‘My Service Charge is too High’ - Commercial Properties - Summary

Summary

In my previous posts regarding having a discussion with your landlord or their agents, I have tried to suggest a few ways that may make those discussions a little easier when you have an issue with your service charge contributions. Principally I have suggested four main areas to improve your position:

• Check your lease

• Discuss the budget

• Consider what is a ‘high’ service charge

• Be polite

As I have previously mentioned I think the main area of conflict occurs where there is mistrust and a perception that poor service is being provided at an unreasonable cost. This mistrust may be further manifested when a tenant may believe there is an unhealthy relationship between a landlord and a contractor or supplier and that is the reason for the costs.

One way for both parties to avoid conflict may be to look at the Core Principles in the Service Charges in Commercial Property 1st Edition 2018. I would refer to 4 main areas which are defined in the document:

1. Service Costs - All costs should be transparent so that all parties, owners, occupiers and managers, are aware of how the costs are made up.

2. Communication and Consultation - While the owner has the right to set the standards by which their investment will be managed and has a duty to manage, managers should consult with occupiers regarding the standard and quality of service charge provision required.

3. Transparency - Transparency is essential to achieving good communication. By being transparent in the accounts, explanatory notes, policies and day-to-day management, the manager will help prevent disputes. Prompt notification of material variances to plans or forecasts ensures better working relationships between owner, manager and occupier.

4. Value for Money - Service quality should be appropriate to the location, use and character of the property. The manager should procure quality service standards to ensure that value for money is achieved at all times. The aim is to achieve effective, value-for-money service rather than merely the lowest price.

By considering these and other areas I have mentioned in these articles it may be possible to achieve a harmonious position for all. As always, I'd love to hear your opinions on my thoughts if you have any.

How High is Too High?

Following on from my previous article, assuming you have checked your lease and discussed the budget, here are a couple more suggestions to consider when discussing your concerns over service charges.

3. What does too high actually mean?

Every now and again I get a call or email that goes along the lines of ‘Can you have a look at my service charge as I think it is too high.’ My response is always the same ‘Why do you think it is high?’ Invariably I hear that the amounts being charged seem ‘high’ and, in virtually every case, that a service is being performed badly and doesn’t justify the charge. It is this latter point on which I think the caller has based their opinion, rather than the cost.

So, what is too high? It's important when judging this to consider the nature of the property you are occupying. If it is 100 years old the costs may vary dramatically compared to a modern building built in the last 10 years or even one that has undergone a recent major refurbishment. Rather than thinking about ‘high’ maybe it would be better to consider whether you are getting value for money for the service that has been provided.

There are a few firms in the market that produce data showing the average cost per square metre of a variety of services. These can be quite helpful in getting an idea of the level of cost that may be appropriate, but they are more of a guide than set in stone. As I’ve mentioned all buildings are different so base your concerns on the quality of service compared to cost.

4. Be Polite

Manners cost nothing and if you want a resolution to a query don’t go in all guns blazing threatening to withhold rent (you should never do this in a service charge dispute), saying you going to speak directly to the landlord and complain to the RICS. This achieves only animosity and makes negotiation difficult from the start. Be honest you want to resolve the issue rather than have a fight. I have been involved in meetings with tenants where it has been clear from the onset that they want a pound of flesh first before discussions even start.

Be cautious going into a meeting armed with alternative quotes to justify your case. There are no rules stating a landlord must use the cheapest quote and indeed many will choose a contractor who is not the cheapest, but they have an established relationship. This relationship may indeed save money in the long run as alternative quotes may be deliberately kept low to get access to the contract and as a result, the service may be reflected in this initial low quote.

‘My Service Charge is too High’ - Commercial Properties

‘That’s it, I’m going to write a strongly worded letter to my landlord’s agent to complain about the exorbitant level of service charge at our property. The central heating never works, the cleaners seem to get paid far too much for a service that’s non-existent and why am I paying for the lift when our office is on the ground floor?!

