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.
Leases for commercial properties occupied by more than one business will contain provisions for the recovery of building operating costs. This is either through:
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.
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 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.
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.
Step 1: Prepare the budget
Step 2: Present the budget to occupiers
Step 3: Monitor expenditure during the year
Step 4: Reconcile expenditure
Step 5: Issue the statement of reconciliation to occupiers
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:
Budget preparation enables the consideration of environmental activities over a 12-month period, and also, for longer-term strategies, over several years.
A Net Zero pathway.
Responding to COVID-19
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.
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.
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
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
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
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.
The BBP Better Metering Toolkit describes:
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.
The following Guidance Notes contain related information:
LaSalle's Energy Reduction Programme
LaSalle Investment Management started implementing its Energy Reduction Programme in June 2013 across UK assets with the largest energy consumption. Delivered in partnership with property managers, the programme has resulted in significant cost and carbon savings through small scale works targeted at reducing energy consumption and by incorporating efficiency measures into refurbishment projects. The Energy Reduction Programme is currently driving improvements across 6 million sq ft of commercial space, including multi-let offices, covered shopping centres and science parks. Read the case study here.
TH Real Estate’s PV Installation at Whitefriars
TH Real Estate installed solar panels on Whitefriars Shopping Centre in Canterbury in 2013. This PV (photovoltaic) array is helping to future proof the centre against energy price rises and supply shortages, generating renewable energy, cutting CO2 emissions, reducing energy costs for occupiers and delivering a stable income stream for TH Real Estate. Read the case study here.
Harnessing Solar Energy Through a Partnership Approach
Nuveen Real Estate and Lambert Smith Hampton aim to deliver impressive carbon emission reductions for the Janus Henderson UK Property PAIF (JHUKPPAIF) by partnering with a retail warehouse occupier in Croydon to install a 210 kWp solar array. This project demonstrates how property owners, managing agents and occupiers can collaborate to improve the sustainability of properties where there are full repairing and insuring (FRI) leases. Building on this success, additional projects are in the pipeline. Read the case study here.
Low Carbon Workplace’s Refurbishment of Premier House
Premier House is a multi-tenanted 3,800 square meter office in Twickenham refurbished by the Low Carbon Workplace, a property development partnership between sustainability experts the Carbon Trust, asset manager Columbia Threadneedle and developer Stanhope. In 2012 the Low Carbon Workplace commissioned a refurbishment which included improving the air tightness of the building, installing active chilled beams systems and new metering and control systems. These improvements along with an active occupier engagement strategy have contributed to reducing the energy consumption of the building by 64%. Read the case study here.
Workspace’s Sustainable Refurbishment at The Record Hall
During the refurbishment and redevelopment of The Record Hall, Workspace made BREEAM Excellent a priority from the outset, exceeding planning requirements. The whole project team worked collaboratively to successfully embed sustainability into every aspect of the scheme and create a location of choice for occupiers. Read the case study here.