New report provides benchmark of Commercial Service Charges and calls for continued improvement

14.04.11

A major new report is to be published this week (14th April) into service charges paid on commercial office buildings by British business.

A major new report is to be published this week (14th April) into service charges paid on commercial office buildings by British business highlights the need for greater transparency in the management of service charges; standardisation of accounting procedures; and better training for property surveyors.

The Service Charge Operating Report (SCOR) for Commercial Offices, which analyses data from nearly ten per cent (9.67%) of UK multi-let office buildings, estimates the current commercial service charge bill, payable every year by businesses renting office space, is £4.06 billion pa.  The report found that service charge costs paid by business averages £5.89 per square foot. SCOR recommends the cost of £7.82 per sq. ft should be used a trigger point by tenants to review their charges.

Accounting procedures used in the administration of service charges were also examined by the report.  It highlights that guidance for managing agents is often dependent on unclear wording in the property’s lease.  Many documents analysed did not show any evidence of being signed-off at all, some were signed-off by a member of the managing agent team; only 7% were signed-off by a Chartered Surveyor.  Of 100 certificates (documents detailing actual costs) analysed in detail, 32% were signed off by a Chartered Accountant.

The report highlights the need for certificates of expenditure to disclose the accounting basis on which they have been prepared – i.e. on a cash or accruals basis.  It also calls for tenants to be given pro-forma statements with sign-off obligations on behalf of both the managing agents and auditors in order that tenants have total transparency when it comes to the service charges they are paying.

SCOR also measures levels of compliance against the RICS* Code of Practice (Service Charges in Commercial Property). Specifically, the report measures the timeliness of when tenants receive service charge budgets and certificates.  However an analysis of 7,728 budgets and certificates relating to the period 2005 to 2011 from 1,397 different office buildings showed that 62.1% of documents failed to provide any clear invoice or issue date thus making measurement of timeliness impossible.

Management fees charged for the administration of service charges were examined and SCOR found that, despite guidance offered by the RICS Code that all management fees charged should be transparent, in 54.5% of documents it was not possible to determine the nature of the fee leaving tenants unaware of what costs they are being charged.

The new report provides a benchmark of Commercial Service Charges.

The Code requires that budgets should be issued to occupiers at least one month prior to the start of the service charge year. SCOR shows that in the documents where dates were present that compliance with the Code has increased from 11% in 2005 to 44% in 2011.  A similar trend of improvement was seen in relation to certificates with 41% of documents compliant in 2009 and 63% in 2010. 

Other results at a glance:

Apportionment

In 38.5% documents there was no evidence of a detailed apportionment schedule or disclosure of the % attributable to the occupier

Management fees

29% documents declared a fixed fee

18.5% declared a percentage fee

54.5% did not include information relating to the management fee

Interest on service charge accounts

26% documents credited interest to the occupier

73% contained no mention of interest 

1% mentioned ‘income’ but no further detail given

Commenting on the report, managing director of Property Solutions(UK) Ltd, which co-authored the report with Kingston University under the Knowledge Transfer Partnership (KTP), said: “SCOR highlights that whilst the industry has made improvements in the management of service charges, it is clear that the is still some way to go to reach industry-wide best practice.”

“This report aims to support the industry in continuous improvement and to highlight areas where increased training and development may benefit the commercial property industry as a whole.”

Notes to Editors:

The Service Charge Overview Report (SCOR) was produced under the KTP (Knowledge Transfer Partnership) established in 2010 between Property Solutions (UK) Ltd (PSL) and Kingston University.  Its objective is to offer an effective benchmarking tool measuring trends in commercial service charges.

*Royal Institution of Chartered Surveyors

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For further information please contact: 

Joanna Randall, Purple Fish PR, 07980 057651, Joanna.randall@purplefishpr.co.uk