5 Tips for Managing Commercial Service Charges

Levying service charges can be one of the most complex, and occasionally controversial, aspects of owning a commercial property.

Service charges represent a major source of income for landlords, with the Royal Institution of Chartered Surveyors (RICS) estimating it to be worth around £6 billion a year.

It is also an unregulated industry, which is where some of the potential for tension between landlords and tenants arises, especially in multiple occupancy sites such as office blocks, retail developments and industrial estates.

The complexity arises from the need for landlords to negotiate service charges with each tenant individually as part of their lease agreement. The charges are themselves a perfectly legitimate means of covering maintenance costs consistently across a whole site – leaving repairs and upkeep to individual tenants would inevitably lead to inconsistency and pose a headache for landlords.

In lieu of various shifting and overlapping codes of best practice, the payment of service charges has evolved into a system whereby tenants pay quarterly in advance. Landlords are encouraged to create a budget forecasting service expenses for each tenant. This is then compared to actual expenditure at the end of the year, with refunds or additional top-up charges due.

This is where the friction can arise, with big discrepancies in budget and final costs potentially ensnaring landlords and tenants in costly legal wrangles. Put simply, tenants do not like their money being spent up front, and then being asked for more than they were told it would cost. Tensions can also arise over different charges levied to different tenants, although that is usually caused by variables such as the age and fixtures and fittings in different units.

Tips for Avoiding Service Charge Controversy

  • Stick to the codes of practice. Although commercial property services are not technically regulated by law, as of 2014 the accounting processes are. Follow the code of practice and set a budget to make sure the arrangements you come to with your tenants comply with financial regulations.
  • Seek professional advice when setting your budget. One of the best ways to minimise the risk of your budget and final charge analysis differing significantly is to employ an experienced chartered surveyor to help with your budget. The complexities of balancing individual negotiations with tenants with compliance and financial forecasting make it a specialist field.
  • Communicate clearly. Effective negotiations with each tenant can help avoid potential flashpoints further down the line. Once you have an idea of budget outlined with your surveyor, explain to each tenant the breakdown of their liabilities – repairs and general maintenance relating to their unit and shared spaces, insurance and staffing costs.
  • Draft service charge clauses carefully. A landlord should protect their own interests by including clauses in each individual lease covering the provisions of the service charges – how and when they are to be paid, details of the tenants’ liabilities and certification procedures. Clauses should also be included to cover additional unforeseen expenses which might be incurred.
  • Stay transparent. No service charge budget will ever match the actual costs of managing your property 100 per cent. As soon as you know of something changing, inform your tenants. Surprises don’t tend to go down well in business, especially when it comes to additional expenses.

Red Rock Facilities provides a comprehensive range of property management services to the commercial and residential sectors. To learn more about how we help landlords manage finances and relationships with tenants, visit www.redrockfacilities.co.uk/index.html.

5 Tips for Managing Commercial Service Charges

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