Our mandatory professional statement – Service charges in commercial property - came into effect on 1 April 2019 with the aim of improving standards, fairness and transparency in the management of service charges and reducing the causes of disputes.
Joanna Crofts explains the benefits of the new rules for both tenants and landlords, what the global property consultancy has seen to-date, and outlines the changes that have become mandatory.
What are the advantages for tenants?
Mandatory guidance is in everyone’s interest. It has helped make service charges clear and transparent for all tenants, rather than just to those whose landlords followed the guidance as best practice.
For example, in the past, it wasn’t set in stone who should be responsible for paying for things like marketing events held in an office building or a shopping centre. Now there’s clear guidance that says the landlord should contribute 50% towards the cost of such events.
Another example is where a landlord has agreed a capped or fixed service charge as an incentive to secure a new tenant. The landlord must pay for any shortfall and not simply try to hide this and recover the shortfall from the other occupiers. The service charge matrix showing the basis for recovery of costs must be completely transparent and disclosed.
What are the advantages for landlords?
The change that has made the biggest impact for landlords are the mandatory, and much tighter, timescales for budgeting and settling service charge accounts. These must be reconciled annually.
Until now, unless the lease states otherwise, there was nothing stopping a landlord going back several years to recover costs owed. This can have a significant negative impact on a tenant’s cash flow. Similarly, if too much time elapses, a landlord risks losing their chance to recover money owed because a former occupier may have since become insolvent.
Service charges on different commercial buildings are now easier to compare too. So, if you’re looking for a property to buy or lease, this will help you make the right decision on which premises to choose, in relation to service charges.
The standard: what has become mandatory?
- All expenditure that the landlord wants to charge for must be in accordance with the terms of the lease.
- Landlords must recover no more than 100 per cent of the costs of the provision of the services.
- Annually, landlords must give tenants service charge budgets, including appropriate explanatory commentary.
- Annually, landlords must give tenants an approved set of service charge accounts showing a true and accurate record of actual expenditure.
- Landlords must give tenants a service charge apportionment matrix for their property each year.
- Service charge monies must be held in one or more discrete (or virtual) bank accounts.
- Interest earned on service charge accounts must be paid into the service charge account.
- Practitioners must tell tenants that, if a dispute exists, any service charge payment withheld by them should only be the actual sum in dispute.
- Practitioners must tell landlords that, following the resolution of a dispute, any incorrect service charge should be adjusted straight away.
Joanna Crofts is Head of the Knight Frank South Wales and South West Property Asset Management Team.
