Landlords Management Charges...

 ((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.