time consuming process , and risks the breakdown of landlord and tenant relations. Parties involved in any dispute should have regard to the RICS Code of Practice , and if necessary seek an alternative dispute resolution (ADR) , before considering Court action. CONCLUSIONS We hope CRC North’s “plain English” guide to service charges can help finance directors, managers and those responsible for paying invoices understand the system much better. It can be a minefield at times. Service charges can run into thousands of pounds, so they cannot be taken at face value or accepted without scrutiny. Any prudent occupier will need to be satisfied that they are only paying the correct and fair amount. To take advantage of CRC North’s expertise to audit, query and verify your service charge accounts call our director, Chris Renshaw, and see how we can save you money. Chris Renshaw Office :‐0161 776 4666 Mobile:‐07768 354 666 email :‐ chrisrenshaw@crcnorth.com