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RICS APC > Service Charge > Flashcards

Service Charge Flashcards

1
Q

What is a service charge?

A

Allows an owner to recover the costs of services / maintenance and any associated admin costs

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2
Q

Can you tell me the main RICS document in relation to service charge?

A

RICS Service Charge in Commercial Property, Professional Standard 2023 (effective 2019)

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3
Q

Is the RICS Service Charge in Commercial Property, Professional Standard 2023 mandatory?

A

-9 Mandatory principles
-24 core principles (best practice)

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4
Q

What is the RICS Service Charge in Commercial property document made up of?

A
  • 9 mandatory principles
  • 24 core principles
  • Best practice to support the
    core principles

Appendix A - Compliance checklist

Appendix B - Standard Industry Cost Classifications

Appendix C - Service Charge accounting sample report

Appendix D - Handover procedures

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5
Q

What are the Industry Standard Cost Classifications?

A

3*
Cost Class (management, soft services, hard services)

Cost Category
(management fee, accounting fee, security, M&E)

Cost Description
(audit fee, window cleaning, waste removal, pest control)

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6
Q

What are the aims and objectives of the RICS SC document?

A

4 aims

  • Improve general standard, best practice, uniformity, transparency and fairness in management and admin of SC
  • Timely issue of budget and year end certificates
  • Reduce cause for disputes and provide guidance on restriction
  • Provide guidance to solicitors and managers of SC negotiation, drafting and operation
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7
Q

What are the 9 mandatory principles of the RICS SC doc?

A
  1. expenditure recovered in accordance with the lease
  2. To recover no more than 100% of the actual provision or supply of services
  3. SC budgets and explanatory notes to be issued annually
  4. Approved set of SC accounts showing accurate expenditure to be issued annually
  5. SC apportionment matrix provided annually
  6. SC monies to help in one or more discrete bank accounts
  7. Interest earned after deductions must be credited to SC account
  8. When acting on behalf of T - must advise any SC monies withheld should reflect on actual sums in dispute
  9. Following resolution of dispute, any SC raised incorrectly should be adjusted to reflect the error without delay.
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8
Q

How do you procure services for SC?

A

Competitive quotes obtained or benchmark on the industry used index

** to ensure value for money

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9
Q

How do you allocate a service charge?

A
  • Allocated to relevant expenditure category and to separate schedules
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10
Q

How should you apportion SC?

A

Fairly reflecting the T’s benefit and use of services

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11
Q

Who has a right to set standards of service?

A

Owner has a right but managers should consult with occupiers regarding quality and standard of services provided

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12
Q

When does a duty of care arise in SC?

A
  • Managers certifying SC accounts have a DOC to owners and occupiers
  • Owner/Managers have a DOC to manage property and to occupiers who trust in spend
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13
Q

If parties cannot agree on a SC what would you do?

A

Check the lease for ADR (i.e. mediator or internal expert determination)

If we could not agree on an appointment, president of RICS would nominate

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14
Q

When should budgets be issued to occupiers?

A

1 month prior to start of SC year

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15
Q

When should statements be issued to occupiers?

A

Detailed statements setting out actual expenditure with accounting policies should be issued 4 months before year end

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16
Q

Why are statements sent out 4 months before year end?

A

Allows questions to be answered, discussions had and information to be provided.

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17
Q

In respect of the building how would you reflect this in the SC?

A

Service quality should be appropriate to location, use and character of the property

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18
Q

What are exclusions from SC?

A
  • Initial Costs (design and construction of fabric/plant)
  • Setting up costs (fit out / equipping on-site management)
  • Improvement costs above normal maintenance/ repair
  • Future redevelopment costs
  • Costs relating to owners investment interest (i.e. asset management, rent collection)
  • Void premises
  • Costs arising from negligence of manager / owner
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19
Q

What are the 2 cost sections under management?

A
  • Management fee (managing and supervising)
  • Site management costs (site specific)
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20
Q

How should a management fee be applied to SC budget?

A

Fixed price basis

  • Not as a % of expenditure as this is no longer accepted by RICS
  • it is recognised the lease may state % of management costs and the PS cannot override lease terms
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21
Q

How do you ensure costs reflect value for money?

A

Manager to keep cost under review

Contractors and suppliers to submit competitive tenders to provide competing quotes

Regular benchmarking

Compare with 3rd party providing similar services

22
Q

Who meets the service charge cost of void space?

A

Owners

23
Q

Who is to cover the cost if there was a special / personal concession given to occupiers?

A

Owner

24
Q

What is contained in an apportionment matrix?

A
  • Basis
  • method of calculation
  • apportionment schedule for each unit (personal concessions to be kept confidential)
25
Q

What are the methods of apportionment of SC?

