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RICS Professional Guidance, UK

Service charges in commercial property3rd edition

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RICS Code of Practice

Service charges incommercial propertyRICS Code of Practice, UK

3rd edition

Published by the Royal Institution of Chartered Surveyors (RICS)Parliament SquareLondonSW1P 3ADwww.rics.orgNo responsibility for loss or damage caused to any person acting orrefraining from action as a result of the material included in thispublication can be accepted by the authors or RICS.Produced by the Service Charge Code Steering Group of the RoyalInstitution of Chartered Surveyors.

ISBN 978 1 78321 038 1

© Royal Institution of Chartered Surveyors (RICS) January 2014.Copyright in all or part of this publication rests with RICS. No part of thiswork may be reproduced or used in any form or by any means includinggraphic, electronic, or mechanical, including photocopying, recording,taping or web distribution, without the written permission of RICS or inline with the rules of an existing licence, see appendix C for more detailson reproducing the service charge accounting sample report.

Typeset in Great Britain by Columns Design XML Ltd, Reading, Berks

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Contents

Acknowledgments 1RICS guidance notes 2

Introduction 4The service charge arrangement................................... 4

New service charge lease provision.............................. 4

Using this Code of Practice .......................................... 4

Section 1: The Code 5Aims and objectives ...................................................... 5

Core principles............................................................... 5

Limitations of the Code ................................................. 7

Section 2: Recommended best practice to supportthe core principles 81 Administration ................................................................ 9

1.1 Standard and quality of service provision .............. 9

1.2 Staffing and personnel ............................................ 9

1.3 Management charges.............................................. 9

1.3.1 Total cost of management .............................. 9

1.3.2 Management fees............................................ 10

1.3.3 Duties of the manager..................................... 10

1.3.4 Site-management costs .................................. 10

1.3.5 Notional rent for managementaccommodation........................................................ 11

1.4 Contract procurement ............................................. 11

1.4.1 Service standards and provision .................... 11

1.4.2 Procurement of services................................. 11

1.5 Allocation and apportionment ................................. 12

1.5.1 Schedules ....................................................... 12

1.5.2 Flexibility ......................................................... 12

1.5.3 Void and unlet premises ................................. 13

1.5.4 The apportionment matrix .............................. 13

1.5.5 Floor-area apportionment ............................... 13

1.5.6 Rateable value apportionments...................... 13

1.5.7 Owner’s cost/profit centres ............................ 13

1.5.8 Tenant alterations............................................ 13

1.6 Direct recoveries...................................................... 14

1.6.1 Insurance ........................................................ 14

1.6.2 Utilities ............................................................ 14

2 Communication and consultation................................ 16

2.1 Communication........................................................ 16

2.2 Consultation............................................................. 16

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2.3 Budgeting and cost review ..................................... 16

3 Dealing with existing and new leases ......................... 173.1 Existing leases......................................................... 17

3.2 New leases .............................................................. 17

3.3 Sweeper clauses ..................................................... 17

3.4 Professional arbitration in court (PACT) .................. 18

4 Financial controls and competencies ......................... 194.1 Accounting principles .............................................. 19

4.2 Audit and certification of service charges .............. 19

4.2.1 The requirements of the lease........................ 19

4.2.2 Service charge certification ............................ 19

4.2.3 Auditing of the service charge accounts........ 20

4.2.4 Independent accountants’ report ................... 20

4.2.5 Recommended best practice ......................... 21

4.3 Standard industry cost classifications .................... 21

4.4 Budgets and actual expenditure accounting .......... 22

4.5 Right to challenge.................................................... 22

4.6 Change of owner or manager ................................. 22

4.7 On-account payments............................................. 23

4.8 Interest on service charge accounts ....................... 23

4.9 Forward funding of service charge costs ............... 23

4.10 Timeliness .............................................................. 23

4.11 Benchmarking and cost analysis .......................... 23

4.12 Value for money..................................................... 24

5 Dispute resolution ......................................................... 255.1 ADR as industry best practice ................................ 25

5.2 Early neutral evaluation (ENE) ................................. 25

5.3 Mediation ................................................................. 26

5.4 Independent expert determination .......................... 26

5.5 Arbitration ................................................................ 26

5.6 The RICS DRS fact sheets...................................... 27

6 Mixed-use schemes ...................................................... 28

7 Provision for anticipated future expenditure .............. 29

8 Initial provision, replacement and improvement offabric, plant and equipment ....................................... 318.1 Initial provision of fabric, plant and equipment ...... 31

8.2 Like-for-like replacement ......................................... 31

8.3 Replacement with enhancement............................. 32

8.4 Improvement and enhancement ............................. 32

8.5 Refurbishment ......................................................... 32

8.6 Communication........................................................ 32

9 Environmental sustainability......................................... 339.1 Green leases............................................................ 33

9.2 Carbon Reduction Commitment Energy EfficiencyScheme (CRC) ............................................................... 33

9.3 Improving environmental performance.................... 34

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9.4 Energy Performance Certificates (EPCs)................. 34

10 Additional best-practice guidance for shoppingcentres .......................................................................... 3510.1 Marketing and promotions .................................... 35

10.2 Commercialisation (non-core income)................... 35

10.3 Apportionment of service charges in shoppingcentres – weighted-floor area apportionment............... 36

Appendices 37Appendix A: Best-practice compliance checklist ......... 38

Appendix B: Standard industry cost classifications ..... 39

Appendix C: Service charge accounting samplereport.............................................................................. 43

Appendix D: Glossary and terminology ........................ 63

Appendix E: Further reading.......................................... 67

iv RICS Guidance Note


Acknowledgments

RICS would like to thank the following for theircontributions to this guidance note:

Lead author:

Peter Forrester is a director and head of service chargeconsultancy at international property consultants Savillsand is an acknowledged industry expert and outspokenadvocate of best practice in the management andadministration of service charges in commercialproperty. Peter is the Chairman of the RICS ServiceCharge Working Group.

With special thanks to the Service Charge WorkingGroup and representatives of the industry bodiessupporting this Code:

Andrew Varley, Next plc

Anne Rush, Cushman & Wakefield LLP

David Tudor-Morgan, British Land

Hilary Rushby, Wragge & Co LLP

Ian Fletcher, British Property Federation

Jenny MacDonnell, British Council for Offices

John Gray, John Gray Service Charges Ltd

Simon Taylor, Derwent London plc

Paul Bagust, RICS

With special thanks also to Alex Maries, Jones LangLaSalle Ltd and Duncan Ashman, BDO LLP for theirinvaluable help with regard to the accounting section.

This edition of Service charges in commercial propertyis dedicated to the memory of Chris Edwards (1951 –2013).

Chris was one of the UK’s most sought after adviserson property management issues and was the drivingforce behind the RICS Code of Practice Servicecharges in commercial property which launched inJune 2006. The Code’s welcome from all sides of theindustry as a real breakthrough in best practice istestament to his foresight and energy as well as hiscommitment to ensuring fairness and transparency inthe management of commercial property.

Throughout a career spanning more than 40 years,Chris was a popular figure who made a hugelysignificant contribution to raising standards in theprofession.

RICS Guidance Note 1

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RICS guidance notes

This Code has the status of a guidance note. Itprovides advice to practitioners. Where procedures arerecommended for specific professional tasks, these areintended to embody ‘best practice’.

Practitioners are not required to follow the advice andrecommendations contained in the Code. They shouldhowever note the following points.

When an allegation of professional negligence is madeagainst a practitioner, the court is likely to take accountof the contents of any relevant guidance notes indeciding whether or not the practitioner had acted withreasonable competence.

A practitioner conforming to the practicesrecommended in this Code is unlikely to be adjudgednegligent on account of having followed thesepractices. However, practitioners have the responsibilityof deciding when it is appropriate to follow theguidance. If it is followed in an appropriate case, thepractitioner will not be exonerated merely because therecommendations were found in a guidance note.

On the other hand, it does not follow that a practitionerwill be adjudged negligent if he or she has not followedthe practices recommended in this Code. It is for eachindividual practitioner to decide on the appropriateprocedure to follow in any professional task. However,where practitioners depart from the practicerecommended in this Code, they should do so only forgood reason. In the event of litigation, the court mayrequire them to explain why they decided not to adoptthe recommended practice.

The Code has been prepared to promote best practicein terms of service charges for commercial properties innew leases or renewed leases. Circumstances canarise where the suggested best practice in this Codecannot be applied. This Code therefore should notcompel owners, occupiers or managers to aninappropriate course of action. Transparency simplyrequires that in the event the Code is inappropriate thereasons for this are shared with all relevant parties anda record kept.

In addition, guidance notes are relevant to professionalcompetence in that each practitioner should be up todate and should have informed him or herself ofguidance notes within a reasonable time of theirpromulgation. In the opinion of the approvingprofessional bodies, this Code represents bestpractice.

2 RICS Guidance Note


Document status defined

RICS produces a range of professional guidance and standards products. These have been defined in the tablebelow. This document is a Code of Practice.

Type of document Definition StatusStandardInternational Standard An international high level principle based standard

developed in collaboration with other relevantbodies

Mandatory

Practice StatementRICS practice statement Document that provides members with mandatory

requirements under Rule 4 of the Rules of Conductfor members

Mandatory

GuidanceRICS Code of Practice Document approved by RICS, and endorsed by

another professional body / stakeholder thatprovides users with recommendations for acceptedgood practice as followed by conscientiouspractitioners

Mandatory or recommendedgood practice (will beconfirmed in the documentitself)

RICS Guidance Note (GN) Document that provides users withrecommendations for accepted good practice asfollowed by competent and conscientiouspractitioners

Recommended goodpractice

RICS Information Paper (IP) Practice based information that provides users withthe latest information and/or research

Information and/orexplanatory commentary


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Introduction

This Code of Practice is a best practice document andthe industry as a whole is expected to aspire to followits recommendations

The service charge arrangement

Service charges enable an owner to recover the costsof servicing and operating a property from theoccupiers, as well as any others who benefit from anduse the services and facilities provided.

The service charge arrangement is set down in thelease(s) and the aim is to entitle the owner to recoverhis or her charges and any associated administrativecosts incurred in the operational management of theproperty. This will include reasonable costs ofmaintenance, repair and replacement (usually wherebeyond economic repair) of the fabric, plant, equipmentand materials necessary for the property’s operation,plus any other works and services the parties agree areto be provided by the owner, but subject toreimbursement by the occupier.

If the property is fully let, the owner will normally beable to recover all expenditure on services through theservice charge, except any concessionary discountsthe owner may have given.

Usually, there will be a manager who administers theseservices, for which he or she will receive a fee.

Service charge costs do not generally include thefollowing:

+ any initial costs (including the cost of leasing ofequipment) incurred in relation to the originaldesign and construction of the fabric, plant orequipment

+ any setting up costs, including costs of fitting outand equipping the on-site management offices thatare reasonably considered part of the originaldevelopment cost of the property

+ any improvement costs above the costs of normalmaintenance, repair or replacement. Servicecharge costs may include enhancement of thefabric, plant or equipment, where such expenditurecan be justified following an analysis of reasonableoptions and alternatives, and with regard to a cost-benefit analysis over the term of the occupiers’

leases. Managers are expected to provide thefacts and figures to support and vindicate such adecision

+ future redevelopment costs

+ such costs that are matters between the ownerand an individual occupier, for instance,

– enforcement of covenants and collection ofrents

– costs of letting units

– consents for assignments

– subletting

– alterations

– rent reviews or

– additional opening hours, etc.

+ any costs arising out of the failure or negligence ofthe manager or owner.

New service charge lease provisions

The City of London Law Society(www.citysolicitors.org.uk) and Practical Law Company(uk.practicallaw.com) have both drawn up servicecharge lease provisions that have been specificallydesigned to comply with the principles and provisionsof this Code. These can be downloaded from theirwebsites.

Using this Code

This Code sets down best practice in the managementand administration of service charges in commercialproperty. Section 1 of this document outlines the aimsand objectives of this Code, along with stating its coreprinciples. Section 2 then gives recommendations andguidance on how the Code can be followed. Theappendices contain additional information andresources to support an understanding of the Codeand to assist with its implementation.

This Code of Practice is freely available atwww.rics.org/servicechargecode



Section 1: The Code

Aims and objectives

+ To improve general standards and promote bestpractice, uniformity, fairness and transparency inthe management and administration of servicescharges in commercial property.

+ To ensure timely issue of budgets and year-endcertificates.

+ To reduce the causes of disputes, and to provideguidance on the resolution of disputes if thesearise.

+ To provide guidance to solicitors, their clients(whether owners or occupiers) and managers ofservice charges in the negotiation, drafting,interpretation and operation of leases, inaccordance with best practice.

The core principles

‘Tenants who agree to service charge clauses underwhich they contract to pay against a surveyor’sestimate or an accountant’s certificate rely upon theprofessional people involved performing their roleswith professional scrupulousness, diligence, integrityand independence and not in a partisan spirit,supposing their only task to be to recover as muchmoney as they can for the landlord.’

Jonathan Gaunt QC sitting as a deputy high courtjudge: Princes House Ltd v Distinctive Clubs Ltd

[2006] All ER (D) 117 (sep). [2007] 14 EG 104 (CS)

The service costs

1 Best practice recommends that services areprocured on an appropriate value-for-money basis,and that competitive quotations are obtained orthe costs benchmarked.

2 Owners should not profit from the provision orsupply of services. Save for a reasonablecommercial management fee that reflects theactual costs of managing the services, the amountan owner may recover is limited only to the properand actual cost incurred in the provision or supplyof services.

3 All costs are to be transparent so that all parties,owners, occupiers and managers, are aware of

how the costs are made up. Management fees areto be on a fixed price basis with no hiddenmarkups.

Allocation and apportionments

4 Costs should be allocated to the relevantexpenditure category. Where reasonable andappropriate, costs should be allocated to separateschedules and the costs apportioned to those whobenefit from those services.

5 The basis and method of apportionment should bedemonstrably fair and reasonable to ensure thatindividual occupiers bear an appropriate proportionof the total service charge expenditure that clearlyreflects the availability, benefit and use of services.

6 Managers are expected to make available to alloccupiers a full apportionment matrix that clearlyshows the basis of calculation and the totalapportionment per schedule for each unit withinthe property/complex.

Certification

7 Certified accounts of expenditure are to representa true and accurate record of expenditure incurred.Those certifying service charge accounts shouldrecognise that they have a duty of care to bothowners and occupiers to act with professionalcare, diligence, integrity and objectivity.

Communication and consultation

8 While the owner has the right to set the standardsby which his or her investment will be managedand has a duty to manage, managers are advisedto consult with occupiers with regard to thestandard and quality of service charge provisionrequired.

9 Managers are expected to communicate withoccupiers to ensure services are deliveredeffectively for the benefit of all, and to ensure thatoccupiers understand what they can expect toreceive and how much they are required to pay.

10 Managers claiming compliance with the principlesof this Code will be transparent in demonstratinghow they comply with it.

