((Note this Blog is for service / management charges of commerical property - and not residential property.))
Are you faced with an increase in
Landlord’s management charges?
Word on the street is that one of
the main UK Landlords of multi-occupied healthcare premises is about to add
2.4% management charges on to their
service charge bill, so you could be one of those paying more in the near
future.
But can the Landlord do this? And
what are the rules governing service charge ‘add ons. ‘ Read on and I will try
and explain management charges:-
The first rule as ever is to
always look at your lease to see what it says about management charges.
Often, as seen in the LIFT leases
there will be a clause allowing for a management charge of up to 10% of the
total service charge costs.
Where management is provided by
the Landlord via ‘in-house’ staff resource then there is no reason why the
Landlord cannot reclaim these costs, subject to their reasonableness – however the
costs of the resource MUST be associated with managing the service charge items,
as set out under the lease, at that exact site (i.e. your Health Centre) and
definitely not any other work associated with the site, or other sites, such as
negotiating leases or collecting rent or dealing with breaches of covenant.
The RICS Commercial code says:
‘The management charge is the reasonable price for the total cost of
managing the provision of the service charges at the location and relates only
to work carried out in managing and operating the services and administering
the service charge.
The management charge might comprise of 2 elements
·
The fee
charged by the Manager for the management and supervision of the services to a
site (the management fee)
·
The cost
of specific site management staff, whether based on-site full time or part time
(site management costs.)’
The RICS commercial code goes on
to emphasise that no two buildings are the same in the way they need to be
run. The management fees charged ought
to be a reasonable cost and overhead in relation to the operation and
management of the services and should reflect the work necessary for that
building. Further, the commercial code
provides that the fees should be based on a fixed price rather than calculated
as a percentage of expenditure because this is considered to be a ‘disincentive
to the deliver for value for money’.
Rather the fee should be fixed and subject to annual review or
indexation.
So what does this mean for you as
occupiers if your Landlord suddenly starts to add on a service charge?
Firstly make sure you are 100%
clear that what you have been paying for in your service charge historically,
to ensure that what you’ve been paying already does in fact exclude any form of
management costs, or if it does include them, so you can explore the existing
level they are at in terms of overall percentage of your service charge cost.
If your landlord has not been
sending you statements as per RICS standard requirements under the Commercial
Service charge code, you need to ask for more detailed statements to be sent
with due regards to RICS best practise. Indeed I am aware that one of the
landlords for NHS premises has merely been sending service charge demands which
are just an invoice with single ‘total’ figure with no explanation. If this sounds like your landlord, you need
to write to them formally, asking for full breakdown of the service charge
including all receipts / proof of expenditure.
Under RICS best practise
guidelines (which reflect best practise in the commercial property and industry
and the law of England & Wales) the landlord must be totally transparent
with the service charges and be able to explain and provide a paper trail, to
not only prove all of the expenditure made and recharged to the tenant under
the service charge clause, but also to show that it is reasonable.
So when you get to the stage that
you have your service charge breakdown.
You need to look through that breakdown and check that it only contains
items contained within the service charge clause of your lease.
For example, there may be the
cost of buildings insurance included– but if the Insurance clause is on a
separate clause/ schedule in the lease to the Service charge schedule, then
strip the costs out from the service charge figs. The insurance is payable
separately!
Also, have a look at business
rates. In many LIFT buildings the
landlord may be paying the business rates directly to the Local Authority and
then recharging the tenants in the building according to the Landlord’s own service
charge recharge proportions, and adding VAT – again, all added up into a single
fig in an invoice under the guise of the ‘service charge’.
What you need to remember is that
business rates are a tax on occupation.
If you occupy space exclusively in any rented building, even if you have not signed
a lease, then you should contact the valuation Office agency directly and
arrange to pay the tax directly for your area of the building. This is in
accordance with Local Government Legislation.
If you do this, an officer from
the Valuation Office Agency (VOA) will come out and assess the extent of your
area in the shared building (or taxable Hereditament - to call it the proper name.) This follows
standard methodology, accepted by courts, and will be the ‘Net Internal Area’(NIA)
of what you exclusively occupy, as measured per the current RICS measurement
code. The NIA excludes any shared areas like corridors or toilets.
Many LIFT buildings are not
measured nor the proportions measured as per NIA or RICS standards (which are
the standards of measurement accepted in the UK Courts.) So some NHS Landlords service charge
proportions can often be misguided and at worst, unfair.
Once the VOA has assessed your
business rates, they instruct the Local Authority to send you a bill directly. This
means that you will not have to pay for any business rates charged by your
Landlord, nor the VAT that the landlord may also decide to charge on it!
Furthermore some tenants may find
that on assessment by the VOA, the rateable value of their occupied space is
below the threshold for paying this tax. Others may find that by contacting the
Local Authority who collect the rates, and filling out a few forms, that they
can obtain small business discounts from the Council or other discounts if they are a small
business with only a couple of buildings.
Also – there has been a recent
case heard on appeal at the Lands Tribunal James Gallagher and (1) Dr M G Read
& Partners (2) Dr J Poyser & Partners, which has upheld a decision that
found that for rates purposes, in new buildings, it is appropriate for the GPs
surgeries to be calculated using the ‘contractors method’ of valuation rather
than the comparable method. From the
examples provided in the case, this offers considerable savings to GPs.
All in all it is far preferable
to pay your business rates directly -as
it takes your Landlords out of the equation, their VAT and also reduces the
service charge – and hence also the management charge!
Basically, to summarise, if your
landlord is going to charge you a management fee based on a percentage of your
service charge – you need to analyse the service charge and strip it down to
the bare bones of what the lease clause will allow the landlord to recharge.
The landlord will not do this for
you. It is not in their interest to minimise
the service charge cost. If you are a GP
obtaining reimbursement under the GMS Premises directions, you need to know all
of your costs exactly to maximise what you can re-claim and to minimise the
rest.
Finally, I will pick up the point
about how reasonable it is for a Landlord to introduce a management fee out of
the blue. Whilst the lease may reserve
a right for the Landlord to charge a fee, industry best practise under the RICS
code is for the Landlord not to undertake to charge something ‘new’ under the
service charge regime without first consulting / informing with everyone in the
building that has to pay for the service. In terms of a management fee it is
wholly reasonable for the tenant to require the Landlord to explain the basis
of the management fee and how it is justified for the premises and the
administration of the service charge for that building.
Next time, I will look at some hidden costs in service charges
and ways to reduce them.
