GN11.3: Service charge considerations

Guidance Note purpose 

The purpose of this Guidance Note is to provide asset managers, property managers and facilities managers with guidance relating to service charges and other cost recovery methods  and how to operate within them to take account of sustainability related matters. 

Context 

Leases for commercial properties occupied by more than one business will contain provisions for the recovery of building operating costs. This is either through: 

  • An annual service charge which covers services provided by the asset manager, such as security or heating and cooling. 

Or 

  • Separate charges which are recovered periodically for things like building insurance, electricity consumption in leased areas or electric car charging.  

The primary means of determining how these costs should be recovered is the lease itself. In many cases, parties are now entering into green leases which contain specific clauses referring to the management and improvement of environmental performance and how to deal with the related costs. Parties to existing leases who do not wish to vary them may enter into a Memorandum of Understanding covering the same aspects. 

The Royal Institution of Chartered Surveyors (RICS) Service Charges in Commercial Properties Professional Statement ‘the RICS Code’, which contains mandatory elements for RICS members, outlines good practice in all areas of service charges and cost recovery. 

Importance 

Ensuring that the costs of improving sustainability are properly understood and apportioned is a key element of making sure environmental initiatives are driven forward successfully. Transparency and openness will engender constructive discussion between the parties about how to work together to achieve their own and shared targets. 

  • For an asset manager, a building with an efficiently run service charge clearly contributing towards sustainable improvements will be a more attractive proposition than one which is not.  
  • For a property and facilities manager, running an effective service charge and being transparent in the recovery of other property costs is crucial to the successful relationship they seek to enjoy with the building occupiers. 
  • For building occupiers, a properly planned service charge which minimises the likelihood of big, unforeseen increases in future expenditure is crucial to their financial planning and cashflow. This should be viewed as an opportunity to engage proactively and help achieve their own environmental targets. 

For all parties, following best practice cost recovery principles will form an essential element of the long-term relationship at the building which they all seek to enjoy. 

As the RICS Code has made some service charge procedures mandatory for RICS members and asset managers and occupiers are turning to green lease provisions to support their environmental strategies, the need to ensure best practice is followed in this area is becoming increasingly important. 

Responsibilities & Interests

The table below summarises the key activities associated with service charge considerations, and highlights where asset managers, property managers and facilities managers are likely to have a responsibility or specific interest. 

  • AM - Asset Manager
  • PM - Property Manager
  • FM - Facilities Manager

Step 1: Prepare the budget  

Stakeholder:

Step 2: Present the budget to occupiers 

Stakeholder:

Step 3: Monitor expenditure during the year 

Stakeholder:

Step 4: Reconcile expenditure  

Stakeholder:

Step 5: Issue the statement of reconciliation to occupiers 

Stakeholder:

Direct charging 

Stakeholder:

Show less

How to

Intro

Toggle

Usually, the consideration of service charges is a collaboration between asset, property and facilities managers. The following steps should be considered in relation to reflecting sustainability, and other cost elements, within service charges: 

Step 1: Prepare the budget

Toggle

Budget preparation enables the consideration of environmental activities over a 12-month period, and also, for longer-term strategies, over several years. 

For example: 

A Net Zero pathway. 

  • The payback period for environmental or energy saving works planned to reduce costs in the long term should be taken into account. 
  • Occupier engagement through building user meetings and engagement groups, such as those suggested in the Better Building Partnership Green Lease Toolkit, should be used to discuss proposals.  

Responding to COVID-19 

  • COVID-19 has resulted in some asset managers and occupiers looking at ways to reduce costs. 
  • It remains important to ensure that buildings’ mechanical services continue to operate properlyand specialist advice should be sought before reducing service levels.  
  • Common parts cleaning levels may need to be increased depending on building occupancy levels, so a balanced approach needs to be taken to ensure the building is operated safely. 

Energy Performance Certificates (EPC) 

The cost of obtaining an EPC is not normally considered to be a recoverable cost within service charges. EPC’s are only required when a building is sold or rented and is, therefore, of no relevance to, or a requirement for, the provision and management of common building services. 

Step 2: Present the budget to occupiers

Toggle

The RICS Code states that budgets must be presented to occupiers no later than one month before the start of the service charge year and provides guidance on how to layout the budget. 

Whichever presentation format is used for the budget, it is important to identify environmental related costs and anticipated savings and energy consumption estimations. 

New facilities, which may have been installed at the asset managers expense, such as electric vehicle charging points or cycle facilities and showers, will have running costs which could be recovered in the service charge.  The methodology used to apportion these costs should be clearly explained. 

Step 3: Monitor expenditure during the year

Toggle

Regular monitoring of expenditure enables services to be reviewed and adjusted and makes the year end reconciliation easier and quicker to complete. 

Green lease or Memorandum of Understanding commitments to share data on energy, water and waste consumption should be used to make informed decisions on adjusting levels. Building occupier groups should be used as a means of communication and for debating ideas, for example, cleaning during normal working hours rather than out of hours to reduce lighting and heating costs 

Step 4: Reconcile expenditure

Toggle

The RICS Code states that reconciliations must be issued within four months of the service charge year end. Undertaking regular reviews of expenditure throughout the year and issuing interim statements of expenditure will make this an easier target to achieve.  

Asset and property managers should consider when to use external auditors to certify the service charge accounts, normally for higher value service charges and/or where the lease provides for external audit. 

Such an audit will bring greater credibility to the figures particularly for larger buildings, shopping centres or mixed-use developments with more complex service charges.  

The RICS Code provides examples of templates for expenditure reports, apportionment schedules and variance reports. a

Step 5: Issue the statement of reconciliation to occupiers

Toggle

The Green Lease toolkit highlights the need to separately identify environmental initiative costs and savings and provide a detailed analysis of energy consumption. 

In the event that a dispute arises over the service charge, the RICS Code contains a section with guidance on dispute resolution and offers a mediation service using service charge specialists. 

Direct Cost Recharging

Toggle

Direct Cost Recharging 

From the sustainability perspective the most relevant area of direct cost recharging relates to energy costs for the area which has been leased to an occupier for their sole use. Electric car charging points are also becoming more common and give rise to several different recharging situations. 

Energy costs 

The BBP Better Metering Toolkit describes: 

  • What energy metering opportunities exist. 
  • Why improving metering and energy measurement is important. 
  • How to choose which meter to use and use the data effectively. 

The benefits of stimulating changes in behaviour and reducing consumption and cost should develop from more accurate energy measurement and installing sub meters for occupier space will add further impetus to this. 

The Heat Networks (Metering & Billing) Regulations, came into effect in December 2014.  These stipulate that those operating central systems that provide heating, cooling or hot water to users, for example in a multi occupied office building, must install meters and use readings taken from them as a basis of billing customers.  

Electric vehicle charging points 

In relation to installing electric charging points at multi occupied commercial buildings, estates and retail sites, the costs of installation are usually borne by either the building owner or operator.  If occupier demand is strong, then consideration of the service charge funding all or some of the cost can be discussed with occupiers. 

Income from charging points can be treated in different ways normally dependent on who has funded initial installation and the guide considers different measurement options to assist billing strategies.  

The provisions of the lease should always be taken as the initial basis for assessing the alternatives here. 

Related Guidance Notes 

The following Guidance Notes contain related information: 

 

Additional Resources