Duty of care

11 The owner and/or manager has a duty to managethe property, as well as a duty of care to both the


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occupiers, who entrust the spending of their ownbusiness overhead and cash flow by funding theservices, and to the owner whose investment theyare servicing.

12 There will be clear policies as to how the servicecharge will be managed.

Financial competence

13 In incurring costs in the provision of services, themanager is spending the occupiers’ money.Managers are therefore expected to demonstrate ahigh degree of competence, professionalism,integrity, diligence, objectivity and transparency indealing with the service charge accounts.

14 When issuing statements of accounts and/orcertifying expenditure, managers are urged do soin a non-partisan spirit, acting as experts. Themanager will therefore endeavour to ensure that allcosts have been incurred and are properlyrecoverable in accordance with the leases.

15 Service charge monies will be held in one or morediscrete bank accounts in recognition of the factthe monies are being held to provide for theprocurement and delivery of the services.

16 All interest earned on service charge accounts – orwhere separate accounts per property are notoperated, a proper and reasonable amount ofinterest calculated on normal commercial rates –will be credited to the service charge account afterappropriate deductions have been made. Thisapplies, for instance, to bank charges, tax, etc.

17 The recommended Industry Standard CostHeadings should be used in reporting budget andactual expenditure.

Occupier responsibilities

18 Occupiers are obliged to ensure prompt paymentof all service charge on-account and balancingcharges. Where a legitimate dispute exists, anypayment properly withheld should reflect only theactual sums in dispute.

19 Occupiers will recognise that the service chargeprovision of any lease has legal effect, and shouldensure that any representatives involved indiscussions, meetings, etc. have an appropriatelevel of responsibility and authority to makedecisions concerning service charge matters.

20 In recognition that value-for-money andmaintenance of quality standards will be enhancedthrough partnership, occupiers are urged to beproactive in assisting owners in the operation andutilisation of services and service systems – forexample, by separating waste to facilitateappropriate and cost-effective recycling, adoptingenergy-saving measures, etc.

Right to challenge/alternative dispute resolution (ADR)

21 All new leases (including renewals) should makeprovision for either party to require the resolutionof disagreements through the use of alternativedispute resolution (ADR) as a cost effectivealternative to court action.

22 If the parties cannot agree a mediator orindependent expert to determine the dispute thePresident of the RICS should (on request)nominate a suitable person. Where leases do notallow for ADR, parties are reminded that there isnothing to stop them agreeing to use ADR toresolve a dispute.

Timeliness

23 Communication and consultation betweenmanagers and occupiers is to be timely andregular to encourage and promote good workingrelationships and understanding with regard to theprovision, relevance, cost and quality of services.

24 Managers will issue budgets to occupiers,including an explanatory commentary at least onemonth prior to the start of the service charge year.Detailed statements of actual expenditure, togetherwith accounting policies and explanatory text, willbe issued within four months of the service chargeyear-end.

Transparency

25 Transparency is essential to achieving goodcommunication. By being transparent in theaccounts, the explanatory notes, policies and day-to-day management, the manager will help preventdisputes. Prompt notification of material variancesto plans or forecasts ensures better workingrelationships between owner, manager andoccupier.

Value for money

26 Service quality is to be appropriate to the location,use and character of the property. The manager isurged to procure quality service standards toensure that value for money is achieved at alltimes. The aim is to achieve effective, value-for-money service rather than merely the lowest price.



Limitations of the Code

Existing lease terms

This Code cannot override the lease but, if read inconjunction with it, it can enable users to identify thebest way forward in interpreting that lease to ensureeffective management of services.

As business practice constantly evolves, so it is withservice charges. Negotiating a new lease, or therenewal of an existing lease, provides an idealopportunity to ensure that modern and flexible best-practice service charge clauses are incorporated withinthe lease contract to facilitate effective management ofthe property and aid the relationships between theparties.

An ADR clause will enable any difficulties during theterm of the lease to be resolved efficiently.

All parties should carefully consider the principlesand requirements of this Code prior to entering intoa new or renewal lease

Proportionality

The extent to which owners and managers should seekto comply with the recommended best practiceprocesses and procedures set down in this Code willoften depend on a variety of issues, such as the size,nature and type of property; the aggregate of the totalservice charge costs; and the amounts payable byindividual occupiers, which are likely to be consistentwith best-value principles.

Nevertheless, owners, managers and occupiers shouldat all times seek to comply with the core principles setdown in this Code.


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Section 2: Recommended best practice tosupport the core principles of the Code



1 Administration

1.1 Standard and quality of serviceprovision

The aim of service provision is to ensure that servicesare beneficial and relevant to the needs of the property,its owner, its occupiers and their customers.

Managers and occupiers should consider the nature,type and complexity of each property, as the levels andstandards of service provided will differ according tothese factors. In providing these services, the aim is toachieve effective, value-for-money service rather thanthe lowest price.

The manager is responsible for:

+ ensuring the standards of services provided aremonitored

+ ensuring that the quality and cost of the servicesprovided are regularly reviewed and

+ where possible, demonstrating that servicestandards are being delivered and that value formoney is being achieved.

It is recommended that management policies andprocedures be established to define the procurement,administration and management of services, and toensure the respective obligations of owner andoccupier are discharged and services are providedefficiently, economically, cost-effectively and safely.

Where there are sound reasons for implementingalternative procedures to those set out in the Code, themanager is expected to be able to explain and justifythese in advance.

Effective communication is key to achieving bestpractice. The aim is to provide transparency betweenmanager and occupier in the way services are providedand managed, and in how the costs of these servicesare recovered.

On occasion, additional services will be providedoutside the service charge. Occupiers are entitled toexpect similar transparency, accountability, etc. inthese services. The Code applies to these as well.

1.2 Staffing and personnel

On-site management staff are required to have a soundknowledge of appropriate modern business practicesand to be adequately skilled in order to provide the

best and agreed performance standards. As they willneed appropriate skills in general management,employment, and health and safety matters, anynecessary training costs may also be covered by theservice charge.

To ensure the services are provided efficiently andcost-effectively, sufficient staffing of the right type andcalibre is to be provided. In keeping with the goal oftransparency, it is best to declare the total costs forsuch additional staff.

Site-management teams and managers are advised toperform according to defined standards. It is alsoadvisable to measure and review performance regularlyagainst these performance standards.

Where reviews of staffing levels are undertaken, it isreasonable that costs associated with achievingbeneficial changes – such as the termination ofemployment contracts – will be recovered under theservice charge. This is provided that such costs can bejustified following the analysis of reasonable options,and that the purpose is proven to achieve greater cost-effectiveness and value for money.

1.3 Management charges

1.3.1 Total cost of management

The total cost of management is the reasonable pricefor managing the provision of the services at thelocation, and relates only to work carried out inmanaging and operating the services and administeringthe service charge.

The total cost of management might comprise twoelements:

+ the fee charged by the manager for managing andsupervising the services at a site (the managementfee) and

+ the cost of the site-specific management staff,whether based on-site in a full- or part-timecapacity (the site-management costs).

No two buildings are identical in the way they need tobe run to meet the requirements of all parties with aninterest in the property. Management fees and site-management costs will need to be set at theappropriate level.


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It is not for this Code to prescribe the operatingbusiness model of the manager.

Where, for instance, a regional facilities manager isemployed, to oversee a number of properties,managers should be aware of the additional costs increating a tiered management structure and should beprepared to demonstrate that the total cost ofmanagement is fair and reasonable in thecircumstances and consistent with the value for moneyprinciples set out in this Code.

Best practice requires transparency and a managementstructure where costs are clearly identified andexplained. It is therefore recommended that thisinformation be contained within the explanatory notesincluded in the budget, along with a clear statement ofthe actual expenditure to occupiers.

1.3.2 Management fees

The management fees charged should comprise onlythe reasonable costs and overheads borne in theprocess of operating and managing the services. Thesewould also reflect the actual work necessary to fulfil theprinciples of this Code. It is recognised that whoever isproviding the service is entitled to cover their costs andoverheads, including a reasonable profit element.

The manager should ensure that the management feerelates only to the actual work carried out in managingthe service charge. Other costs, for instance, assetmanagement and rent collection, should be excludedfrom the service charge management fee, which wouldbe stated in the service charge report.

The Code requires that fees be set on a fixed-pricebasis rather than being calculated as a percentage ofexpenditure. Percentage is no longer appropriate, andis considered to be a disincentive to the delivery ofvalue for money. The management fee should thereforebe a fixed fee subject to annual review or indexation.

It is recognised that many leases refer to themanagement fee as a percentage of the total servicecharge, or contain a percentage cap. This guide cannotoverride the terms agreed between the parties andrecorded in the lease. However, where the lease limitsthe amount or quantum of the fee recoverable fromoccupiers, it is a matter between the owner andoccupier and should not prevent or limit the manager’sability to charge a commercial fee that reflects therequirements of this Code. In certain circumstances,this may result in a shortfall in the recovery of servicecharge costs on behalf of the owner, but the overridingprinciple must be to achieve best-practice principlesfor the management and administration of servicecharges in commercial property.

Managers should confirm in the service charge report:

+ the basis of their appointment

+ when they were appointed and

+ the basis of the management fee payable, which isrecoverable under the service charge.

Where owners manage the property in-house theyshould have due regard to the principles as outlinedabove, and be able to support the basis of their feeswhen benchmarked against other comparable serviceproviders.

It is advisable for the costs of reports (e.g. fire-riskassessment reports, Disability Discrimination Act (DDA)reports, health and safety reports, etc.) undertaken byspecialists working for the same organisation as themanager to be excluded from the management fee,and for any fees for these additional services to bestated clearly and to represent value for money. If othercosts of providing the management service are beingincluded as separate items, the management fee is toreflect this separate ‘accounting’ as part of themanagement service.

Further detailed information and guidance is availablein the RICS information paper, Limiting liability incommercial property management contracts(2009).

1.3.3 Duties of the manager

Items 11 and 12 of the core principles outline the duty-of-care responsibilities relating to service charges. Theowner has the duty to manage or delegatemanagement of the property, and the responsibility toadminister and account for the tax properly due on theservice charge. Best practice requires the manager torecognise a duty of care, both to the occupiers whofund the services being provided, and to the ownerswhose investment they are servicing.

The manager will usually perform additional roles andduties relating to investment interests, for instance,asset management and rent collection. In such cases,the fees the manager charges in relation to performingsuch additional duties will be excluded from the servicecharge management fee.

1.3.4 Site-management costs

Site-management costs are the full employment costsfor sufficient staff, as described in 1.2. The job titles ofthe staff will vary, however, the total cost of the staffwill include wages, National Insurance (NI), tax,compliance with statutory requirements, training andother appropriate benefits.

Site-management costs might also include:

+ the costs of providing appropriate officeaccommodation and administrative support wherenecessary

+ a fee representing the human resources (HR) andpayroll costs associated with dealing with staff(often referred to as an administration charge)



+ separate specialist consultancy fees payable, forinstance, in connection with the carrying out ofhealth and safety risk assessments, asbestossurveys, etc. and which should be clearly identifiedin the service charge accounts.

One way of ensuring the costs reflect value for moneyis to compare them to a third party providing similarservices. Where such fees are included the basis ofcalculation and/or quantum of the fees included shouldbe clearly communicated to occupiers to aidtransparency.

The total on site-management cost should be explicitlyshown in the service charge accounts. Staff costsshould not generally be split between other accountcode headings, for instance, the cost of a directlyemployed security manager would be included as partof the on-site management cost whereas a securitysupervisor provided by a contractor would be includedas a security cost. However, where such costs are notincluded as a site-management cost but allocated to aspecific cost heading (i.e. cleaning or security) themanager should be clear and explicit as to how thesemanagement costs have been treated.

Similarly any additional administrative charges includedshould be clearly and explicitly identified.

Where on-site staff are responsible for more than oneproperty, their costs (and any appropriateaccommodation and administrative support costs) arebest distributed accordingly so that each propertycovers a fair share of their cost. The service chargereport should identify clearly whether this is the caseand how the costs are split.

Many buildings require management 24 hours a day, 7days a week. A manager may consider supporting thefunction of the on-site staff by providing a customersupport/help desk to deal with property mattersoutside of usual business hours, or when the managercannot be contacted. Where this is provided as analternative to employing additional on-site staff, thereasonable cost of running this service may berecovered from the service charge.

1.3.5 Notional rent for management accommodation

Many leases contain provisions for the inclusion of anotional rent within the service charge for managementaccommodation, or for other premises used inconnection with the management of the property.Notional rents were originally included to providedevelopers with a return on otherwise unlettable spaceand to cover the initial provision costs for managementaccommodation.

In many cases, management accommodation cannotbe separately let, and thus has no market value otherthan as a location for such an operation. However,

there are situations where the management premisescomprise accommodation (offices) that wouldotherwise be lettable space; in these cases, there is anelement of rent foregone to provide accommodation forthe on-site management team.

It is generally not advisable to charge occupiersnotional rent in situations where either the premises areincapable of beneficial occupation for any otherpurpose, or where provision has not been made forfacilities management accommodation, for example, amodern building designed without facilitiesmanagement accommodation as part of the originaldesign specification.

There is also an argument that if notional rents areapplied, it may discourage an efficient use of space, ora consideration of alternative uses for areas currentlyoccupied by centre or facilities management.

1.4 Contract procurement

1.4.1 Service standards and provision

It is advisable to ensure that all contractors andsuppliers perform according to written performancestandards. It can prove valuable to regularly measureand review performance against these definedperformance standards, as well as to regularly reviewthe appropriateness of the standards used.

1.4.2 Procurement of services

It is the responsibility of the manager to identify theprocurement strategy most suitable for the propertybased on an appropriate level of service and value formoney.

In 2011, a new standard covering the procurement offacility-related services was published. British Standard(BS) 8572:2011, Procurement of facility-related servicesprovides owners, operators, facility managers andproperty managers with guidance andrecommendations for procuring a broad range ofservices that are required to support the physicalassets that make up a facility, also the needs of usersof that facility.

The BS takes the form of guidance andrecommendations, and is not intended to be quoted asif it were a specification.

The manager may use a procurement specialist todeliver best-value solutions, as long as the purpose isto achieve greater cost-effectiveness and value formoney. The cost of any procurement specialistsemployed is considered to be recoverable through theservice charge, but the costs are to be clearly identifiedin the charge report, along with details of whether it isa one-off fee or will be spread over the duration of the


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contract. It is intended that the fee payable will reflectthe work undertaken, which may also be performance-related.

It is generally the responsibility of the manager or theprocurement specialist to:

+ develop procurement systems

+ vet and select the most appropriate contractors,based on track record, skill and managementexperience and

+ prepare a contract and specification, includingTransfer of Undertakings (Protection ofEmployment) Regulations (TUPE) information,where appropriate.

Contract costs are to be transparent and in accordancewith the provisions for transparent accounting.

Further information can be obtained from the RICSinformation paper, TUPE: Information for propertymanagers (2013).

