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13/04/2011

For most businesses it is likely that, after staff costs, commercial property costs are the next highest element of expenditure.

Property costs break down into the categories of rent, rates, insurance and service charge and whilst rents and rates are predictable and indeed in the current market have often fallen and then stabilised at new low levels, service charges are often high and fluctuating. It is this latter cost that occupiers often struggle to both understand and control and therefore budget for.

In 2007 the government was aware of this issue and as a response the Royal Institute of Chartered Surveyors (RICS) proposals, issued a code of practice for 'Service Charges in Commercial Property'. This is an industry endorsed code to advise upon best practice.

This code, reissued in May 2011, is addressing concerns remain present in the industry where it seems occupiers are still facing costs over which they often have little control over or worse still, may even be unreasonable.

A property service charge is a charge raised on behalf of a landlord and invoiced to tenants under the terms of the lease agreement held between the two. This is used to off set against costs incurred by the landlord in complying with his contractual obligations in connection with the maintenance and repair of the premises leased by the tenant.  At present service charges for office tenants in the UK amount to £4.06 billion per annum

It is an area of constant dispute, as the standard "institutional" lease normally determines that although the landlord should provide the services he usually has the right to recover the cost of complying with such, from the tenants by way of a proprty service charge, in other words - the tenant pays. Hence there is often an area of conflict when charges are raised, as this contractual relationship between landlord and tenant appears to take all control of this expense away from the occupiers who can be left feeling that costs are rising at their property but ironically services could be deteriorating.

In addition to a steadily increasing charge, peaks and troughs can occur in the maintenance cycle of a commercial property. This is reflected in the costs to the landlord which have to be passed on to the occupier as a fluctuating charge. Thus major repair works (redecoration or repair of equipment) may be incurred within a single period.

Providers of the services should all aim for best practice, uniformity, fairness and transparency and indeed this is the aim of the revised code. A service charge is not for profit or loss, but is for regular reasonable expenditure at the property to maintain it for the direct benefit from both the occupier and owners perspective.

If communication is good, there is less likelihood of conflict. All occupiers should have sight of the expenditure to be incurred within the property and good practice should ensure that full budget and explanatory notes are issued to occupiers at least one month prior to the commencement of the service charge year, thus allowing time for analysis before the charges are incurred. This budget should be accompanied by a full explanation allowing the details of the expenditure to be highlighted.

Vail Williams can provide advisory services to both the landlord and tenant relationship, to manage this commercial relationship, and to interpret lease provisions. In addition, if the costs of the commercial property are causing issues, Vail Williams can provide both an audit and a consultancy service to reduce these costs where possible.