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Commercial Service Charges – Recent Developments and Current State of the Sector

Commercial Service ChargeCommercial service charges remain a complex and highly topical issue in commercial property. There is a series of problems frequently observed in property management relating to how service charges are managed.

Some of the issues, such as poor compliance with the RICS Code, have recently been addressed at the British Council for Shopping Centres Conference (BCSC). And, further raising the profile of the issues a Service Charge Summit is expected to be staged by the RICS in November this year to address some of the areas of conflict pertinent to service charges.

Peter Knight, director of Manchester-based commercial property managers Knight Site Solutions highlights the issues that are frequently observed in practice relating to the following areas.

Accounting practices. Confusion can be avoided if the service charge reconciliation statement for the year is prepared on an accruals basis. Unfortunately, practice (as well as our research into the subject) suggests that a lot of companies use the cash basis for recording service charge monies. Given the level of spending at some locations, as well as, the nature of accruals accounting, a proper balance sheet must be put together as well. This becomes even more important in the event of sinking fund or utilities deposit collection.

Procurement. Services contracts are often centrally procured by the landlord or the managing agent, which may lead to inappropriate levels of services at a particular building. Furthermore, the costs incurred by the occupiers may be non-recoverable under the terms of the contract, which can result in overcharging.

Management fee. Not all management contracts provide a detailed description of the activities carried out by the management team, which creates ambiguity. Even less often, management contracts specify time required to perform the tasks and respective hourly rates. Hence, a lack of transparency and a ground for a dispute. On the positive side, the industry is shifting from percentage fees to fixed fees, which represents a much more sensible approach to pricing.

Lack of dialogue. As in any sector, insufficient amount of communication creates problems. Hardly ever an appropriate forum is convened to agree on the level of services, KPIs and the budget for the property. We believe that such dialogues between the landlord, and tenants, and the managing agent are paramount to achieve high operation qualities of the property as well as satisfied customers.

These are of course only some areas which require stakeholders’ attention. However, we believe that if the above aspects of property management are sorted out at a higher level, a lot of technical issues can be resolved much easier.

Lack of legislation and separation between the customer and the consumer (for many properties, the managing agent provides its services to the landlords, while the tenants represent the end user or consumer) reduce the incentive to comply with best practice and continuously improve their services for many providers. We believe that a ‘best practice’ approach to service charge management will not only help to avoid disputes (and quite often unnecessary legal costs), but also improve property performance.

Peter Knight can be contacted via