The manager or procurement specialist is expected tobe responsible for:

+ the provision of full pre-qualification assessmentsof suppliers and contractors in terms of theirfinancial standing and proven compliance withhealth and safety

+ appropriate indemnity in respect of the servicesprovided, including any undertakings via sub-contractors (with provisions for prior approvalthereof) and

+ proven environmental/sustainability credentials.

Managers should ensure that there is transparency inprocurement fees and charges for verifying contractorfinancial standing, health and safety records, andenvironmental credentials, etc. including cost or feescharged to owners.

If any fees are received from contractors, managersshould clearly state what these are and what they arefor. Managers should also be aware that the practice ofrequesting fees, other than a reasonable administrationcharge, from contractors for inclusion in approvedcontractor lists, contract tendering, etc. is contrary tobest practice and is considered to be whollyinappropriate under any circumstances.

On receipt of tenders, a tender report should beprepared containing recommendations on whichcontractor is most suitable. Copies of all tenderdocuments should be made available for inspection, ifrequested. If further copies are required, the managerwill be entitled to charge for the time, cost of copyingand postage of such documents.

Owners and/or managers are often able to achievesubstantial savings and other benefits in the provisionof services through bulk purchasing or through the

placing of group contracts. However, the pricing ofservices under such contracts can differ in eitherproviding a single contract sum, a separate cost perproperty or a schedule of rates for different services.

Where such bulk or group contracts exist, occupiersare not entitled to have access to documents relatingto properties other than the one they occupy. However,where the contract/tender includes other properties,transparency in terms of the apportionment andallocation of costs to the subject property is essential.

Where contracts are reviewed, it is reasonable thatcosts associated with achieving beneficial change –such as termination of contracts – are recovered underthe service charge. This is applicable where such costscan be justified following the analysis of reasonableoptions, and where the purpose is to achieve greatervalue for money and cost-effectiveness.

1.5 Allocation and apportionment

1.5.1 Schedules

Costs are to be apportioned to each occupier inaccordance with items 4 and 5 of the core principles.

The basis and method of allocating and apportioningthe service charge expenditure is to be transparent andclearly communicated to all. Any inducements orconcessions to attract occupiers to a property are tobe borne by the owner, and not spread among otheroccupiers. The rationale for the apportionment betweenoccupiers should be set down in writing, andsubsequently re-examined periodically to see whetherthere is a need for a new apportionment matrix or newapportionment method to be applied. Wherereasonable and appropriate, costs can be allocated toseparate schedules and the costs apportioned to thosewho benefit from those services.

In many cases, particularly regarding buildings with avariety of users, not all of the occupiers will benefitfrom the services to the same extent. In suchcircumstances, it may be necessary to divide theservice charges into separate parts (schedules) toreflect the availability, benefit and use of services, witheach part being individually apportioned betweenoccupiers according to the core principles. Theallocation of costs to separate schedules is essential inachieving a fair and proper apportionment of costsbetween those occupiers that benefit from specificservices. Occupiers will therefore often pay differentpercentage apportionments under different schedules.

1.5.2 Flexibility

It is worth considering that the availability, benefit anduse of the services within a building, and the demandfor those services by individual users, could vary over



time, therefore, leases would benefit from being draftedto include flexibility and variation. For example,additional units may be created or the use of aproperty may change, thus causing different demandsfor services and necessitating a change to the costs/payments structure. Even with the grant of shorter-termleases, the ability to change allocation andapportionment methods, where necessary andappropriate, could be made available during the termto ensure service charges are spread fairly andreasonably between beneficiaries and users.

1.5.3 Void and unlet premises

Occupiers are not expected to be liable for the costsattributed to unlet premises; the owner is to meet thecost of these, as well as any special or personalconcessions given to individual occupiers. Owners arealso responsible for bearing a fair proportion of costsattributable to their own use of the property, forexample, where an on-site management premises isalso used for other purposes unconnected with theday-to-day management of the building and services.

1.5.4 The apportionment matrix

Managers are to make a full apportionment matrixavailable to all occupiers that clearly shows the basisand method of calculation, and the total apportionmentper schedule for each unit within the property/complex.

For the avoidance of doubt, and to preserveconfidentiality this should exclude details of anyindividual concessions or other arrangements betweenindividual owners and occupiers; these are costs thatare normally to be borne by the owner. An individualoccupier should be able to clearly verify the basis andmethod of calculation used in arriving at his or herparticular percentage apportionment.

1.5.5 Floor-area apportionment

Apportionment based on floor area is the mostcommon, and often the simplest, method ofapportionment. The standard floor-area apportionmentis the ratio the premises bear to the total lettable partsof the building.

RICS Code of Measuring Practice sets out definitionsof the measurement of buildings and theirrecommended applications, e.g. Gross External Area(GEA), Gross Internal Area (GIA), Net Internal Area(NIA), etc.

Where the service charge is apportioned based on floorarea, managers should ensure that the method ofmeasurement used is consistent. Do not mix differentmeasuring methods in the same schedule.

1.5.6 Rateable value apportionments

Rateable values are no longer recommended as anappropriate method for calculating service chargeapportionments.

Rateable values take account of a variety of factorsrelating to value, such as location, etc. and do notgenerally reflect a reasonable assessment of the benefitand use of common services.

While many leases require service charges to beapportioned based on rateable value, with no provisionfor any alternative basis to be used andnotwithstanding that this Code cannot override thecontractual terms of any lease, it is nevertheless theview of the steering group that rateable valueapportionments should be changed to such otherrecognised methods of apportionment consistent withthe aims and aspirations as set down in this Code.

1.5.7 Owner’s cost/profit centres

Where there is a separate cost or profit centre within aproperty complex that generates income for the ownerthat is not credited to the service charge account, thecosts associated with maintaining and running thatcost centre will not be allocated to the service chargeaccount (for example, car parks, mobile phone masts,advertising, radio aerials, etc.). If the separate cost/profit centre derives benefit from staff or services thatform part of the service charge, the cost/profit centrewill be incorporated into the service charge matrix (forexample, the car park, management office, etc.).Alternatively, owners can estimate and declare acontribution to the service charge that reflects thebenefit and use of the common services enjoyed.

1.5.8 Tenant alterations

Alterations carried out by tenants may have an impacton the calculation of the apportionment of occupierservice charge liabilities.

Tenant alterations that change any factor on which theapportionment calculation is based (such as, but notlimited to, floor area, rateable value, or the extent ofuse and benefit of the services derived) mightdetermine whether adjustments to tenant servicecharge apportionments would be appropriate.

In the case of a warehouse/distribution centre, theintroduction of an additional mezzanine floor, inpreference to full eaves-height racking, may not affector increase the use of the premises, and therefore theuse and benefit of the common services.

However, a mezzanine floor installed in a unit on a retailpark might generate additional sales and customerfootfall, with a corresponding increase in goods


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deliveries, etc. and an increase in the enjoyment, useand benefit of common services such as parking,security, cleaning, etc.

While this situation can often present a dilemma for thelandlord, the answer may often be found in the precisewording of the lease. If this makes specific reference tothe basis on which the service charge apportionment isto be calculated, for instance, to the floor area, thelandlord would be obliged to factor in the additionalfloor area of the demised premises to theapportionment matrix.

Where the lease does not make specific reference tothe basis of apportionment and refers, for instance, toa ‘fair and reasonable proportion as determined by thelandlord’s surveyor’, the landlord’s surveyor, acting asan expert, will be required to adopt a basis ofcalculation that conforms with the basic principles ofservice charge apportionment. This would need to bedemonstrably fair and reasonable to ensure thatindividual tenants bear an appropriate, fair andreasonable proportion of the total service chargeexpenditure that reflects the benefit of the servicesenjoyed.

When dealing with alterations to premises, particularlywhere these require the prior consent or approval ofthe landlord, it is always desirable that carefulconsideration be given to the potential impact on thecalculation of the service charge, to ensure that theapportionment continues to be fair and reasonable.This is in view of the underlying principles set out inthis Code of Practice.

Landlords are also advised to consider includingappropriate wording within any licence for alterations inorder to clarify the position and basis of calculation ofthe service charge for the future.

Further information and guidance can be obtained fromthe RICS information paper Service charges and tenantalterations (2009).

1.6 Direct recoveries

Service charges usually include the cost of utilities forany common parts and services. Traditionally, buildingsand/or rent insurance is apportioned to occupiersoutside of the service charge arrangement as a directlyrecoverable cost. Occupiers are often responsible forpayment of electricity/gas consumption supplied to theoccupied premises direct to the utilities provider. Insome circumstances, however, the lease may providefor the cost of buildings insurance and demisedelectricity to be recovered within the service charge.

Where owners are seeking to recover the cost ofinsurance and utilities outside of the service chargearrangement, occupiers are entitled to expect similar

transparency, accountability, etc. in these services,since the Code is also applicable to these.

1.6.1 Insurance

Value for money

Where owners are responsible for insuring the propertythe insurance policy terms should be fair andreasonable and represent value for money, and beplaced with reputable insurers.

Commission

The principle of commission retention is now longestablished. In its base form, the use of commission tocover administrative costs – including broker fees – isto be recognised, also the owner’s ability to benefitfrom the economies of scale generated by the poolingof risks into a common programme.

Owners and managers are also required at all times todisclose any commission(s) they are receiving.

Service

Owners are obliged to provide full insurance details onrequest, and to be able to explain the process bywhich occupiers can make claims under the policy.

Policies are expected to include an ability to note theinterest of occupiers, as well as any subrogationwaivers and non-invalidation provisions for the benefitof the occupier. Again, these are to be in line with leaseobligations.

Further information and guidance can be obtained fromthe RICS guidance note Insurance for commercialproperty managers (2010).

1.6.2 Utilities

Where a service is provided directly to an occupier orto the occupied premises, such as mains water orelectricity supply as distinct from common works andservices, it is important that the manager and occupierunderstand the basis on which the service is provided,and whether the costs are intended to be includedwithin the service charge account, or will be issued asa separate charge.

Separate metering, or full submetering of utilitysupplies, is considered essential to ensure anapportionment of cost between occupiers that reflectsactual consumption and usage.

Costs should be recovered in accordance with theterms of the leases, which ought to allow additionallyfor the payment of a reasonable administrative charge.The recovery should state unit costs and administrationcharges and include copies of the original invoice inorder to comply with the requirements for transparencyset out in the Code.



To avoid ambiguity, and to ensure that accurateconsumption and billing is recorded for occupiers, it isrecommended best practice that the cost of readingmeters (where carried out by a third party) is includedas an acceptable cost under the service charge.Otherwise, such costs would usually comprise part ofthe on-site management costs.

Occupiers should be aware of the ever-increasingpressure placed on owners by utility providers forprompt payment and should therefore ensure that allinvoices are paid promptly. In certain circumstancespayments in advance may be appropriate.

It is now also becoming increasingly common for utilitycompanies to request that owners either pay largesecurity deposits or higher energy rates.

Where a lease makes specific provision for theinclusion of a security deposit as a service charge cost,both owners and occupiers are urged to ensure thatthe lease allows for the occupier’s proportion of thedeposit to be reimbursed on expiry; or alternatively onsooner determination of the lease, in the event of achange of owner/manager, or if the deposit is otherwisereimbursed by the utility company.

Where a lease makes no such provision, it isconsidered appropriate for the owners to open adialogue with occupiers in order to seek to agree topay a security deposit in return for contract supplyrates, as opposed to default supply rates.

The payment of a deposit can be included in on-account payments for the relevant service chargeperiod, credited at year-end and then re-budgeted forthe following period. Therefore, if a lease expires in anygiven period, the occupier will receive an appropriatecredit in their final service charge balance.


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2 Communication and consultation

2.1 Communication

As poor communication often gives rise to disputes,effective communication is key to achieving bestpractice. Here the aim is to provide transparencybetween manager and occupier in the way services areprovided and managed, and in how the costs of theseservices are recovered. Communication needs to betimely and continuous, and works best when managersand occupiers deal with each other’s reasonableenquiries and reciprocal obligations promptly andefficiently.

Managers are advised to seek feedback from occupierson the performance management standards andservice delivery, and take any action on this feedbackas appropriate.

It is important to have a clear communication structure.Best practice requires managers to hold regularmeetings with occupiers, and occupiers have a duty ofcare to participate in these meetings and to beproactive in informing managers of the key contactswho deal with service charges.

Managers are also obliged to make key contactinformation available to occupiers, for instance, themanagement surveyor, credit controller, accounts clerk,etc., as well as the names of any on-site staff, alongwith their roles and responsibilities.

Managers are to provide occupiers with a copy of themanagement policy, which should contain standardinformation about how the property is managed andthe aims of the management team (e.g. the managerand the on-site team). Managers should also informoccupiers of any future plans for the property,particularly if these are likely to have an impact on theservice charge.

2.2 Consultation

Managers of residential premises are required to followstatutory consultation procedures, and will be keenlyaware that if the proper procedure is not followed, theamount they can recover might be limited.

Managers of commercial property are not generallyobliged to ‘consult’ with occupiers prior to incurringcosts that are ultimately to be recovered under theservice charge arrangement. However, some

commercial leases might set out certain procedures tobe followed, perhaps prior to incurring largeextraordinary costs, such as major fabric or plantreplacements etc. The courts have recently ruled in anumber of instances that owners are obligated tofollow the terms of leases strictly when recoveringservice charges. Therefore, in order to ensure recoveryof the service charge, managers should take particularcare to follow exactly the procedures as set downwithin the lease.

Even where the lease is silent it is considered bestpractice for managers to consult with occupiers withregard to the standard and quality of the service chargeprovision(s) required. While the manager has a duty tomanage the property and will not wish to incurexpenditure that might have a detrimental effect on theowner’s investment, managers should ensure that thestandard of service provision (and therefore the cost tooccupiers) does not unnecessarily exceed thereasonable requirements and needs of the occupiers.

2.3 Budgeting and cost review

It is the manager’s duty to keep expenditure underconstant review in order to identify any unforeseenvariances and to notify occupiers accordingly. Whensignificant variances in actual costs against budget arelikely, it is good practice for the manager to notifyoccupiers promptly and within the current servicecharge year. When substantial works are planned,summary details of the results of tenders and theprocess used should be communicated to theoccupiers, together with full information on theprogramme of works, costs and the process to beadopted for keeping occupiers informed.

Occupiers are entrusting their business overheads/operating costs to an external manager, and as suchare entitled to be notified of any significant or materialvariances to the forecast as soon as possible.

Whether a variance against forecast is to be regardedas significant or material will often be a subjectiveassessment, depending on a variety of issues such asthe size, nature and type of property and the amountspayable by individual occupiers. Prompt notification ofunforeseen variances in the total annual spend shouldbe made to all occupiers, with an explanation as tohow this is being mitigated, at the earliest opportunity.



3 Dealing with existing and new leases

3.1 Existing leases

The basis by which service charges are operated andmanaged is set down in the contract between theowner and occupier, otherwise known as the lease.

Many service charge disputes are caused by the failureof managers and/or occupiers to read and properlyunderstand the respective obligations and liabilitiesunder the contractual arrangement made betweenthem. Therefore, care and attention is required tounderstand the contractual basis of the service chargearrangements properly.

