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.

 

Commercial Service Charges Best Practise

Today's blog will provide more detail about the best practise for commercial service charges.  Please note that residential service charges are different so please do not use this blog when considering residential premises. This Blog is also directed to premises in England & Wales – as the law in Scotland will also differ.)

Indeed, due to the amount of conflict in Landlord and Tenant relationships over the years, legislation has been introduced in the residential sector to control service charges but in the commercial property sector things are still catching up.

 

Due to this situation, the RICS launched a Code of Practise in 2007 to set out the standards for best practise in the commercial sector. Whilst this code is not law, Courts do take account of the contents and resultantly, any self-respecting Chartered Surveyor or commercial property company follows this code as closely as possible.

In a nutshell, the Code’s objective is to ensure transparency in service charge budgets so that Landlords don’t make a secret profit or alternatively, make a loss. It’s about finding the middle way and being fair in all circumstances.

 

The Code can be Downloaded from the RICS Books Website http://www.rics.org/uk/shop/standards/

 

Always look at the lease

The first rule in service charge management is to always look at the provisions for a service charge in the lease.  If you do not have a lease but are still paying a Landlord for a ‘service charge’, the matter is rather more obscure but nevertheless as an occupier under Common Law, (I.e. someone who is paying rent/insurance / service charges to a Landlord but does not have a formal written and signed lease), you will still have a right to know exactly what you are being asked to pay for.

The services that a Landlord provides under the lease will be listed in the Landlord’s Covenants and most leases provide the Landlord with an option to add / vary / change the provision of the services in accordance with ‘good estate management’.  The wording of the lease here is important as it sets the context for any changes the Landlord may choose to make to the services at a later date.

What is clear is that the tenant is only liable to reimburse the Landlord so far as the lease allows. If the Landlord’s expenditure falls outside the lease clause, then this cost can’t be recovered from the Tenant.

 

There is no legal presumption that the Landlord can cover all of his costs in running the building and this is where some of the Landlords of multi occupied healthcare buildings need to be careful.

There is also general presumption in law that the Landlord should not profit via the service charge – albeit this can differ depending on the construction of the lease – hence this is why when you agree a lease it is so important to get decent advice before you sign up.

 

Implied Term as to Reasonableness

In the service charge covenants, many leases will say expressly that the Landlord’s expenditure must be reasonable. Even if the lease is silent, there is an implied legal term that when spending on behalf of the Tenants, the Landlord must not to be unreasonable. This was seen in Finchbourne Ltd V Rodrigues [1976] which was a court case which led to the tendency towards an automatic implication of reasonableness with regard to the circumstances of the Landlords service charge expenditure.

This doesn’t mean that the Landlord has to find the cheapest service provider, but it does means that they can’t go overboard when they procure service charge services on behalf of the Tenants when they are expecting to recharge under the service charge clause.  The key phrase is that the Landlord must ‘maintain to standards contemplated by the covenant’.

So if you are a Tenant in a multi occupied health centre and the standards of e.g. plumbing maintenance are set out as a Department of Health Policy, and other health buildings in the area maintain to this policy level, then it will be reasonable for the Landlord to competitively procure the plumbing service to that standard.  This process may not end up with the Landlord instructing the cheapest provider in the market, but the plumbing service will be in tune with the general cost and quality of plumbing in the local health sector for that particular maintenance activity.

What this means is that the factual background of the lease and all circumstances will influence the outcome of what is deemed reasonable or not.

So to add to this ‘plumbing’ example, it would be unreasonable to the Landlord here, to replace the taps in the building with expensive Gold designer ones– as this would be somewhat out of tune from that both landlord and tenant had in mind when they signed the lease agreement.

 

What about building works incorporated in the Service charge?

When something goes wrong in a multi occupied building, eg a roof leak, the Landlord’s decision with regard to that works are necessary or methods to be adopted must always be reasonable in all the circumstances as court cases have shown a willingness to imply a ‘reasonableness’ requirement.

Again, here the factual background to the lease will influence what is deemed as ‘reasonable.’

However, it is all about the Landlord being reasonable in his actions in ‘incurring’ the costs and not whether the actual costs billed to the Tenants are reasonable. This means that it would be reasonable to expect the Landlord to get ‘arms length quotes’ for appropriate works considering all the circumstances.