A
  • Floor area
  • RV
  • Fixed % or increase
  • Weighted floor area (Shopping centre)
26
Q

What is the most common method of SC apportionment?

A

Floor area

27
Q

Why is the Rateable Value no longer accepted as an apportionment method?

A

Takes into account other factors relating to value and does not reflect a assessment of use of common areas.

  • At renewal this should be updated
28
Q

What is a Fixed amount / % of Service charge apportionment?

A

Inflexible

Advantageous for short term leases where it is likely costs/ services etc are unlikely to change

29
Q

What is weighted floor area apportionment?

A

Seeks to reflect the different costs involved with different sized units.

floor area is divided into bands with progressive discount (similar to zoning)

30
Q

How might a tenant’s alteration have an impact on SC?

A

If there is a change to the floor area etc there may need to be adjustments made to apportionment

31
Q

How does the implementation of a mezzanine floor affect the SC?

A

Check the lease if not it is for consideration…

Warehouse / distribution - may not affect / increase utilisation of premises and therefore benefit common services

Retail park might generate additional sales / footfall and therefore increase in use (cleaning, security etc)

32
Q

How would you ensure communication / transparency throughout SC management?

A
  • Seek feedback from occupiers on performance/ standard
  • Full transparency on budget, reconciliation and an invoices making up expenditure
  • Meetings with occupiers
  • provide key contacts
  • Copy of how budget is managed and aims of management team
33
Q

How would you ensure SC services are set out in the lease?

A

Sweeper clause

34
Q

What is a sweeper clause?

A

Allows an owner to recover the costs listed in the lease alongside miscellaneous costs in the lease

  • not to be used to recover if there has been something left out of the lease
35
Q

Why is a sweeper clause used?

A

As it’s difficult to predict what services may be provided through duration of the lease and which to be covered by SC

36
Q

What is PACT?

A

Professional Arbitration on Court Terms

scheme offered by RICS for lease renewal disputes

37
Q

What are SC accounts / annual accounts statement?

A

Cost and expenditure

Calculation of SC

38
Q

Who approves Service Charge Accounts?

A

Check the lease **

  • Approved by or on behalf of the LL by an appropriately qualified competent person with experience in SC (manager / surveyor)
  • Lease may require accounts to be reviewed / approved by independent third party (chartered accountant) or via an audit
39
Q

Who approves Service Charge budget?

A

Service charge to be formally approved / certified by LL, surveyor or managing agent

40
Q

What is a SC accrual?

A

costs that were incurred but have not been paid (i.e. invoices outstanding)

41
Q

What would a balance sheet show in respect of SC?

A

Assets - Prepaid expenses, SC arrears

Liabilities - accrued expense, sinking and reserve fund

42
Q

Why is is important to use Industry standard cost classification?

A

Provides better cost comparison between properties and benchmark indices

43
Q

What is set out in a report (budget and accounts)?

A
  • Comprehensive detail
  • Explanation of significant various costs / variance from previous year
  • Comparison of prev years costs
  • Info on allocation, apportionment, tendering
  • Achieved / target measures of improved management performance
  • Onsite management team costs
  • Prepayments, accrued expense, contractors providing services
  • full apportionment matrix
  • date of issue
44
Q

What if there is a change over in ownership / management of the SC?

A
  • It is essential a definite timescale for accounts to be closed and handover agreed
  • No later than 4 months from DOC of the sale of the property a closing statement of expenditure should be approved by former LL and provided to new manager

(Handover procedures set out in Service Charge PS appendix D)

45
Q

How should SC monies be held?

A

In one or more discrete accounts as being held to deliver SC

All interest earned on SC should be (following deductions of Bank charges, tax etc) be credited to SC account.

46
Q

What would you do in respect of interest where SC accounts are not operated per property?

A

A proper and reasonable amount of interest must be credited to the benefit of the SC

47
Q

What ADR do the RICS recommend for SC disputes?

A

Mediation or Independent Expert Determination

48
Q

When can a sinking fund or reserve fund be implemented via SC?

A

If set out in the lease.

If the lease is silent this cannot be actioned

49
Q

What is a sinking fund?

A

Fund formed periodically by setting aside money for replacement of wasted assets (i.e. heating, AC)

50
Q

What is a reserve fund?

A

Fund formed to meet anticipated future costs for maintenance (i.e. external cleaning, redecoration)

51
Q

What are depreciation changes?

A

Measuring of wearing out, consumption or other reduction in the life of an asset

(amount in SC is to reflect the cost to the LL based on the initial cost of installation)

52
Q

What is the process of undertaking a SC?

A

RICS APC (22 decks)

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