Property Management - Service Charge

Question 1

What is contained in a service charge budget?

Answer 1

• Property contacts
• Apportionment schedule
• Tenant names
• Sqft
• Apportionment %
• Tenants apportionment figure
• Cap details
• Void liabilities
• Contract costs
• Expected repairs
• Management fee
• Schedule splits
• Details on previous years spend
• Forecast figures for the current sc year

Question 2

Are there time restrictions on sending the service charge budgets to the tenants?

Answer 2

• Must be issued one month before the beginning of sc start date
• Company KPIs are 3 months

Question 3

How is service charge apportioned?

Answer 3

• Based on size of the unit
• Based on rateable value
• Weighted service charge

Question 4

What is service charge weighting?

Answer 4

• Weighting is to allow for abnormally sized units to pay what is determined a more equitable level of apportionment and in doing so contribution to the service charge.
• This recognises that the size of the unit does not represent the impact that this unit has on the common parts and the services which are required to manage the service charge.
• This is not a cap or a landlord contribution, and it does not allow for certain services being excluded (i.e. Marketing, roof repairs etc.).

Question 5

When would service charge weighting apply?

Answer 5

• A ratcheted reduction on unit size e.g. – a percentage reduction at a certain size (i.e. 10% reduction on 10,000 sq. ft., 20% reduction between 10,001 sq. ft. and 30,000 sq. ft. and 30% reduction on any area thereafter)
• A reduction on certain floors e.g. – Upper floors are only apportioned at 50% of the floor area

Question 6

How do you benchmark the budget?

Answer 6

• Ensure contracts are tendered every 2-3 years

Question 7

Why might there be different schedules in a budget?

Answer 7

• Some parts of the building may not benefit from services due to be paid

Question 8

How would you prepare for large costs on an old building?

Answer 8

• Carry out a PPM report over a 5–10-year period > incorporate this into the budget over the next five to ten years, or collect via a sinking/reserve fund.

Question 9

What is the difference between a sinking fund and a reserve fund?

Answer 9

• Sinking fund - A fund formed by periodically setting aside money for the replacement of a wasting asset (for example, heating and air-conditioning plant and equipment, lifts, etc.).
• Reserve fund a fund formed to meet anticipated future costs of maintenance and upkeep to avoid fluctuations in the amount of service charge payable each year (for example, for external cleaning and redecorations)

Question 10

Can you explain how the lease terms vary between inclusive or exclusive of service charges, rates, or insurance?

Answer 10

• Inclusive lease covers services, insurances, taxes.
• Exclusive leases are charges to the tenant separately.

Question 11

Based on your experience, what is the significance of service charge caps?

Answer 11

• Service charge caps serve as a protection measure for tenants against excessive charges.
• They introduce a limit to what a landlord can recover for the provision of services and are a significant negotiation point in lease agreements.

Question 12

How does the guidance note on service charges assist with managing your portfolio?

Answer 12

The Guidance Note on Commercial Property Management assists with managing my portfolio by providing me with the best practice processes and procedures for managing commercial property effectively and in accordance with the regulatory and legal framework.

Question 13

What is a service charge cap?

Answer 13

• A clause capping the amount a tenant has to pay as service charge under a lease
• The cap tends to increase annually, based on the Retail Prices Index (RPI)

Question 14

Based on your experience, what is the significance of service charge caps?

Answer 14

• Service charge caps serve as a protection measure for tenants against excessive charges.
• They introduce a limit to what a landlord can recover for the provision of services and are a significant negotiation point in lease agreements.

Question 15

Could you explain how you set up service charges based on a fair and equitable proportion for the maintenance and upkeep of multi-let premises?

Answer 15

• We use the area method, pro-rata based on the square footage each tenant occupies. This approach ensures each tenant fairly contributes to the costs incurred in proportion to their share of the property.

Question 16

Talk me through a SC budget process

Answer 16

• Three months prior to the year end, the PPM is reviewed/instructed
• Review what repairs and maintenance the building requires for the next SC period
• Complete the SC template
• Send to the client for approval
• Send to service charge team to load to the system and raise amended invoices
• Issue out the invoices along with the budget to the tenants

Question 17

How would you deal with a SC dispute?

Answer 17

• When handling disputes, I focus on clear communication, ensuring both parties understand the lease terms.
• Failing direct resolution, I recommend mediation or, in extreme cases, legal arbitration.

Question 18

What is a reconciliation and how did you prepare?

Answer 18

Comparison of all service charge income demanded against all service charge expenditure for a given service charge accounting period. This enables the calculation of any balancing charges and credits due from tenants and/or landlords.

Question 19

What are the timescales for a reconciliations?

Answer 19

• To be issued 4 months after year end
  Our KPI is 3 months

Question 20

What is a balancing service charge?

Answer 20

Once the service charge has been reconciled, if the budget has been overspent then a balancing service charge invoice will be raised to tenant (client for voids) for the overspend. If the budget is under spent, then a balancing credit will be raised and refunded to tenants.

Question 21

What has the RICS published regarding Service Charges

Answer 21

Service charge in commercial property, 1st edition, 2023

Question 22

What are the main principles of the SC code?

Answer 22

• Improve standards and promote best practice
• Ensure timely issue of budgets and recs – within 3 months
• Reduce the cause of disputes and provide guidance of resolutions
• Provide guidance when agreeing, negotiating, drafting and interpretating leases

Question 23

Why was the code updated

Answer 23

• Previously a guidance, now mandatory

Question 24

Would the length of the lease be considered when reviewing a tenants SC contribution?

Answer 24

• The tenant would pay on a pro-rata basis for the part of the year.
• There is case law which directs that the term of a lease is a material consideration in considering what is a “fair” apportionment to a tenant in respect of major expenditure.
• Case Law - The Landlord and Tenant Act 1985