Service Charges are a regular cause of discussion and disagreement between Landlord and Tenant but this often arises out of poor communication or lack of transparency.
What are service charges?
In the case of a standalone property, fully let to the tenant on a full repairing lease, the responsibility for maintenance and other costs is usually quite clear.
Where a property is leased to multiple tenants (e.g. it is split into units) life becomes more complicated. Each tenant usually has personal responsibility for services and maintenance inside his area of responsibility (subject to the conditions of the lease) but the Landlord has the right (again subject to the conditions of the lease) to recover revenue related costs (i.e. services and maintenance) for operating those common areas of the property which all tenants benefit from. The common areas could be as simple as a car park or shared driveway but could also include shared stairwells, reception areas, corridors, wash rooms, lifts etc.
Costs should be apportioned to tenants fairly and broadly in line with their "use". Often the relative square footages of each unit are used as a basis of apportionment. There is no completely scientific means of allocation and pragmatic solutions must be adopted.
If units are vacant the landlord should bear the proportionate cost of that unit (void space) which would not be allocated to occupying tenants.
The landlord should not recover costs associated with building improvement or other capital projects.
It is however reasonable for the Landlord to spread the cost of a major repair program over several years (e.g. a roof repair fund) so as to share the cost over the estimated life of the roof. This avoids the tenants who happen to be in situ in the year of the works bearing costs disproportionate to their occupancy.
The Service Charge Process
The service charge process follows the following broad stages:
- Prepare a budget for the service charge costs
- Split the budget into cost schedules (if appropriate)
- Apportion the budget across tenants and charge on account in line with rent frequency
- Certify the annual spend against budget
- Apportion the certified annual spend across tenants
- Compare a tenants share of actual spend to that charged on account and issue adjusting invoices or credit notes
RICS Code of Practice
The RICS has issued a Code of Practice to drive best practice in respect of Service Charges and reduce the volume of disputes.
Aims of the Code
The RICS Service Charge Code has the following aims:
- To improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property.
- To ensure timely issue of budgets and year end certificates.
- To reduce the causes of disputes and to 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.
The Code establishes the following core principles:
"Tenants who agree to service charge clauses under which they contract to pay against a surveyor''s estimate or an accountant''s certificate rely upon the professional people involved performing their roles with professional scrupulousness, diligence, integrity and independence and not in a partisan spirit, supposing their only task to be to recover as much money as they can for the landlord."
Jonathan Gaunt QC sitting as a Deputy High Court Judge: Princes House Ltd v Distinctive Clubs Ltd 
The Principals are set out below:
The service costs
- 1. Best practice requires services to be procured on an appropriate value for money basis and that competitive quotations are obtained or that cost are benchmarked.
- 2. Owners should not profit from the provision or supply of services. Save for charging a reasonable commercial management fee to reflect the actual costs of managing the services the amount recoverable by an owner is limited only to the proper and actual cost incurred in the provision or supply of services.
- 3. All costs are to be transparent so that all parties, owners, occupiers and managers, are aware of how the costs are made up. Management fees are to be on a fixed price basis with no hidden mark ups.
Allocation and apportionments
- 4. Costs should be allocated to the relevant expenditure category. Where reasonable and appropriate, costs should be allocated to separate schedules and the costs apportioned to those who benefit from those services.
- 5. The basis and method of apportionment should be demonstrably fair and reasonable to ensure that individual occupiers bear an appropriate proportion of the total service charge expenditure that reflects the availability, benefit and use of services.
- 6. Managers are to make a full apportionment matrix available to all occupiers, which clearly shows the basis of calculation and the total apportionment per schedule for each unit within the property/complex.
- 7. Certified accounts of expenditure are to represent a true and accurate record of expenditure incurred. Those certifying service charge accounts must recognise that they have a duty of care to both owners and occupiers to act with professional care, diligence integrity and objectivity.
Communication and consultation
- 8. Whilst the owner has the right to set the standard to which his investment will be managed and has a duty to manage, managers will consult with occupiers with regard to the standard and quality of service charge provision required.
- 9. Managers will communicate with occupiers to ensure services are delivered effectively for the benefit of all and to ensure that occupiers understand what they can expect to receive and how much they are required to pay.
- 10. Managers claiming compliance with the principles of this Code will be transparent in demonstrating how they comply.
Duty of care
- 11. The owner and/or manager has a duty to manage the property and also has a duty of care to occupiers, (who entrust the spending of their own business overhead and cash flow by funding the services) and to the owners, (whose investment they are servicing).