This is a scenario many commercial tenants have found themselves in and as someone who has experienced all aspects of management surveying throughout my career, it is something I can genuinely sympathise with. The issue always seems to be that tenants are asked to hand over money, ordinarily in advance, only to find that they then have little or no control over how it is spent.

But why is there this mistrust? As with any well-regulated or controlled industry, there are still some bandits out there, but that’s rare. Most reputable firms want to offer a decent service where issues are dealt with quickly and occupiers get good value for money for the services provided. I don’t think anyone really wants conflict, so how is it best to discuss a very emotive issue such as service charges with your landlord or his agent?

So, you’ve decided to take a breath and not send an angry letter after all, but to take stock and take a rational approach. Here’s where I'd recommend you start;

1. Check your lease

It may sound obvious but the first thing to do is to check the service charge provisions in your lease. In most modern leases the basis of the charge is normally set out towards the beginning of the document with the cost centres normally defined towards the end, often in a separate schedule. As I mentioned in a previous article this is not always the case! They are however generally very easy to find and the definitions straightforward to read.

You may find a gem without any need to refer to complicated case law. It may well be you are being charged for something that the lease does not provide for. A recent example I came across was where a ground floor retail unit was being charged for numerous items for the offices above when in fact their only liability was for a shared fire alarm system and shared air conditioning. Sometimes it may be more obvious that a specific cost centre has been excluded due to the location or unusual nature of your demise. If you find something like this, write to your landlord pointing out the clause and await their response.

2. Discuss the budget

Most budgets for the forthcoming financial year are set well in advance of the issuing of new demands. I know from experience that most management surveyors want to get as close as possible to the final amount charged over the year. No one wants a balance or for that matter a credit at year-end.

Rather than save your fury until the year end, why not have a civilized conversation at the start of the year and discuss the items in the budget? There may be notes explaining why an increase or decrease has been applied and perhaps this is where issues over levels of cost and service can be raised. At the end of the day, the landlord or his agents visit properties only periodically and if you or he are not getting value for money they may well be delighted you have bought it to their attention.

It’s also worth bearing in mind that good practice and RICS guidance dictate that contracts are reviewed on a regular basis and firms should have a procurement process in place. That’s not to say every five minutes a new contract is sorted and the lowest price wins. Service compared to cost are key so that the service suits the expectations and affordability of the building and its occupiers.

In the next of this series of articles, I’ll try and share a few ideas that I've found may make negotiations a little less fraught and may ultimately improve the relationship with your landlord. I must stress though that my thoughts are by no means a blueprint to avoid conflict and possibly arbitration, but more a way of mitigating the possibility of such action occurring.

How have the terms in English commercial leases adapted in the last few years – ‘Conclusions’

In my previous articles, I commented about the changes I have noticed in the terms that are being incorporated in the leases that I am currently reading. I’ve made it clear from the start that my thoughts are based on what I am seeing, rather than a scientific analysis across the whole property sector. I read between 500-1000 leases each year and whilst this is a relatively small sample, it is interesting to note that the trends are common across many of the documents.

I think it is fair to say that the terms being incorporated favour the tenants rather than the landlord. I don’t think this is much of a surprise when we consider the concerns for the high street and offices in general when we reflect on the lockdowns during the pandemic. Indeed, what I was more surprised with was that I didn’t see more surrenders or tenants vacating their premises, it seemed a temporary restructuring of the rent terms was the preferred and most sensible option.

One area that surprises me, and it really shouldn’t, is the reduction in parties seeking protection under The 1954 Act. In the past protection under The Act was largely for the benefit of the tenant who was occupying under a longer term, and it was not clear what 25 years in the future held. Today, with shorter terms, it seems that both landlord and tenant seem more relaxed about the implications of contracting out.

The property market is always evolving and changing, and commercial and residential leases will always reflect the market conditions. The traditional commercial lease has I believe changed as a result of outside pressures, not least the proliferation of serviced offices, which offer flexible terms and conditions. It will be interesting to see how a lease will look in 5 years in view of the energy and cost of living crisis we are currently experiencing. It will certainly continue to keep pace.