Existing leases may contain service charge provisionsthat differ from the recommendations in this Code.Where this is the case, this Code cannot override thelease, but existing service charge clauses are to beinterpreted as far as possible in line with the principlesand practices as set out here. This applies unless thelease specifically stipulates a different approach, whichtherefore has legal force.

Where doubt or possible ambiguity exists, seekspecialist professional advice.

3.2 New leases

As new leases are granted and older leases renewed, itis essential to bring service charge clauses up tomodern standards. If modernisation of the servicecharge provision of the lease is required, both to meetbest practice and in the interests of compatibility withother occupiers, and this results in an increase ordecrease in the amount payable by the occupier, this isto be taken into account in any negotiations, forinstance, as reflected in the rent payable.

While this Code cannot override the lease, it does setout the industry-accepted best practice in the field ofservice charges. It will help solicitors, their clients (bethey owners or occupiers) and the managers of servicecharges to draft, interpret and operate leases inaccordance with best practice.

It is recommended that owners, occupiers and theirsolicitors ensure the lease they sign reflects this Code,which will enable more effective, business-focusedservice charge management during the course of thelease. Terms should be relevant and appropriaterecognising the length of the lease term, and the scale

and type of property concerned. At the time of leaserenewal, the service charge clauses will certainlyrequire review and probably modernisation/updating. Itis recommended that new leases be drafted withsufficient flexibility to allow for changes in bestpractice.

The attention of owners, managers and occupiers isalso drawn to the Code for Leasing Business Premises,which provides further guidance for negotiations beforethe grant of a lease or lease renewal in creating adocument that is clear, concise and authoritative.

Further information can be obtained fromwww.leasingbusinesspremises.co.uk

It is unlikely that all leases within a multi-let propertywill fall for renewal on the same date. Modernising theservice charges on an ad hoc basis may lead to a‘dual’ service charge, where in effect two servicecharge arrangements would operate in tandem, withone based on the older form of leases, and the otherbased on the modern form. Therefore, interimarrangements may be necessary to ensure the practicaloperation of the services and the recoverability of theservice costs during the intervening period until suchtime as all leases have been modernised. For example,renewal leases might reflect the ideal service chargeregime going forward, as well as the status quo, sothat when the tipping point is reached, the owner canswap from the old lease service charge regime to thenew.

3.3 Sweeper clauses

It is often difficult to predict precisely what servicesmight be provided through the duration of a long lease,and which are to be covered by the service charge. Toavoid the risk of incurring costs that might fall outsideof the service charge, most leases contain a ‘sweeper’provision entitling the owner to charge, not only for theservices specifically listed, but also for othermiscellaneous services that might be provided in thefuture.

This is not usually a problem for short leases however,as in these cases it is far easier to accurately predictthe services that are to be provided. Unless a leaseincorporates very clear wording to the contrary, if theowner had in mind the provision of a service, but has


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not covered the right to include the cost of providing itin the service charge, he or she will not generally beable to use the sweeper clause as authority to recoverthe cost.

A sweeper clause cannot be used to cover the costof something that was left out of the lease in error.The intention is to give the owner the ability toprovide further services that are not identified or incontemplation at the time the lease was granted,and that, for any reason, are considered necessaryor desirable to be provided at a later time.

3.4 Professional arbitration on courtterms (PACT)

The Civil Procedure Rules (CPR) determines that ADRmust be considered before litigation, or the parties riska punishment of costs by the courts.

PACT is a scheme offered by RICS and the LawSociety as a form of ADR for lease-renewal disputes.

The scheme provides the opportunity for owners andoccupiers to have the terms and rent payable undertheir new lease decided by a surveyor or solicitor,acting as either an arbitrator or independent expert. Itis important to note that any decision made by eitheran arbitrator or independent expert is legally binding.

The objective of the scheme is to increase theeffectiveness and flexibility of the legal system, and togive a greater choice to owners, occupiers and theiradvisers through the lease-renewal process.



4 Financial controls and competencies

4.1 Accounting principles

Annual statements of service charge expenditureshould include a comprehensive list of accountingpolicies and principles on which the statement isprepared, including:

+ whether the statements are prepared on anaccruals or cash basis

+ whether the owner has waived the exemption tocharge VAT (opted to tax)

+ a description of the intended purpose for anysinking or reserve fund, together with anexplanation of the tax treatment of contributions toand interest earned on such funds, and details ofthe trust where such monies are held

+ a statement of all contributions to and expenditurefrom the sinking or reserve fund account, togetherwith the account opening and closing balances,and the amount of interest earned and tax paid inthe relevant period

+ an analysis of any material variances betweenbudget and actual expenditure, with a detailedcommentary to explain trends and variances wherethese are significant and

+ sign-off statements by the accountants and/ormanager with regards to compliance, financialaccuracy and the use of appropriate accountingpolicies.

4.2 Audit and certification of servicecharges

4.2.1 The requirements of the lease

It is usual for leases to provide for an annual statementto be issued to occupiers following the end of eachservice charge period; this would normally include asummary of the costs and expenditure incurred in theprovision of the services and a calculation of theservice charge.

Many leases will set out the procedures regarding thepreparation of the annual statement, and will oftenrequire that the annual statement be ‘certified’ by thelandlord’s surveyor, managing agent and sometimes thelandlord’s accountant. However, certain leases mightalso require the statement to be ‘audited’.

It is essential that any contractual requirements in thelease be duly followed. Compliance with therequirements and procedures set down in the leasemay be a ‘condition precedent’, and recent case lawhas determined that where a lease sets down specificrequirements and procedures, a failure to comply mayadversely prejudice the owner’s ability to recover suchsums.

Managers should therefore ensure that annualstatements of service charge expenditure areissued strictly in accordance with the proceduresand requirements as set down under the terms ofthe lease.

There is currently widespread confusion, however, as tothe intention and purpose of the certification processand the requirement for ‘auditing’ of service charges.Furthermore, the terminology used in relation to theissuing of annual statements of account, particularly inolder leases, may be quite generalised, and may notreflect modern auditing and accounting standards andpractice.

Independent accountants who issue a report on astatement of service charge expenditure will often carryout differing levels of work, and will each sign adifferent style of report. Consequently, there is littleunderstanding of the level of assurance that ownersand occupiers can take from the report, and potentiallyconfusion regarding the actual work undertaken byindependent accountants.

4.2.2 Service charge certification

The purpose of certification of the service chargeaccounts is to provide occupiers with the comfort andcertainty that:

+ the accounts produced represent a true andaccurate record of the expenditure incurred by theowner in supplying the services to the building and

+ the expenditure the owner is seeking to recover isin accordance with the terms of the leases and,where practicable, the provisions of this Code.

Annual statements of service charge expenditureshould be certified by the manager as complying withthe statements above. In certifying the statement themanager is required to act in a professional, non-partisan manner, and not supposing that the only taskis to recover as much money as they can for theowner.


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Notwithstanding any specific requirements of the lease,the certifier will need to be an appropriately qualified,competent person with experience in dealing withservice charges. In certifying the service charge, thecertifier has a duty of care to both owners andoccupiers to act with professional care, diligence,integrity and objectivity.

The lease might also set down the credentials/qualifications required of the person who will certify theservice charge statement. In certain circumstances, thelease might specifically allow the surveyor oraccountant to be an employee of the landlord.

In the interest of transparency, the status of the personissuing the certificate and the capacity in which thecertificate is issued should be made clear (i.e.landlord’s surveyor, accountant, etc.).

In certain instances, certification may be issued in thename of the manager. Where this is the case,managers are advised to have clear internal proceduresin place that control who may sign in the name of thefirm, and to ensure this is an appropriately seniorindividual.

Where the manager undertakes the certification, themanagement fee is to include this cost. Where thelease requires certification by someone other than themanager, the costs of certification of the servicecharge, together with the fees of an independentaccountant, will be recovered through the servicecharge.

4.2.3 Auditing of the service charge accounts

+ An audit is an independent external review processthat adds to the credibility of an entity’sdisclosures, be it their annual financial statements,systems of internal control, or compliance withcontractual or legislative obligations.

+ An audit involves performing procedures to obtainevidence that a specified process is being followedin order to give occupiers sufficient comfort thatthere is no material misstatement within theinformation subject to the audit (or in this case, theservice charge accounts).

Where the lease specifically refers to an ‘audit’, this isto be carried out in accordance with InternationalAuditing Standards (IASs) (UK and Ireland), and shouldbe performed by a registered auditor.

In carrying out an audit in accordance with acceptedauditing standards, it is the auditor who would normallyassess the level of risk involved in the instruction, andwould also adjust the level of work (and cost)accordingly. For instance, the auditor is likely to requirea copy of the lease or leases governing theadministration of the property, and summarise theexpenses that may be charged to the occupiers. This

exercise is likely to be extremely time-consuming, andhence costly, particularly for larger properties withmany leases in operation. The auditor may need toemploy an expert in order to carry out this review onhis or her behalf.

The auditor’s reasonable and proper costs and feeswill, subject to the terms of the lease, be charged tothe service charge account.

Frequently, the work required by a modern auditingframework is not what was anticipated when leaseswere drawn up; especially where the original leasedates back many years. Where this is the situation, themanager faces a dilemma whereby the lease requiresan ‘audit’, but an audit in accordance with auditingstandards may exceed that which was intended. Anaudit may not, therefore, provide best value foroccupiers. In such situations, owners/managers mayconsider it appropriate to engage an independentaccountant to examine the service charge accounts ofa property, rather than carry out an audit.

If the lease specifies that an audit is to be carried outthen this should be undertaken, unless the occupiersconfirm in writing that it is not required. In thesecircumstances, an independent accountants’ reportshould be prepared.

4.2.4 Independent accountants’ report

In the majority of cases, it is considered appropriate forowners/managers to engage an independent reportingaccountant to examine the service charge accounts ofa property rather than carry out an audit, as the cost ofan ‘audit’ in accordance with auditing standards islikely to be disproportionate and may not offer value formoney.

Even where a lease requires the service charge to beaudited, or certified by the landlord’s auditors, ownersand managers will need to make clear whether an auditunder accepted auditing standards has been carriedout, or alternatively an independent accountant’s reportprepared.

The onus and style of an independent accountant’sreview differs from an audit. The procedures carried outmay include:

+ checking whether the figures contained in theinformation were extracted correctly from theaccounting records maintained by the managerand

+ checking, based on a sample, whether entries inthe accounting records were supported by receiptsor other documentation, or the evidence wasinspected.

It would be usual for annual statements of servicecharge expenditure to be prepared, and certified, bythe owner or manager. In practice, for many small



properties, the reporting accountant may be engagedto prepare the statements from accounting recordsmaintained by the owner or manager, as well asproviding the independent accountant’s report. In thesecircumstances, the owner or manager will retainresponsibility for the preparation and certification of thestatement.

Where the lease is silent or the audit is optional,managers should not use an external audit orindependent accountant’s report as a means of givingcredibility to service charge expenditure at theoccupiers’ expense, unless this is agreed with theoccupiers in advance. In addition, an audit orindependent accountant’s report should not be used asa substitute for an alternative method of certificationspecified in the lease, unless this has been agreed withthe occupiers in advance.

If an occupier requests an audit (subject to clarificationof ‘audit’ as above) or independent accountants’report, the manager should agree and the costs thereofshould be charged to the occupier.

4.2.5 Recommended best practice

+ Annual statements of service charge expenditureshould be certified by the manager to confirm thatthey represent a true and accurate record of theexpenditure incurred by the owner in supplying theservices to the building, and that the expenditurethe owner is seeking to recover is in accordancewith the terms of the leases.

+ Annual statements of service charge expenditureshould be reviewed by an independent accountant.However, to be consistent with best valueprinciples this requirement should be consideredas optional for smaller properties and dependentupon the quantum and nature of the expenditure.

+ In certifying the service charge, managers have aduty of care to both owners and occupiers to actwith professional care, diligence, integrity andobjectivity.

+ If the lease requires an audit to be carried out,then this should be undertaken, unless theoccupiers confirm in writing that this is notrequired. In these circumstances, an independentaccountants’ report should be prepared.

The Institute of Chartered Accountants in England andWales (ICAEW) is to issue a technical release toprovide guidance on accounting for commercial servicecharges. For the latest information see the ICAEWwebsite at www.icaew.com

This technical release will provide good practiceguidance on technical and practice issues relevant tothe work of accountants and other professionals.

In consultation with the ICAEW, RICS has issued asample report on service charge accounting (seeappendix C) setting out recommended best practice forthe disclosures and information that managers shouldprovide to the accountants appointed to carry out anindependent review of service charges, and forsubsequent communication to tenants as to the nature,type and cost of services provided.

4.3 Industry standard cost classifications

Appendix B includes details of industry standard costclassifications that must be used in reporting budgetand actual expenditure.

The industry standard cost classifications providesthree levels of analysis:

+ cost class

+ cost category and

+ cost description.

As a minimum acceptable level of reporting, servicecharge budgets and statements of actual expenditureare to be prepared at cost class and cost categorylevel.

Adoption of the industry standard cost classificationswill reap enormous benefits for the industry as a whole,as this will facilitate better cost comparison betweenproperties and the benchmark indices. It will alsoreduce costs and assist in the transfer of informationbetween managers and owners when properties aresold or when there is a change of manager (i.e. fromin-house to external, or between managing agents).

However, to achieve transparency in accordance withthe principles of this Code, it is recommended bestpractice that budget and actual expenditure analysesare provided at the detailed cost description levelwhenever practicable, and particularly in respect oflarger properties, with a summary of the total costsunder each cost category.

In accordance with the core principle of proportionality,it is acceptable for smaller properties or those withlimited service charge expenditure (for example,industrial sites) to report at the higher cost categorylevel, although this is generally regarded as anexception rather than the norm.

To maintain consistent industry standards and tofacilitate benchmark comparison, managers and thoseresponsible for preparation of the accounts areencouraged to use all best endeavours to comply withthe cost class and cost category analysis as set outand not permit the creation of new cost categories orcost classes.

However, the detailed cost descriptions set out are notintended to represent an exhaustive list, but are


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included for illustrative and guidance purposes only.Individual cost descriptions may vary from manager tomanager, and the inclusion of additional costdescriptions is encouraged where this will facilitategreater transparency and clarity with regard to theexpenditure incurred or proposed.

The use of the standard cost classes and categories inindustry-standard format are essential if benchmarkingis to be effective. However, for benchmarkingpurposes, accounts are only required at cost-categoryand cost class level. It is not intended that benchmarkanalysis of expenditure be carried out at costdescription level.

4.4 Budgets and actual expenditureaccounting

The service charge accounting sample reportestablishes a basic framework for the preparation ofservice charge accounts, and identifies areas forspecial consideration by managers and reportingaccountants.

Core principle 24 requires managers to issue budgetsof anticipated service charge expenditure to occupiers,including an explanatory commentary at least onemonth prior to the commencement of the service-charge year. Budgets should also include a clearexplanation of the calculation of the occupier’sproportion of the total costs.