- 12. There will be clear policies as to how the service charge will be managed.
- 13. In incurring costs in the provision of services the manager is spending the occupiers'' money. Managers must demonstrate a high degree of competence, professionalism, integrity, diligence, objectivity and transparency in dealing with the service charge accounts.
- 14. When issuing statements of accounts and/or certifying expenditure managers must do so in a non-partisan spirit, acting as experts. The manager must therefore ensure that all costs have been incurred and are properly recoverable in accordance with the leases.
- 15. Service charge monies will be held in one or more discrete bank accounts, recognising that monies are held to deliver the service expenditure.
- 16. All interest earned, or where separate accounts per property are not operated a proper and reasonable amount of interest calculated on normal commercial rates, will be credited to the service charge account after appropriate deductions have been made, i.e. bank charges, tax, etc.
- 17. The recommended Industry Standard Cost Headings must be used in reporting budget and actual expenditure.
- 18. Occupiers will ensure prompt payment of all service charge on-account and balancing charges. Where a legitimate dispute exists, any payment properly withheld should reflect only the actual sums in dispute.
- 19. Occupiers will recognise that the service charge provision of any lease has legal effect and will ensure that representatives involved in discussions, meetings etc. have an appropriate level of responsibility and authority to make decisions concerning service charge matters.
- 20. In recognition that value for money and maintenance of quality standards will be enhanced through partnership, occupiers will be proactive in assisting owners in the operation and utilisation of service and service systems, e.g. separating waste to facilitate appropriate and cost effective recycling, adopting energy saving measures, etc.
Right to challenge/dispute resolution
- 21. All new leases (including renewals) should make provision for either party to require the resolution of disagreements through the use of alternative dispute resolution (ADR) as a cost effective alternative to court action.
- 22. If the parties cannot agree a mediator or independent expert to determine the dispute the president of the RICS should (on request) nominate a suitable person. Where leases do not allow for ADR, parties are reminded that there is nothing to stop them agreeing to go to ADR to resolve a dispute.
- 23. Communication and consultation between managers and occupiers need to be timely and regular to encourage and promote good working relationships and understanding with regard to the provision, relevance, cost and quality of services.
- 24. Managers will issue budgets to occupiers, including an explanatory commentary, at least one month prior to the start of the service charge year. Detailed statements of actual expenditure, together with accounting policies and explanatory text, will be issued within four months of the service charge year end.
- 25. Transparency is essential to achieving good communication. By being transparent in the accounts, the explanatory notes, policies and day to day management the manager will prevent disputes. Prompt notification of material variances to plans or forecasts ensures better relationships between owner, manager and occupier.
Value for money
- 26. Service quality is to be appropriate to the location, use and character of the property. The manager is to procure quality service standards to ensure that value for money is achieved at all times. The aim is to achieve value for money and effective service rather than lowest price.
How we can help
Whether you are looking to rent or lease out a property, keeping on top of your financial situation is incredibly important and that''s why putting together a service charge budget can go a long way to helping you ensure that you are able to accurately and effectively deal with any bills or costs that you might incur in the upcoming year.
At Roger Hannah we are able to produce a service charge budget for your company to ensure that you are able to clearly outline any potential costs that you might incur and that you can plan accordingly to ensure that you are able to cover these costs financially. Our team will work with you to go through any costs that you may not have considered and work to provide an accurate description of what you can expect to pay on a monthly or annual basis.
A service charge budget also covers any potential repair costs that you might need to include as a landlord which includes upkeep for general wear and tear around the property in addition to any direct problems which might need fixing throughout the lease.
As a landlord you have a certain responsibility to provide a number of services within your property and to provide a level of maintenance to support these services, to help ensure the comfort and safety of your tenants. Although it''s essential that these are provided, they don''t have to be provided at your own cost and as such you may choose to levy service charges on a tenant for any services that they use while leasing your property.
We see Service Charge Management as an important part of Property Management with the goal to ensure both a fair recovery of cost and a minimum level of disputes with Tenants.
Key to this is that, in a tenancy agreement, service charges must be clearly and concisely laid out and this means it must outline what the service charge covers - for example building insurance, general maintenance and repairs and associated services - as well as how much they are going to cost the leaseholder.
Our Lease Advisory Team can assist with negotiating and drawing up a lease including the provisions for Service Charges.
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