It’s like something out of a horror film – a lease can drive up your costs to frightening levels, completely beyond your control.
On Thursday this week I attended the Commercial Property Service Charge Seminar at Offices 09, keen to gain a better understanding of the issues facing occupiers. I soon realised that this is an essential topic – avoid it at your peril!
A landlord’s business is the provision of space for occupation by other businesses, often in multi-occupier premises. So, should the landlord not bear the risks (including the uncertain costs) of that provision? Well, look at it this way – would a restaurant’s customer agree to pay for a meal provided as and when it suits the restaurant, at a standard and price to be defined, after the food and drink is delivered?
This was the essence of the first slide introduced by Vivien King of Bond Pearce, and it identifies the unique position of service charges. Read on for details of how to escape a service charge nightmare!
Here are some rather uncomfortable facts:
- Service charges cost over £4bn a year in England and Wales.
- If you take out a lease you can expect to add roughly 10% to your rent bill to cover your service charge.
- Charges can vary widely from year to year – it is quite common for the charge in some years to shoot up to four times higher than charges for other years.
- You will not necessarily know about charges in advance (the Loughborough Report 2009* found that in the past two years only 21% of landlords had delivered budgets one month before the start of the financial year).
- You may not have in writing an agreed level of service that you can expect to be covered by your fees – in fact you may not have any clear idea of how they are arrived at.
- Previous Loughborough Reports have found service charges both higher than necessary and inexplicably variable.
- Sinking funds are often not well managed or accounted for, and in the case of shorter-term leases they really may not be appropriate.
It is worth remembering that in the current climate, in which occupiers can have the upper hand in negotiations, anyone entering a lease should negotiate and make sure they very clearly understand what they are signing up to. There are many options to consider, including fixed service charges, caps on service charges, all-inclusive rents and agreements from landlords to comply with the RICS guidelines. Remember that once the lease agreement is signed, depending on its terms you may have no right to withhold payment, even if you think that the payments are unfair. As long as they are in line with your lease arrangement, charges may well be deemed to be just (and therefore upheld in a court of law) even if they don’t seem fair (a great point made by Graham Chase of Chase & Partners & RICS). A lawyer will not necessarily point out the implications of your service charge clause, so question it yourself or ask an expert. The Loughborough Report 2009 found that the median service charge is £5.29 per sq ft, so you are advised to monitor service charges if the total is above this, and to investigate each item if the total is above £7.80 per sq ft.
With regard to legislation, there is a clear distinction between the residential sector, where current legislation covers consultation with tenants; written estimates for proposed work; and ‘reasonable’ costs, standards and timescales for payment demands; and the commercial sector, where no such legislation exists. Given the variable nature of commercial property, legislation may not be the answer in this sector. There are guidelines for RICS members, to which many adhere, even if they may not be happy to put it in their contracts, but a lot of property professionals are not RICS members. While the arguments continue as to who should be responsible for enforcing compliance, ultimately any lease agreement has to be signed by two parties. The more a service charge is questioned, the more this will expose unscrupulous landlords – and those that are already compliant and fair will have a chance to shine.
Service charge disputes are not just a problem for small companies. I spoke to a large occupier in dispute with their landlord over a charge of £1.4m. The occupier claims that services have been cut back, but service charges have not been reduced. Although the occupier had a service charge cap in place, the landlord is charging at the upper limit without justification, the occupier argues. The company concerned would like to have more of a say about contractors and potentially take on managing some services itself.
by Miranda Munn
For more details, full reports or expert advice you can talk to Property Solutions, sponsors of the event.
*The Loughborough Report 2009: Commercial Property Service Charges, by Dr John Calvert, published by Loughborough University Enterprises Ltd.
Long-term money invests in commercial property
The latest quarterly report from the Association of Real Estate Funds shows that UK institutional funds are returning to the commercial property market as returns improve.
The report says that unlisted pooled property funds raised a total of £3.2bn of new money in the final quarter of 2009, which is the highest figure since records began in 1998. The previous peak was £1.7bn during the 2006 boom.
The Financial Times reports AREF chief executive John Cartwright’s comments as follows: "This marks the second quarter of positive net sales, signalling the resurgence in popularity for property funds. Interestingly, while retail investors remain active, we have also seen significant new money from institutional investors who tend to have longer-term investment horizons."
The newspaper adds, however, that the speed and strength of the recent surge in returns has led to some fears that there may be another dip in values in the near term. It seems that while longer-term investors are flocking to the sector, confidence elsewhere remains more shaky.