Detailed statements of actual expenditure, togetherwith accounting policies and explanatory text, will beissued within four months of the service charge year-end.

The accounts are to give an adequately detailed andcomprehensive summary of items of expenditure, withfull explanations of any material variations (+ or -)against the budget, and in a reasonably consistentformat year on year.

It is recommended that the budgets and accounts beissued with a report that provides the followingminimum information:

+ a comprehensive level of detail to enableoccupiers to compare expenditure againstestimated budgets

+ explanations of significant individual costs and ofvariances from the previous year’s budget/accounts

+ a comparison against the previous two years’actual costs, where appropriate

+ information on core matters critical to that account(e.g. levels of allocation, apportionment, contracts,report on tendering, etc.)

+ the achieved and/or targeted measures ofimproved management performance (e.g.successes in delivering improved quality servicesand greater value for money)

+ on-site management team costs, separatelyidentified

+ details and results of the most recent previous andforthcoming tendering exercises. Occupiers are tobe advised of the contractors who are providingthe services

+ a full apportionment matrix that clearly shows thebasis of calculation and the total apportionmentper schedule for each unit within the property/complex

+ the date of issue

A set of industry standard cost classifications has beendrawn up, and is included in appendix B (see also 4.3).It is essential that these be used at cost-class andcost-category level.

4.5 Right to challenge

This Code cannot override an occupier’s legal right tochallenge incorrect or inappropriate service chargessubject to the prevailing statute of limitations.

Where the manager has demonstrably complied withthe provisions of the lease and this Code of Practice, itis recommended that the manager allow occupiers areasonable period (e.g. four months from issue) inwhich to raise enquiries or request further informationin respect of the certified accounts. Managers areexpected to deal with reasonable enquiries promptlyand efficiently, and to make all relevant paperworkavailable for inspection. Where copies of thesupporting documentation concerning the certifiedaccounts are supplied, it is acceptable for anappropriate fee to be charged.

Occupiers and consultants appointed on their behalfhave a duty to respect and conform to the principles ofthe Code. In the interest of promoting a swift andharmonious resolution of service charge queries, thereshould be openness and transparency in disclosing theoccupier’s brief to his or her consultant and whetherremuneration is on a contingency fee basis.

4.6 Change of owner or manager

In the event of a sale or change of manager, it isessential that a definitive timescale is agreed withinwhich accounts will be closed and handed over.

It is recommended that as soon as practicable – butnot later than four months following the date ofcompletion of a sale of a property, or a change ofmanager – full details of all service charge expenditure,



accruals, pre-payments, etc. for all outstanding servicecharge years be provided to the new owner/manager,up to the date of sale/transfer.

The new owner or manager should issue any futurebudget in such a way that it provides sufficientinformation to enable occupiers to compare it with themost recently issued certified accounts. The occupierscan then convert historical data into a consistentformat for comparison where the current manager wasnot responsible for previous years.

Further information on the recommended processesand procedures in the event of a property’s sale, orother circumstances where the manager changes, isincluded in the RICS information paper Commercialproperty service charge handover procedures (2011).

This is particularly relevant to solicitors when draftingand reviewing sale contracts.

4.7 On-account payments

Service charges are usually ‘reserved as rent’ in thelease. However, in reality, the service charge is neutralin income and expenditure terms, after year-endbalancing charges/credits. Service charge monies willbe held in one or more discrete bank accounts inrecognition of the fact that the monies are being heldto deliver the service expenditure.

Furthermore, and based on the principle that ownersshould not profit from the supply of services, allinterest earned will be credited to the service chargeaccount (after appropriate deductions have been made,i.e. bank charges, tax etc.).

Where separate accounts are not operated perproperty, or advance payments from more than oneproperty are held in a single account, a proper andreasonable amount of interest on normal commercialrates is to be credited to the benefit of the servicecharge.

4.8 Interest on service charge accounts

Interest earned and late payment interest should becredited to the service charge account. Bank chargesand account operating costs are to be offset againstthe interest. Owners are required to perform theirobligations under the terms of the lease, and toaccount to occupiers for any balancing charges due/owed at the end of the service charge period.

Modern leases often enable owners to recover the costof borrowing to fund major non-cyclical expenditure asa cost to the service charge. In older leases, there is arisk of having to fund shortfalls from negative cashflows.

It is the owner’s responsibility to fund the contributionfrom void units, and to make these payments to theaccount as promptly as payments made by occupiers.If an owner is not as prompt as occupiers are requiredto be, the interest charges should apply in line with thepayments made by occupiers.

When communicating with occupiers through budgetand expenditure reports, managers shouldunambiguously state their policy concerning thecrediting of interest to the service charge.

4.9 Forward funding of service chargecosts

Leases should enable owners to recover thereasonable and proper cost of borrowing to fund majornon-cyclical or exceptional unbudgeted expenditure asa cost to the service charge. In older leases there is arisk of having to fund shortfalls from negative cashflows. Where owners are crediting interest earned tothe service charge account, they should be reassuredthat charging the interest on borrowed money to fundmajor non-cyclical or exceptional unbudgetedexpenditure meets best practice requirements (see alsosection 7 Provision for anticipated future expenditure).

4.10 Timeliness

It is the responsibility of the manager to provide theoccupiers with budget and reconciled accounts foranticipated and actual service charge expenditure atthe appropriate time. This to include appropriateexplanatory comments with regard to costs proposedor incurred, together with details of the basis ofapportionment, to enable occupiers to reasonablyunderstand how their liability has been calculated.

Budgets will be issued at least one month prior tocommencement, and reconciled accounts issuedwithin four months of the end of the service chargeyear in question.

Where an occupier raises queries or seeks furtherclarification on any matters relating to the budget oractual costs, the manager is encouraged to deal withsuch proper enquiries promptly and efficiently.

4.11 Benchmarking and cost analysis

Adoption of the standard industry cost classifications(see 4.3 and appendix B) is considered essential tofacilitate better cost comparison between propertiesand the benchmark indices. It will also reduce costsand assist in the transfer of information betweenmanagers and owners when properties are sold, or if


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there is a change of manager (e.g. from in-house toexternal, or between managing agents).

Further, these cost classifications are largelycompatible with industry benchmark indices, whichfacilitates a benchmark comparison of costs.

However, when using benchmark information tocompare operating costs for any building, caution isneeded. Industry benchmark indices are not intendedas a definitive database of costs for operating servicecharges in commercial buildings, but do serve tohighlight indicative trends in service charge costs.Buildings differ substantially in terms of construction,age, layout, gross to net floor-area ratio, staffing andsecurity levels, hours of operation, and standards ofmaintenance and management.

These analyses take the average of service charges forsimilar properties, and therefore provide a guide to thecost effectiveness of the management service.However, property is not mass-produced in similarformats (as is a car, for example). Each property willhave its own variations from the average, therefore‘beating the benchmark’ is not necessarily proof ofservice efficiency and value for money. Industrybenchmark indices provide an excellent guide, butmanagers may wish to reflect further on how theirspecific property is performing from a value-for-moneyperspective.

4.12 Value for money

In providing the services, the owner/manager isrecommended at all times to endeavour to achievevalue for money and effective service, rather than thelowest price. ‘Value for money’ can be simply definedas ‘paying no more than is necessary for no less thanis required’.

Occupiers are to be proactive in assisting managerswith operating and using services that are consistentwith the aim of achieving value for money, for example,separating waste to facilitate appropriate and cost-effective recycling.

The manager is to keep all costs under review, andwhere appropriate (generally every three years), requirecontractors and suppliers to submit competitivetenders or provide competing quotations. However,where it is considered that formal re-tendering wouldnot be cost-effective or practical, the manager shouldbenchmark the service standards and pricing toconfirm that value for money is still being achieved.

It is advisable for managers to require major serviceproviders to demonstrate that their services, methodsand processes are continually reviewed to ensure valueand efficiency.



5 Dispute resolution

There are times where managers and occupiers candisagree on matters such as which services arechargeable, what benefit the occupiers individually orcollectively receive, and/or how much they cost.Traditionally, leases have not allowed for any form ofredress for the occupiers, and therefore expensivecourt action has often been necessary to query theservice charge (see paragraph 4.5).

It is usually beneficial to both owners and occupiers toresolve service charge disputes quickly, as going tocourt can be slow and expensive. Many occupiers canbecome dissatisfied and, believing that disputing aservice charge in the courts is not cost-effective, willsimply resort to withholding payment instead.Occupiers are advised not to arbitrarily withholdpayment of any sums that are properly demanded,rather, where circumstances dictate, any paymentwithheld is to relate to the actual sums queried or indispute, and not to the whole of the service chargedue.

Alternative dispute resolution (ADR) can provide a morecost-effective way of resolving service charge disputesthan the courts, and it is recommended that thisprocess be used even when leases do not expresslyprovide for it (see paragraph 5.1).

When disputes are resolved, the base-rate interest is tobe paid or allowed in respect of the period duringwhich the relevant amount has been under or overpaid.In mediation, the parties will agree what they want toachieve, and an independent expert will then determinewhat the lease says.

5.1 ADR as industry best practice

The glossary of terms in the Civil Procedure Rules 1999defines ADR as a: ‘collective description of methods ofresolving disputes otherwise than through the normaltrial process’.

Since April 1998, the courts have encouraged partiesto use ADR rather than go to trial. From April 2006, thecourts have been obliged to take into account whetherthe parties have given proper consideration to the useof ADR, and have used it to resolve their dispute, ifappropriate. The attitude of the courts is that litigationis always a last resort. The courts can require parties toprovide evidence that alternative means of resolving

their dispute were properly considered. A party can bepenalised in costs for failing to give properconsideration to the use of ADR, even if it wins at trial.Therefore, it is strongly recommended that in disputesabout service charges, ADR be considered first beforetaking legal action.

All new leases (including renewals) are to provide forADR where it concerns service charge disputes. If theparties cannot agree on the person to provide thisservice, a decision can be taken by the President ofRICS to appoint such a person. The RICS DisputeResolution Service (DRS) (www.rics.org/drs) managesapplications to the President for the appointments ofmediators, independent experts and arbitrators.

Where leases contain no ADR clauses, there isnothing to stop the owner and occupier agreeing touse ADR to help them find a resolution to a dispute.It is possible that a party who declines to use ADR,if it is available, could be penalised in a costs orderif the court considers they have refused to engagein ADR without a good reason.

There are issues as to which form of ADR is mostappropriate to service charges. The options are variedand include:

+ early neutral evaluation

+ mediation (facilitative or evaluative)

+ independent expert determination or

+ arbitration.

5.2 Early neutral evaluation (ENE)

ENE is an ADR process whereby both parties retain aneutral party to provide a non-binding evaluation on themerits of a dispute. As the name suggests, this isusually most effective if attempted early in the life ofthe process, before positions become entrenched andsignificant costs have been incurred. There are noprocedural requirements for ENE beyond those agreedbetween the parties.

The advantages of ENE are that where parties areengaged in direct discussions, the opinion of amutually respected neutral person may assist in thenegotiations. An evaluative opinion from a neutralsurveyor, who understands the practical issues relatingto the management and administration of the service


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charge, or a senior legal professional on a disputedpoint of contractual construction, can help provide theparties with a realistic appraisal of their cases whileavoiding deadlock and/or positional bargaining.

5.3 Mediation

Mediation is a non-binding structured settlementnegotiation facilitated by a neutral third party – themediator – who has no decision-making power. Theobjective of mediation is to achieve a mutuallysatisfactory agreement between the parties, rather thanhave something imposed by a third party.

In a facilitative mediation, the mediator encourages theparties to look at the issues from each other’s point ofview, and each view is then ‘reality tested’ so it ispossible to see the strengths and weaknesses of eachrespective position. This process enables the parties toform a more balanced view of their position, and alsoallows them to come to a genuine agreement as to away forward.

In an evaluative mediation, the mediator takes adifferent role and uses his or her expertise to give theparties an honest appraisal of how their dispute, orcertain aspects of it, might play out in a more formalhearing. Armed with this information, the parties maythen choose to negotiate a settlement on a differentbasis to anything previously on offer.

A mediated settlement is generally recorded in a formalagreement (a contract). The mediation proceedings are‘without prejudice’, which means that nobody can usewhat has been said or recorded in the mediation in anysubsequent legal proceedings, and the mediatorcannot be called as a witness in any subsequent courtproceedings. What is said is confidential and remainsconfidential. The process is informal. A mediationhearing often lasts no more than one day, which makesit more cost-effective compared to court, as the partiesshare the costs of the mediation between them.

There are several organisations that can providemediators. RICS DRS can provide mediators who arechartered surveyors experienced in property matters.

There are no formal rules and procedures formediation, and in some cases, the parties may wish toadapt the process so that it is less facilitative.

5.4 Independent expert determination

This is an ADR process where an independent thirdparty (usually a chartered surveyor or solicitor who isan expert in the subject matter) determines theoutcome of the dispute. The basis of the appointmentof the independent expert is that he or she isempowered by an agreement between the parties to

make a final and binding decision. The agreement oftwo parties to refer their dispute to independent expertdetermination creates a contractual obligation for themto be bound by the decision of the independent expert.It is very unusual for such an independent expert’sdecision to be overturned by the courts.

The independent expert usually is a specialist in thematter of service charges. It is usual for parties tomake submissions to the independent expert, who willnormally incorporate them into his or her decision-making process. An independent expert will generallymake a decision on a dispute based on the applicationof his or her personal expertise in the subject matter,the results of their personal enquiries and thepersuasiveness of the parties’ representations.

In independent expert determination, the parties usuallyare invited to agree the precise issues that are indispute, and the independent expert then sets out theprocedures to be followed to reach a determination ofthis. Occasionally, there may be a need for a meetingof all the parties and/or a visit to the relevant property.

The fees of an independent expert are usually splitequally between the parties unless it is agreed betweenthem that the expert will also decide who will beresponsible for his or her costs as part of the overalldetermination of the dispute.

The parties usually bear their own costs incurred inpreparing their case and instructing professional orlegal representation, unless it is agreed between themthat the expert will also decide who will be responsiblefor inter-party costs as part of the overall determinationof the dispute.

While this process can be more formal than mediation,it means that the expert is free to use his or her ownknowledge and investigation to come to a final andbinding determination of a dispute.

5.5 Arbitration

The Arbitration Act 1996 governs all arbitrations inEngland and Wales. A request may be made to RICSDRS for an arbitrator to be appointed, or the involvedparties can agree on one. The process is more formal.The arbitrator (who will no doubt have some knowledgeof service charges) will decide the outcome of thedispute based on the evidence before him or her, but isnot allowed to stray outside the evidence.

As with independent expert determination, the processmay involve meetings known as ‘hearings’ andsubmissions. The decision of the arbitrator is usuallyknown as his or her ‘award’. The arbitrator is alsoentitled to decide on both his or her own costs and thecosts of the parties involved in the dispute.



5.6 RICS DRS fact sheets

RICS DRS has issued a highly informative series ofeasy-to-read fact sheets for surveyors and the generalpublic, covering the different areas of disputes, courts,tribunals and other processes involved in resolvingdisputes.