 

What if the Landlord wants to vary the services provided?

Again this is quite often provided for through the terms of the service charge covenant in the lease. The Landlord has to exercise careful discretion to only vary the service charge services in the very best interests of estate management and definitely not for any personal gain. The decision must be something that would be reasonable for any reasonable Landlord to make in that position.

When making changes the Landlord must ensure that the decision making process is open and fair and that the Tenants are kept informed, even if this is not explicitly required through the lease terms, so that the scope for later challenge by the Tenants is minimised. 

Where there is an existing system of service charging in place, then the Landlord must approach all the Tenants in the building and engage them to obtain an agreement for the proposed variation in the services. This is where the Landlords liaison and relationship with his tenants is very important.

 

 

Next Time:

We delve into Landlord’s Management Charges.

 

So your Landlord sorts out your buildings insurance? And sends you the bill?

You may be wondering what your rights are as the tenant and whether your Landlord can procure any insurance policy he wishes, at any cost and expect you to pay the bill.

I hope today’s blog will clear things up a little for you.

Let’s start with the basics first:

Where is your lease?

If you have a lease make sure you have a copy. Make sure it is a copy of the actual signed lease and not a draft. Print it out so you can annotate it and keep it in a safe place where you can lay your hands on it.

If you don’t have a lease but you are paying money to your Landlord (and there are many NHS occupiers like this at present,) this does not mean you don’t have a lease, it means you have a lease in Common Law.  Believe it or not it is possible to have a lease without having anything on paper. It can make things slightly more tricky and is not ‘best practise’ for Landlords, but is more common then you imagine, particularly in NHS shared premises.

Why have a lease in the first place?

Leases are generally a good thing to have because a lease is a contract that sets out the terms of the arrangement for your occupation of a property - so each party knows where they stand. In the commercial world it also is a document that protects tenants from being ‘thrown out’ on no notice – so affords safety in business continuity.  It also enables Landlords to forecast contractual rental income.  Landlords are agreeable to getting leases in place as it means they can borrow money from the bank against this guaranteed income – or if they have already borrowed the money, they can arrange to pay it back on preferential terms.

 

What sort of occupier are you?

GPs

If you are a GP Practise then I refer you to ‘The National Health Service (General Medical Services – Premises Costs) Directions 2013.  Part 5 covers ‘recurring Premises costs’. At Section 46 you will find the detail of ‘Payments in respect of running costs’.

This section basically provides you with the detail of what you will get reimbursed for under your GMS contract – including insurance. However under Section 47 you will see that you may, depending on the circumstances, only receive part payment of the cost of the service charges for your premises.  Furthermore, there are lots of costs that may be included in your actual service charge bill, that are not re-reimbursable under these Directions.

This means that it is in your Practise’s financial interest to minimise, where possible, these particular payments to your Landlord. This doesn’t mean that you refuse to pay for your insurance and service charges – but it does mean you should be seeking for transparency of these charges, to ensure they are 100% clear, justified and accurately reflect the lease contract.

Clinical Service Provider and charities

If you are providing a service/ charity work from an NHS property, then quite often you will want to know where you stand with using a property for the purposes of business planning.  For charities, under the Charity Commission rules, you will be aware that you must seek value for money when undertaking business and this means you need to be prudent when it comes to dealing with your financial undertakings – and therefor when dealing with your accommodation costs.

So how is your insurance bill arriving?

Some Landlords wrap the rent, insurance and service charge into one single bill. Others split out the invoice completely and send it on an invoice, quite separate from the Rent and service charge invoices.

There is no hard and set rule about how you should receive your insurance bill for your property. However this is what you need to know:

Your lease is key to setting out the basis of the insurance that your Landlord procures on your behalf. So if you have a lease – flick through with a highlighter and mark every single element which refers to insurance.

Most leases will have an insurance schedule located towards the back of the lease document and there will be a clause nearer to the front of the lease which sets out what you, as the tenant, must pay under the lease contract.  Often it will say ‘the tenant will pay for the costs buildings insurance as set out in Schedule X’ – and this will be the respective Insurance schedule at the back of the lease.

Tenants proportion?