The fact sheets mainly cover the jurisdiction of Englandand Wales, but some also cover the position in otherjurisdictions.

For more information, refer to www.rics.org/drtoolkitand www.rics.org/disputeresolution


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6 Mixed-use schemes

Recently, there has been a huge increase in mixed-usedevelopments. While the concept is not new, what isdifferent about mixed-use developments today is theincrease in the introduction of residential units intocommercial buildings. This is being driven not byorganic growth, but by public policy.

The mixture of commercial and residential uses, inmanagement terms, presents particular challenges thatoften require both residential and commercial servicecharge management skills and expertise.

The extent to which the owner is obliged to provideand carry out works and services, in respect of bothcommercial and residential leases, will depend on astrict interpretation of the wording of the lease. TheLandlord and Tenant Act 1985, subsequently amendedby the Housing Act 1996 and Commonhold andLeasehold Reform Act 2002, imposes statutoryconstraints in respect of service charges for residentialproperties.

It has been a common misconception among manypractitioners that if the residential element of a mixed-use scheme was ‘let’ under a single head lease, itwould not be subject to the residential legislation. Thecases of Heron Maple House Ltd v Central Estates[2002] and Oakfern Properties Ltd v Ruddy [2006] havedetermined that an owner of a lease that includes bothresidential and non-residential elements will also needto follow the statutory procedures laid down by theLandlord and Tenant Act 1985 (as amended) to ensurethat non-recovery does not result due to aninfringement of the legislation designed to protectresidential occupants only.

Further detailed information and guidance is availablein the RICS guidance note, Managing mixed usedevelopments (2012).

Also see the RICS Service charge residentialmanagement code, which is approved by the Secretaryof State for England and has RICS guidance notestatus.



7 Provision for anticipated future expenditure

The nature of commercial leases and, in particular, thelength of these leases, has changed substantially overrecent years. Many items managed under the servicecharge will have a life expectancy longer than the leaseterm being granted. Owners and occupiers need tocarefully consider how they will recover (or pay for)these major expenditure items when they are due. It istherefore recommended that proper plannedpreventative maintenance (PPM) plans are used.

In addition to regular expenditure on services, ownersand occupiers may need to make provision foroccasional one-off outlays on replacing major items ofequipment (such as a heating system). Majorexpenditure of a regularly recurring nature (such asexternal redecorations) can also cause significantfluctuations in the amount of service charge payableeach year.

The move towards shorter leases creates difficulties inthe recovery of the cost of long-term maintenance/repair. An occupier occupying under a lease for a termof, say, five years may only have a ‘transitory’ interestin the replacement of a boiler, for example, which mighthave a life expectancy far beyond the term of his or herlease. That occupier is therefore not likely to beinterested in the replacement of the boiler at anindeterminate date in the future.

Contrast this with the situation of an incoming occupierwho has signed a new lease that includes a liability forpayment of a proportion of the cost of repair andreplacement of the owner’s plant, who then finds thatthe boiler requires replacement within the first year ofthe term.

To the extent that these items can be foreseen, it maymake sense for the cost of major extraordinaryexpenditure items to be spread over a number of years(and over a number or lease periods) by setting up asinking or reserve fund, rather than charging the wholecost to the current occupiers in the year in which theequipment is replaced.

Some confusion has arisen as the description andpurpose of such funds has become interchangeable.The following definitions set out industry guidance onhow these terms are to be used.

Sinking fundA fund formed by periodically setting aside moneyfor the replacement of a wasting asset (for example,major items of plant and equipment, such as heatingand air-conditioning plant, lifts, etc.). It is usuallyintended that a sinking fund will be set up andcollected over the whole life of the wasting asset.

Reserve fundA fund formed to meet the anticipated future costsof maintenance and upkeep in order to avoidfluctuations, or an anticipated large, one-off increasein the amount of service charge payable each year(for example, regularly recurring items such asexternal cleaning and redecorations).

Depreciation chargeA measure of the wearing out, consumption or otherreduction in the life of an asset (for example, heatingand air-conditioning plant and equipment, lifts, etc.).An amount would usually be included in the servicecharge to reflect the ‘cost’ to the owner of theannual depreciation of plant and equipment, whichwould be based on the initial cost of an installationrather than on the future cost of replacement.

Where provision is to be made for significant futureexpenditure such sums should not be included asaccruals but should be considered as contributionstowards reserve or sinking funds as above andreported accordingly.

In managing sinking and reserve funds or depreciationcharges, the following is to be considered as bestpractice.

Sinking, replacement and reserve funds

+ Monies accumulated in a sinking or reserve fundare to be held in one or more separate discretebank accounts to be maintained in trust for theoccupiers.

+ The owner or managing agent is expected to actreasonably in estimating the amount of the sinkingor reserve fund contributions to be included withinthe service charge, which will relate to specificallyidentified expenditure only (for example, repairs orreplacement of the roof, boiler plant, lift, etc.)rather than other unidentified future expenditure.


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+ The owner or manager is to provide a clearexplanation of the basis of calculation of thesinking or reserve fund contribution and the itemsto which it relates, and will apply a realisticassessment of the anticipated life cycle of the itemin question and the funds accumulated fromprevious service charge periods (including anyinterest).

+ The owner will make all payments into the sinkingor reserve fund account for void premises.

+ Statements of service charge expenditure willcontain a clear statement of any contributions toand expenditure from the sinking fund account,along with the account opening and closingbalances, the amount of interest earned and anytax paid in the relevant period.

+ On completion of the sale of a property, the vendorwill pass all sinking or reserve fund monies held tothe purchaser, together with any accrued interest.It is advisable to seek advice to ensure any taxliability on the fund is appropriately mitigated andaccounted for.

Depreciation charges

+ Charges made in respect of depreciation belong tothe owner. Accordingly, where a depreciationcharge is made, the responsibility for the cost ofreplacement moves to the owner. The owner ormanager will act reasonably in estimating theamount of the depreciation charge, and willprovide a clear explanation of the basis of thecharge calculation and the details of the specificitems for which the depreciation charge iscalculated.

+ A proper and reasonable depreciation charge is tobe considered as an annual cost to the ownerrather than the initial cost of installation.

+ Depreciation charges and sinking/replacementfunds are mutually exclusive. A depreciationcharge cannot be made where a sinking or reservefund is or will be made in respect to a specificitem, and vice versa.

Further detailed information and guidance is availablein the RICS information paper Sinking funds, reservefunds and depreciation charges (2014).



8 Initial provision, replacement andimprovement of fabric, plant andequipment

The service charge would usually be limited to therecovery of the reasonable costs of maintenance, repairand replacement (usually where beyond economicrepair) of the fabric, plant, equipment and materialsnecessary for the property’s operation.

Service charge costs will not include:

+ any initial costs (including the cost of leasing ofequipment) incurred in relation to the originaldesign and construction of the fabric, plant orequipment

+ any setting-up costs that are reasonably to beconsidered part of the original development cost ofthe property

+ improvement costs above the costs of normalmaintenance, repair or replacement (also seebelow) and

+ future redevelopment costs.

Service charge costs may include improvements orenhancement of the fabric, plant or equipment wheresuch expenditure can be justified following the analysisof reasonable options and alternatives, and with regardto a cost-benefit analysis over the term of theoccupiers’ leases. Managers should provide the factsand figures to support and justify such a proposal.

Recent case law has determined that the length of theoriginal or unexpired term of the tenant’s lease may bea factor in determining whether costs are recoverable.Current decisions do not give occupiers authority tosustain a proposition that, as a general rule, theycannot be required to pay a higher service charge forworks carried out towards the end of the term of theirlease. If an owner can demonstrate that repairs arenecessary to comply with the obligations under theterms of and within the life of the lease, the costs arelikely to be recoverable, even from a tenant whoselease is about to end.

8.1 Initial provision of fabric, plant andequipmentService charge costs will not include any initial costs(such as the cost of leasing of equipment) incurred in

relation to the original design and construction of thefabric, plant or equipment. The owner is expected toprovide these.

This also extends to the cost of fitting out andequipping any on-site management facilities, as thesecosts will be indistinguishable from other facilities andequipment such as lifts, heating, ventilating and air-conditioning plant, security systems, toilets, etc. thatcomprise part of the property. It is expected that thesesystems will be provided for the management,administration and operation of the property’s servicesfrom the outset.

In line with best practice, the initial cost of providingsuch furniture and facilities are not to be included aspart of the service charge.

8.2 Like-for-like replacement

The service charge should be limited to the costs ofreplacement and renewal of fabric, plant or equipmentonly, providing:

+ the relevant items being replaced or renewed arebeyond economic repair, or efficient or economicoperation

+ replacement or renewal of such items is a relativelylow cost compared with the much greater cost thatcould occur due to material postponement of thereplacement or renewal or

+ replacement or renewal of such items is a properrequirement of any public or competent authorityor legislation, or of the insurers.

Plant and equipment reaches the end of its economiclife when it is more economic to replace it than tomaintain it. Whether equipment is approaching the endof its economic life or not is determined by aninspection of the plant in operation by an experiencedengineer. As equipment approaches the end of itseconomic life, it is reasonable to anticipate that failureswill occur with increasing frequency. Therefore a reviewof service records, along with records of theoccurrence and frequency of failures, will help toestablish whether it is necessary to replace it.


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8.3 Replacement with enhancement

Where plant and equipment that has becomedilapidated or worn out is replaced, the replacementwill usually include an element of enhancement orupgrade of the previous equipment, due to the fact thatthe replacement will be of an equivalent modernstandard.

Strictly speaking, replacement of plant and equipmentby its modern equivalent would generally fall within thedefinition of repair and not improvements. However,there may well be a tendency towards exceeding thedesign specification of the original equipment in orderto meet modern requirements, or to introduce newproducts or practices intended to improve the servicelevels and/or value for money.

If the costs are to be recovered through the servicecharge, it is important to consider whether the intentionis to improve or repair the existing equipment.

If the additional cost of carrying out the improvementcan be justified on a cost-benefit basis, for example, areduction in the ongoing maintenance costs, increasedenergy efficiency, etc., there is a case for the servicecharge to be made to cover these. In suchcircumstances, proper communication, supported byfigures to support and justify such a proposal, will helpachieve a practical and common sense solution.

8.4 Improvement and enhancement

Service charges would not generally include the cost ofimprovement above the cost of normal maintenance,repair and replacement as above, but it is likely thatcircumstances will arise where owners and occupierswould see a direct benefit from the introduction of newinnovations or additional improvement orenhancements of the building fabric, plant, orequipment. The service charge might include suchcosts where the expenditure can be justified followinganalysis of reasonable options and alternatives, andhaving regard to a cost/benefit analysis over the termof the occupiers’ leases. Managers shouldcommunicate any proposals clearly to occupiers, andprovide the facts and figures to support and justifysuch a proposal (see also section 9 Environmentalsustainability).

8.5 Refurbishment

Refurbishment is a different concept to improvement.Within the scope of the refurbishment works proposedthere may include elements of catching up onaccumulated disrepair as well as elements ofimprovement.

The amount occupiers will contribute towards the costof refurbishment will depend on the extent and natureof the works proposed, in addition to the wording ofthe lease.

Owners will seek to protect the value of theirinvestments and to maximise rental levels.Refurbishments are often dictated by market forces,and are generally timed to coincide with rent reviews orlease expiries. Occupiers often object to contributingtowards the cost of refurbishment because not only willthey be paying for the cost of refurbishment throughthe service charge, but also through increased rents asa result of any improvements.

When refurbishments result in higher rental values, theowner is to be responsible for the cost ofenhancements or improvements above those ofmaintenance.

The need to carry out extensive repairs or to replaceservices is also considered in the decision to refurbish.Prior to a refurbishment, major repairs or replacementsmay be deferred to benefit from economies of scalethrough placing one major works contract. Theimproved efficiency of the new environment and anyimproved services may produce cost savings in day-to-day services management, resulting in the annualservice charge being reduced.

Occupiers may still be liable for the costs of repair orreplacement carried out as part of a largerrefurbishment contract as though the works had beenstarted separately from the refurbishment.

8.6 Communication

To ensure agreement and avoid dispute, if it isproposed to include the cost of improvements in theservice charge this is to be communicated to occupiersbefore any expenditure is committed. It is alsoadvisable to record any agreement in writing.

In the case of refurbishment, the owner’s proposals areto be communicated to all occupiers well in advance ofcommencement of any works to explain which coststhe occupiers are responsible for in relation to theservice charge. Best practice also recognises the needto establish regular communication between themanager and the occupiers to monitor therefurbishment and to agree which elements of theworks are to be considered service charge costs. Thisreduces or avoids the potential for dispute over anyunexpected costs following completion of the works.



9 Environmental sustainability

9.1 Green leases

The sustainability debate has been very much focusedon how to develop more sustainable buildings, but ithas ignored two key issues: what to do with existingbuildings and the role of the occupier in reducingemissions. The recent emergence of green leases in theUK may be one way of addressing these issues. Greenleases are standard commercial property leasespertaining to cooperation between landlord andtenants, with the aim of reducing waste production andenergy and water consumption.

Owners and occupiers are advised to be aware of theenvironmental impact of their respective operations.This Code supports and promotes a cooperative andcollaborative approach in recognising and managingthe environmental impact of the occupation andmanagement of commercial premises.

Leases are binding documents that are not easy toamend. There may be value in owners and occupiersentering into a non-legally binding memorandum ofunderstanding (MoU), which provides a roadmap forcooperation between the parties on improving theenvironmental performance of buildings. This allows theMoU to be updated to reflect the latest businesspractice as agreed between the parties during the termof the lease.

Further information can be obtained from the BetterBuildings Partnership’s ‘Green Building ManagementToolkit’, which is available at:www.betterbuildingspartnership.co.uk/download/bbp-green-building-managment-toolkit-1.pdf

9.2 Carbon Reduction Commitment EnergyEfficiency Scheme (CRC)

In May 2010 the government committed to increasingthe proportion of tax revenue accounted for byenvironmental taxes. The government classifiesenvironmental taxes as those that meet all of thefollowing three principles:

+ the tax is explicitly linked to the government’senvironmental objectives

+ the primary objective of the tax is to encourageenvironmentally positive behaviour change and

+ the tax is structured in relation to environmentalobjectives (for example, the more polluting thebehaviour, the greater the tax levied).

The Carbon Reduction Commitment Energy EfficiencyScheme (often referred to as the CRC) is defined bythe government as an environmental tax based onthese principles.

The CRC is aimed at improving energy efficiency andcutting emissions in large public and private sectororganisations. It does not apply to all organisations butowners, managers and occupiers should continue tomonitor for any updates.

The CRC dilemma is that it is a tax levied onorganisations and is not property specific. Furthermore,it is a tax levied at the highest corporate level of anorganisation and therefore in many instances the taxwould not be paid by a tenant’s immediate landlord,but by the landlord’s parent company.

CRC is not therefore a property specific charge in thesame way that the Climate Change Levy is directlylinked to actual electricity or gas consumption and as atax on organisations is not a tax or charge on landlordsper se.

The position is further complicated in situations wherethe owner is responsible for the electricity supply to thewhole of a building and is able to recover the cost ofdirect electricity consumption to the occupationalpremises, in addition to the costs of the landlordcommon parts areas, through the use of submetersetc. In such circumstances, the owner in effect andinadvertently becomes liable for payment of CRC costsfor which the occupier would otherwise have beendirectly liable.

In older leases it is a matter of contract law as towhether the lease specifically and unambiguouslypermits the landlord to recover the cost of CRC withinthe service charge. While the debate continues as towhether, in principle, CRC costs should properly berecoverable under a service charge arrangementowners and occupiers, managers and lawyers shouldcarefully consider the implications when drafting newleases.


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Nevertheless there should be a fair and reasonableapproach in the apportionment and recovery of CRCcosts between owners and occupiers, based on thecore principle that owners should be able to recoverthe full cost of providing bona fide serves to occupiersand that occupiers should be in a no better or noworse position than had they occupied premises on thebasis of a full repairing and insuring lease, althoughwith the emphasis on the ethos that the ‘pollutershould pay’.

Where CRC costs are to be recovered under a servicecharge arrangement the following is considered toembody best practice:

+ Occupiers should not be responsible for theowner’s costs of managing and administering theCRC scheme.

+ Owners owe a duty of care to take such steps asare reasonably necessary to keep costs down andto procure that the relevant member of the groupwhich has CRC responsibilities complies with itsduties.

+ The method of apportionment across thelandlord’s group and between buildings owned bythe landlord’s group should be:

– fair and reasonable and

– consistently applied.

+ In the spirit of openness and transparency,occupiers should be provided with information toreasonably verify the accuracy and performance ofthese objectives (particularly in relation to themethod of apportionment).

9.3 Improving environmental performance

The sharing of data and other related information isessential. For this reason, it is advisable for owners,managers and occupiers to cooperate on the runningof any building management systems and on a rangeof environmental improvement measures. Non-reportingwill incur heavy penalties for owners and occupiers.Cooperation on data sharing is essential.

There should be a fair and reasonable approach to:

+ the apportionment of sustainability costs betweenowners and occupiers, although consistent withthe principle outlined above that there should bean emphasis on the ethos that the ‘polluter shouldpay’

+ the carrying out of works that improve theenvironmental performance of the building and

+ restrictions on works by either party that adverselyaffect the environmental performance of thebuilding.

In accordance with the principles set out in this Code,improved sustainability and other environmentalimprovement measures are to be taken into accountwhen considering and assessing whether any particularservice or provider offers value for money. These arealso to be factors in any cost-benefit analysis carriedout to justify improvement costs above the costs ofnormal maintenance, repair or replacement (forexample, the installation of energy-efficient plant).

9.4 Energy Performance Certificates(EPCs)

For the avoidance of doubt, the cost of obtaining anEnergy Performance Certificate (EPC) would notnormally be considered to be a recoverable servicecharge cost. An EPC is only required when a building issold or rented, and therefore has no relevance to, noris it a requirement for, the provision and managementof common services.

However, costs that might subsequently be incurredwhile improving energy efficiency identified whenobtaining an EPC might fall to the service charge,subject to the terms of the lease and the principles setout in this Code (see 8.4 and 9.3 above).



10 Additional best practice guidance forshopping centres

10.1 Marketing and promotions

The marketing of and promotional activity supporting aretail shopping centre scheme are recognised as beingof joint benefit to all stakeholders, and are thereforejointly funded. This joint funding should cover not justthe actual marketing and promotions, but also thecosts of providing specialist staff (and accommodationetc.) whether directly or via an agency arrangement.

The service charge budget and accounts should betransparent and should include the gross marketingand promotional expenditure and the contribution fromthe owner. This will clearly show the net contributiondue from the occupiers.

It is best practice for marketing plans (includingpromotions) to be prepared and presented to occupiersin advance of the period to which they relate. It is oftenuseful to agree and regularly review marketing planswith occupiers’/retailers’ associations in order toanalyse their effectiveness, and to ensure that thestated objectives are achieved. Where the servicecharge bears the cost, all pedestrian flow-datacollected is to be issued to occupiers as a matter ofcourse.

As marketing and promotions are of joint benefit, it isimportant for owners/managers to encourage occupiersto recognise that they have an obligation to proactivelycommunicate their views on the best approach to themarketing of centres.

Any costs incurred in relation to the initial promotionallaunch and/or rebranding of a scheme are to be borneby the owner, and are not to be considered asrecoverable service charge costs. It is recommendedthat any plan to relaunch a centre be discussedbetween manager and occupiers so that they canagree to an appropriate split of the expenditure to eachparty.

The costs of entertainments, attractions, Christmas,and other seasonal decorations and events within theshopping centre are not usually considered to be amarketing and promotional cost, but are to be regardedas amenities or facilities. Where such costs areincluded within the service charge, they would not bejointly funded as above.

The marketing of vacant units in the scheme is not aservice charge item.

10.2 Commercialisation (non-coreincome)

Increasingly, owners are finding additional non-coreincome streams from their investments. It is clear thatthey are entitled to receive this income from theinvestment they have made. However, if the servicecharge has provided either the initial capital or ongoingservices for the income stream, the income is to beused as a credit against the service costs. When theowner provides the capital but uses the services tosupport the operation, an appropriate contribution tothe service charge is to be made by the owner toreflect the benefit and use of the services. Bestpractice for the owner is to clearly state his or herpolicy with regard to miscellaneous income within thedevelopment.

As well as rents being collected on occupationalleases, income is also generated from other sources.Many properties receive income from vending-machinetakings, selling recyclable waste, etc., while shoppingcentres and malls also receive income frompromotional space (e.g. advertising on displays anddrums and in car parks, etc.) and licences granted forother mall activities (e.g. children’s rides, photo booths,etc.). Occupiers may also have (chargeable) use ofphotocopiers in the management offices. How suchincome is treated varies considerably from property toproperty, and from owner to owner.

There is to be a clear statement of policy on how andto where costs and income generated from servicesand activities in the centre/malls are allocated.Transparency is required at all times.

Income derived from the provision of a service oractivity, where the cost is included in the servicecharge, is to be treated as a service charge credit, forexample, photocopying and fax reimbursements, etc.Income derived from promotional activity is to becredited to the marketing expenditure budget.


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Where the owner retains income from common-partareas, and the space is used on a permanent or semi-permanent basis, for example, barrows or kiosks withinshopping malls, the space is to be included in theservice charge apportionment matrix. Alternatively,appropriate equivalent credit is to be given for thecosts of that space.

For less substantial or temporary fixtures, a sum is tobe credited to the service charge to reflect acontribution towards the benefit of the servicesenjoyed. Owners are to estimate and declare acontribution to the service charge to reflect the benefitand use of the common services enjoyed.

Managers are to clearly state their policy on how costsand income generated from services and activities areallocated. The simple rules are as follows:

+ If the item is not funded by the service charge, nordoes it use any services, 100 per cent of theincome goes to the owner.

+ If the item is funded by the service charge, theincome is credited to the service charge (e.g.photocopying for occupiers).

+ If the item uses some of the services and/or needssupport from the site team who are being paid viathe service charge, a contribution is to be made tothe service charge in accordance with the policy.

In addition to the minimum information set out inparagraph 4.4, budgets and statements of actualexpenditure are also to include a statement detailinghow income generated from commercialisation or mallincome is dealt with, and how shared services arecharged. The statement is also to clearly set out howthis income impacts on the service charge, and whatreimbursement has been made to it.

10.3 Apportionment of service charges inshopping centres: weighted-floor areaapportionment

In addition to the usual recommended methods for theapportionment of service charges, many shoppingcentre developments often feature a ‘weighted-floorarea’ basis of apportionment that seeks to reflect thedifferent costs involved in servicing different-sizedunits.

A weighted-floor area apportionment discounts thepercentage the occupier will pay over a certain size toreflect the benefit of the services provided. The floorarea is divided into bands with a progressive discount,and is a similar concept to the zoning of shops forrental purposes.

Therefore, for example, a 5,000m2 unit may not costfive times that of a 1,000m2 unit, but a 500m2 unit maycost twice that of a 250m2 unit.

There is no such thing as a standard weightingformula. Where the use of a weighted formula isconsidered to be appropriate, this is to beformulated to reflect the particular circumstances,size of units, layout and use of the scheme beingserviced (see below).

The following is included for illustrative purposesonly:

The first 500 m2 @ 100%

The next 500 m2 @ 80%

The next 2,000 m2 @ 70%

The next 2,000 m2 @ 60%

Excess over 5,000 m2 @ 50%

In this example, a 1,000 m2 unit has a weighted floorarea of 900 m2 [i.e. (500 x 100%) + (500 x 80%)]whereas a 10,000 m2 unit will have a weighted area of6,000 m2. Although ten times larger in floor area, the10,000 m2 unit pays approximately six and a half timesthe service charge of the smaller unit.

Similarly, the floor area of ancillary basement andupper-floor accommodation, or of remote storage,might be discounted to reflect the reduced benefitderived from certain services as distinct from theground-floor retail space or main offices.

For the avoidance of doubt, a reasonable and fairlyadministered weighting formula for apportionment ofthe service charge cannot usually be considered aconcession.



Appendices

Appendix A: Best-practice compliance checklist

Appendix B: Standard industry cost classifications

Appendix C: Service charge accounting sample report

Appendix D: Glossary and terminology

Appendix E: Further reading


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Appendix A: Best-practice compliance checklist

The compliance checklist included below is a basis to enable owners, managers and occupiers to self-assess theircompliance with the core principles of this Code as set out in this guidance. However, merely ticking the boxes doesnot of itself constitute a full compliance with the Code, which also entails adhering to the further recommended best-practice recommendations as provided to support the core principles.

Core principle Evidence Comply

Value for money

Procure an appropriate level of service for the occupiers in thebuilding.

Demonstrate that services offer good value for money.

Competitive tender

Other market testing

Cost benchmarking

Transparency

All costs, apportionments and policies are explicit and opento any scrutiny by occupiers or their agents.

All apportionment schedules are published

All policies are outlined in budget packs

Detailed explanations are provided in year-endstatements where the costs have materially variedfrom the budget

The landlord bears the cost of all voids andconcessions

Timeliness of reporting

All reports are issued within timeframes required by the Code.Budgets are issued at least one month prior to thestart of the service charge year

Year-end statements of actual expenditure areissued within four months of the end of the servicecharge year

Management fee

The management fee reflects a reasonable cost to undertakenecessary work to manage and operate the services and toadminister the service charge.

Fixed fee (not per cent of service charge)

Meets Code guidelines on what can and cannot becharged for management

Duty of care to occupiers – consultation and approval

All costs are recoverable in accordance with leases.

The occupiers are consulted where appropriate for theiragreement to the levels of service and services to be offered.

All occupiers are given the opportunity to commenton the budget

The occupiers are consulted on the levels ofservice and/or the introduction of new services

Standardised financial reporting

Budgets and statements of actual expenditure are reported inline with the Code’s cost categories.

Where appropriate, separate schedules are prepared toallocate costs to reflect the availability, benefit and use ofdifferent services.

Standardised cost categories are used

Separate schedules are included as appropriate

Interest income and expenses

Separate interest-bearing accounts are operated for eachbuilding, with all interest income and expenses credited orcharged within the service charge.

Bank statement of interest income and expenses

Code-compliant terms in new leases

New leases have adopted Code-compliant terms.Standard lease terms

Support for alternate dispute resolution (ADR)

ADR is supported and recommended as the basis to resolveservice charge disputes.

Standard lease terms

All policies are outlined in budget packs



Appendix B: Standard industry costclassifications

The cost descriptions are not intended to represent an exhaustive list, but are used for illustrative purposes only. Thenarrative is therefore intended to provide guidance for coding only. To facilitate greater transparency and clarity theseshould not be used as a substitute for a proper and appropriately detailed explanation of the actual expenditureincurred (or proposed).

Owners and managing agents are encouraged to include additional cost descriptions where this will facilitate greatertransparency and clarity with regard to the expenditure incurred or proposed. However, to maintain industry standardsand to facilitate benchmark comparison, it is suggested that the cost class and cost category structure is not altered.

B1 Cost classifications

COST CLASSCost category

Cost description Notes

MANAGEMENT

1 Management fees

Management fees Owner or managing agent fees for managing andadministering building services excluding rent collection,asset management etc.

2 Accounting fees

Service charge accounting fees Fees for preparation of year end service chargestatement and reconciliation

Independent accountant’s fees Independent accountant’s fees to review the year endservice charge accounts

Audit fees Auditor’s fees for carrying out formal audit of the servicecharge

3 Site management resources

Staff costs Direct employment or contract costs for provision ofstaff for management of on-site facilities

Receptionists/concierge Direct employment or contract costs for provision ofreception and concierge staff, including associatedadministrative and training costs

Site accommodation (rent/rates) Rent, service charge and rates associated with sitemanagement accommodation

Office costs (telephones/stationery) Costs of equipping and running site management office

Petty cash Miscellaneous minor expenditure incurred in relation tosite management duties

Help desk/call centre/information centre Operational costs for providing helpdesk/call centre/information centre facilities

4 Health, safety and environmental management


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Landlord’s risk assessments, audits andreviews

Consultancy fees and other costs associated withprovision and review of owner’s health and safety (H&S)management systems

UTILITIES5 Electricity

Electricity Electricity supply to common parts and retained areasand central plant, excluding occupier directconsumption

Electricity procurement/consultancy Consultancy and procurement fees for negotiatingelectricity supply contract and auditing of energyconsumption

Fuel (standby electrical power) Fuel oil to run any standby electrical power systems

6 Gas

Gas Gas supply to owner’s central plant, excluding occupierdirect consumption

Gas procurement/consultancy Consultancy and procurement fees for negotiating gassupply contract and auditing of energy consumption

7 Fuel oil

Fuel Oil Fuel oil supply to owner’s central plant, emergencygenerators etc excluding occupier direct consumption

Fuel oil procurement/consultancy Consultancy and procurement fees for negotiating oilsupply contract and auditing of energy consumption

8 Water

Water and sewerage charges Water supply to central plant, common parts andretained areas excluding occupier direct consumption

Water consultancy Consultancy fees incurred in reviewing water usage

SOFT SERVICES9 Security

Security guarding Direct employment or contract costs incurred inproviding building security guarding

Security systems Servicing and maintenance of building security systems(e.g. CCTV, access control, intruder alarm)

10 Cleaning and environmental

Internal cleaning Cleaning of internal common parts and retained areas

External cleaning Cleaning of external common parts and retained areas

Window cleaning

Hygiene services/toiletries Cleaning and servicing of common parts’ toiletaccommodation

Carpets/mats hire Provision of dust and rain mats to common part areas

Waste management Refuse collection and waste management servicesprovided for building occupiers

Pest control Pest control services provided to common part andretained areas

Internal floral displays Providing and maintaining floral displays within thecommon part areas

External landscaping Provision and maintenance of external landscapedareas and special features

Snow clearance/gritting Costs incurred in snow clearance and supply of snowclearing equipment and gritting salt



Seasonal decorations Provision and maintenance of seasonal decorations tocommon part areas

11 Marketing and promotions

Events Promotional events

Marketing Marketing and advertising in accordance with marketingstrategy

Research Research into local market conditions, customersurveys, etc.