In terms of the proportion of the bill that you must pay – this can be quite a complex issue – so I will save that for another day – so watch this space.

FSA Regulation of Insurance

Over recent times, EU Directives have led that most areas of insurance are now regulated by the Financial Services Authority (FSA). You can check here to see if your Landlord / their nominated managing agent should be registered with the FSA

http://www.fca.org.uk/firms/firm-types/intermediaries/property-managing-agents

Quite often, commercial Landlords will be deemed as registerable under the FSA if they are ‘acting in the administration and performance of a contract of insurance’.

What does this mean?

Most Landlords need to be registered by the FSA if they are involved with the procurement of insurance products for tenants.  If they are registerable under FSA rules then they fall under the ‘Treating Customers Fairly’ principles.  So even if it does not say explicitly in the lease, it is reasonable for you, as the tenant, to ask for a copy of the insurance that has been procured on your behalf plus details of all the costs involved in its procurement. 

So when you get a bill for insurance – make sure you contact your Landlord and ask for:

Details of their FSA registration. A copy of the insurance policy. Details of all costs being claimed (this includes any brokers fees.)

Once you have a copy of your insurance you need to check that the cover accurately reflects the cover that is set out in the insurance clause of your lease contract.  This is because the landlord must ensure that the insurance they have procured falls squarely within the scope of your lease.  If the policy does not comply with the lease contract, then the Landlord may not seek reimbursement from you, as his tenant.

Can the Landlord use any insurance company he likes?

The short answer for commercial leases is yes. The lease contract must be used as the basis of this arrangement, however, the Landlord is under a Common Law duty to ‘act properly’. Current case law has seen that it is not necessary for the Landlord to go out and get the cheapest deal, but Landlords do have to undertake the exercise of procuring the insurance ‘at arms length’ and the rate charged should be no more than the chosen insurer’s going rate for the policy in question.

Can the Landlord take a commission?

Unless the lease says otherwise, it’s generally accepted that the Landlord or his managing agent should not profit from placing insurance products without the Tenant’s consent. This means the Landlord should really give the Tenants the benefit of any discount they might receive and be transparent about this aspect.

What about broker’s fees?

The issue of broker’s fees has come up with a situation I have been dealing with recently. I have not been able to find much detail on this in terms of legal cases (yet), but where the lease does not mention that the cost of insurance brokers fees is rechargeable to a tenant, then I would be arguing that the broker’s fees are something that the Landlord has to pay and that these specific costs cannot be demanded. Clearly, if I discover information to the contrary, I will update this blog.

 

Supply of Goods & Services Act

What I have established is that there is case law in 1994, the arrangement by insurance by the Landlord is not something that is caught by the Supply of Goods and Services Act 1982.

 

So that’s the end of this blog for now. Will do another soon.

 In the interim if you have any queries about commercial service charges please refer to the property industry best practise - the RICS code practise guidance- which can be purchased here:

http://www.rics.org/uk/knowledge/professional-guidance/codes-of-practice/service-charges-in-commercial-property/

I believe it is £20 if you are not an RICS member

 

 

Hello and Welcome

Welcome to my blog page which I have set up for the benefit of occupiers of NHS or health care premises in England and Wales.

 

This blog is aimed at providing hints and tips to GPs, charities and other healthcare related providers who are tenants in multi occupied buildings.

 

Some of you may have leases or other agreements, some of you may not.   Whatever the arrangement, I am sure you will find the contents of my blog interesting and useful. You might even save some money along the way and learn a few interesting things outside your normal specialism.

 

I will:

• Delve into the mystery of service charges and insurance etc. setting out the commercial property industry requirements and standards for transparency.
• Explain in lay terms what you should expect from your landlord and when, perhaps, you might want more information before paying money over.
• Add in a few other tips about building compliance etc.
• Keep the blog updated and hopefully not too 'dry'.

 

I am an RICS Chartered Surveyor by background and I have come to specialise in Healthcare premises.  I am a advocate of best practise and throughout my blog I will regularly refer you to RICS, DoH and legal best practise guidelines and policies.  These are very handy to know when dealing with landlords.

 

I would have done a podcast but I will start with the blog in the first instance and see if there is interest out there for this sort of thing.

Happy reading.