Staff costs Direct employment or contract costs for provision ofmarketing and promotional activity

Landlord’s contribution to marketing Financial contributions made by landlord towardsmarketing and promotions

Local authority contribution to marketing Financial contributions made by local authority towardsmarketing and promotions

HARD SERVICES12 Mechanical and electrical services (M&E)

M&E maintenance contract Planned maintenance to the owner’s M&E services,including contractor’s H&S compliance

M&E repairs Repair works to the owner’s M&E services

M&E inspections and consultancy Auditing quality of maintenance works, condition ofM&E plant and H&S compliance

Life safety systems maintenance Planned maintenance works to the owner’s fireprotection, emergency lighting and other specialist lifesafety systems, including contractor’s H&S compliance

Life safety systems repairs Repair works to the owner’s fire protection, emergencylighting and other specialist life safety systems

Life safety systems inspections andconsultancy

Auditing quality of maintenance works, condition of lifesafety systems

13 Lifts and escalators

Lift maintenance contract Planned maintenance works to lifts in the common partand retained areas, including contractor’s H&Scompliance

Lift repairs Repair works to common parts’ lifts

Lift inspections and consultancy Auditing quality of maintenance works, condition of liftplant and H&S compliance

Escalator maintenance contract Planned maintenance works to escalators in thecommon part and retained areas, including contractor’sH&S compliance

Escalator repairs Repair works to common parts escalators

Escalator inspections and consultancy Auditing quality of maintenance works, condition ofescalator plant and H&S compliance

14 Suspended access equipment Suspended access equipment includes all forms ofhigh-level access equipment maintenance, i.e.hatchways, eye-bolt, fall address and cradles

Suspended access maintenance contract Planned maintenance works to the owner’s suspendedaccess equipment, including contractor’s H&Scompliance

Suspended access repairs Repair works to the owner’s suspended accessequipment

Suspended access inspections andconsultancy

Auditing quality of maintenance works, condition ofsuspended access equipment and H&S compliance

15 Fabric repairs and maintenance


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Internal repairs and maintenance Repair and maintenance of internal building fabric,common part and retained areas

External repairs and maintenance Repair and maintenance of external building fabric,structure, external common part and retained areas

Redecorations Redecoration and decorative repairs

INCOME Distinct activities that yield a true income to the servicecharge account

16 Interest

Interest Interest received on service charge monies held withinowner’s or agent’s bank account

17 Income from commercialisation Income yielded from any facilities installed and/ormaintained at the occupier’s expense

Car park income

Vending machine income

Other

Operational expensesContract charges Overheads, expenses and operational costs incurred in

providing any of the commercialisation facilities

Repairs and maintenance

Staff costs

INSURANCE18 Engineering Insurance Landlord’s engineering insurances

Engineering insurance

Engineering inspections

19 All risks insurance cover Landlord’s all risk insurance costs

Building insurance

Loss of rent insurance

Public and property owner’s liability

Landlord’s contents insurance

20 Terrorism insurance Landlord’s terrorism insurance cover

Terrorism insurance

EXCEPTIONAL EXPENDITURE21 Major works

Project works Exceptional and one-off project works, over and aboveroutine operational costs

Plant replacement Replacement of the whole or major components ofplant and equipment (where beyond economic repair)

Major repairs Significant one-off repairs or maintenance over andabove routine operational maintenance and repair

22 Forward funding

Sinking funds Forward funding of specific major replacement projects(e.g. plant and equipment replacements, roofreplacements)

Reserve funds Forward funding of specific periodic works to even outfluctuations in annual service charge costs (e.g. internal/external redecorations)

Depreciation charge Depreciation charge in lieu of sinking/replacement fundcontribution of major plant and equipment



Appendix C: Service charge accounting samplereport

Copyright in the Service charge accounting sample report (pp. 43-62), which forms appendix C of the RICS Code ofPractice Service charges in commercial property, 3rd edition, belongs to the Royal Institution of Chartered Surveyors(RICS).

The Service charge accounting sample report may be reproduced without the need to seek prior consent from RICS.Where it is adapted and integrated into personalised reports, no copyright acknowledgment is required; however, anyother use by way of reproduction requires an acknowledgment of RICS copyright ownership, which should appear onany copy that is reproduced.

Any other enquiry related to copyright may be addressed to:

Licensing Manager

RICS Parliament Square

London

SW1P 3AD


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Introduction

In managing the provision of services and in certifyingthe service charge, managers have a duty of care toboth owners and occupiers to act with professionalcare, diligence, integrity, and objectivity.

Accounting for service charges in the property industryis a specialist area that requires expertise and anunderstanding of the sector.

The RICS Code of Practice Service Charges inCommercial Property (‘the Code’) recommends as bestpractice that an annual statement of service chargeexpenditure be certified by the manager to confirm thatit represents a true and accurate record of expenditureincurred in supplying the services to the building, andthat the expenditure that is being recovered is inaccordance with the terms of the occupational leases.

The Code also recommends that annual statements ofservice charge expenditure should be reviewed by anindependent accountant.

The Institute of Chartered Accountants in England andWales (ICAEW) is to issue a technical release toprovide guidance on accounting for commercial servicecharges. This technical release will provide goodpractice guidance on technical and practice issuesrelevant to the work of accountants and otherprofessionals.

This sample report, prepared in consultation with theICAEW sets out recommended best practice for thedisclosures and information that managers shouldprovide to the accountants appointed to carry out anindependent review of service charges and forsubsequent communication to tenants as to the nature,type and cost of services provided.

It is not for this Code to prescribe the operatingbusiness model of the manager and therefore there isno strict layout or order of preference for the statementof service charge expenditure. However, it isrecommended best practice that the statement ofservice charge expenditure should include the followingkey elements:

+ Service charge certificate (paragraph 3)

+ The independent accountant’s report

+ Service charge expenditure report (paragraph 4and annexes A and B)

+ Notes to the expenditure report (paragraph 5)

+ Service charge allocation and apportionment(paragraph 6 and annex D)

+ Operational review and variance report (paragraph7 and annex C).

The information referred to in this sample report underOperational review is considered to be best practice tomeet the core principles for communication andtransparency as set down in the Code as to the nature,type and cost of services provided but would usuallybe outside of the scope of the independentaccountant’s review. The basis of apportionment of theservice charge would also be outside of the scope ofthe independent accountant’s review.



Statement of service charge expenditure

[Owner’s name]

[Property name and address]

[dd/mm/yyyy] to [dd/mm/yyyy]

Total service charge expenditure £


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1 Introduction

This report has been produced by [manager’s name] onbehalf of [owner’s name], the landlord of [propertyname], and relates to the reconciled service charge forthe period [dd/mm/yyyy] to [dd/mm/yyyy]. This reporthas been produced having regard to the best practiceguidelines for service charges in commercial propertythat have been published through the collaboration of anumber of professional bodies representing a diversityof interests throughout the property industry.

The report is intended to provide further explanation asto actual service charge costs incurred and anymaterial variances against the property budget issuedto tenants on [dd/mm/yyyy].



2 The management team

[Insert names and contact details of managementteam, i.e. property manager, building/centre manager,accounts manager, etc.]


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3 Service charge certificate

Model landlord surveyor’s certificate

Certification period: [dd/mm/yyyy] to [dd/mm/yyyy]

Landlord: ………………………………………………

Managing agent: ……………………………………

Building: ………………………………………………

I hereby certify that, according to the informationavailable to me, the attached statement of servicecharge expenditure report and accompanyinginformation on pages [X] to [Y] records the true cost tothe landlord of providing the services to the propertyfor the period [dd/mm/yyyy] to [dd/mm/yyyy], inaccordance with the terms of the lease and, wherepracticable, the RICS Code of Practice Service chargesin commercial property (current edition).

Signed ………………………………………………

[Name and qualifications] …………………………

Position ………………………………………………

For and on behalf of [Manager Name]

Date: …………………………………………………



4 Service charge expenditure report

The summary or detailed expenditure report should beinserted. This should be prepared and presented inaccordance with the current edition of the RICS Codeof Practice Service charges in commercial property.Examples of the summary and detailed expenditurereports are included in this sample report as annex Aand annex B respectively.


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5 Notes to the expenditure report

5.1. Accounting principles

A statement should be made as to whether theaccounts are prepared on an accruals basis or cashbasis (best practice recommends all statements ofservice charges should be prepared on an accrualsbasis).

This section may also be used to provide further detailsin respect of other accounting principles adopted inpreparing the expenditure report. For example, detailsof landlord contribution to the service charge orinformation regarding forward funding by the landlord.

5.2 VAT

Example wording

With effect from [dd/mm/yyyy] the landlord electedto waive the exemption from VAT. Therefore allservice charge expenditure is shown exclusive ofVAT. VAT will be charged at the appropriate rate onall service charge payments demanded/invoiced bythe landlord.

Or

The landlord has not elected to waive the exemptionfrom VAT and therefore all service chargeexpenditure is shown inclusive of VAT whereapplicable.

5.3 Sinking fund/reserve fund

This section is to include a description of the intendedpurpose of any sinking/reserve fund together with anexplanation of the tax treatment of contributions to andinterest earned on such funds and details of the bankaccount where such monies are held.

It is important to recognise and understand thedistinction between sinking funds and reserve fundsand all contributions thereto should be accounted forseparately. For further information refer to the RICSinformation paper Sinking funds, reserve funds anddepreciation charges (2014).

£

Balance brought forward as at [dd/mm/yyyy] x,xxx

Contributions during the year excludinginterest x,xxx

Interest credited x,xxx

Expenditure during the year excluding tax x,xxx

Tax paid x,xxx

Balance carried forward as at [dd/mm/yyyy] x,xxx

5.4. Banking

A clear statement is to be provided as to whetherservice charge monies are held in one or more discretebank accounts and whether interest earned is creditedto the service charge account.

5.5. Accruals

These are expenses for goods and services actuallyincurred in a period for which no invoice has beenreceived at the period end. As the cost relates to theperiod, it must be charged to the service chargeaccount for that period.

A schedule of accruals included in the service chargeexpenditure should be provided. Where invoices arenot received in respect of an accrual brought forwardfrom the previous year, the accrual should be creditedback to the service charge unless there is a realisticexpectation that an invoice will be received in thefuture.

Large round sum provisions included to spread thecost of significant works over a period of time are notaccruals as they do not represent a liability at the endof the period. Accordingly, they should not be includedas accruals but should be considered as contributionstowards reserve or sinking funds and reportedaccordingly (see above).



5.6. Prepayments and security deposits

A schedule of prepayments included in the servicecharge expenditure for the period should be provided(including utility deposits).

5.7 Marketing and promotions

The service charge accounts should be transparent andshould include the gross marketing and promotionalexpenditure and the contribution from the owner, toclearly show the net contribution due from theoccupiers.

£

Gross marketing/promotion expenditure x,xxx

Contribution from the landlord x,xxx

Net marketing/promotion expenditure x,xxx

5.8 Commercialisation

If applicable include a clear statement of policy on howand to where costs and income generated fromservices and activities in the property are allocated.

5.9 Total cost of management

5.9.1 Management fees

The manager should provide details of the basis of hisor her appointment and whether this relates only to thesubject property or includes other property owned bythe same landlord/client.

The manager should confirm the basis of the fee, forexample, a fixed fee of £x subject to annual review/indexation and should include a clear statement as towhether the fee relates only to work carried out inmanaging the service charge. The RICS Code ofPractice Service charges in commercial property clearlystates that asset management and rent collection costsare excluded from the service charge management fee.

If in addition to the management fee a charge is maderelating to the cost of providing a help desk, therationale should be explained and the costs detailedseparately.

5.9.2 On-site management

The manager should provide details of all on-sitemanagement staff and the total employment costs,which would usually include NI, pension contributionsand other direct employment costs. A separatebreakdown of any other costs incurred in employingon-site staff, such as the provision of officeaccommodation, etc. should be provided.

If staff are employed on more than one property a clearexplanation is to be given of the calculation of thecosts charged to the subject property, which shouldgenerally only relate to those costs associated with theactual time spent working on that property.

If a separate administration charge is made in relationto human resources and payroll costs associated withdealing with on-site staff this should be clearly statedtogether with the amount of the fee and the costcategory in which it is included.

Where separate specialist consultancy fees areincurred, for instance in relation to the carrying out ofhealth and safety risk assessments, these costs shouldbe shown separately.


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6 Service charge allocation andapportionment

6.1 Empty units and concessions granted totenants

Managers should confirm the basis on which costs areapportioned for periods less than the full servicecharge year, for example, on a daily basis.

For the avoidance of doubt, managers should alsoconfirm that the landlord bears an appropriateproportion of the service charge expenditure in respectof voids and vacant premises. Likewise, if any tenanthas any form of concession whereby their contributiontowards the service charge is capped or is lower thanthe apportionment due, the landlord pays thedifference.

6.2 Service charge allocation – schedules

Where costs are allocated into separate schedulesmanagers should provide a detailed description of theschedules and the basis and rationale for the costallocation.

For example:

Service charge allocation

Costs are allocated to separate schedules and thecosts apportioned to those who benefit from thoseservices as follows:

[Insert list of schedules and description, forexample:]

Schedule 1 Estate

Schedule 2 Building 1

Schedule 3 Building 2

[Note to managers – add additional schedules asnecessary in order to achieve fair and reasonableallocation of costs.]

Schedule 1 – Estate

[Insert detailed description of schedule and basis ofallocation.]

Schedule 2 – Building 1


Schedule 3 – Building 2


6.3 Service charge apportionment

Managers are to provide a full apportionment schedulefor the property/complex to all occupiers, which clearlyshows the basis of calculation and the totalapportionment per schedule for each unit within theproperty/complex.

Managers should also be transparent with regard to thetreatment of void and unlet premises, any specialconcessions given to individual occupiers and the costattributable to the owner’s own use of the property (seeempty units and concessions granted to tenantsabove).

See annex D for an example apportionment schedule.



7 Operational review

This section should comprise a comparison betweenthe budget and finalised actual expenditure for eachservice line for the period in question. The reportshould be prepared using the same headings as theservice charge expenditure report and should include adetailed commentary and an explanation of significantvariances.

7.1 Service procurement

Procurement fees

Where a procurement specialist is used this should beclearly stated together with the amount of the fee andthe cost category in which it is included. A clearexplanation should also be provided as to the basis ofcalculation of the fee to demonstrate delivery of bestvalue solutions, greater value for money and costeffectiveness.

7.2 Contracts

The manager should provide tenants with a schedule ofcontracts in force during the service charge period withdetails for each contract of the contractor, a summaryof the scope of the contract, the annual contract sum,the date of commencement and length of the contractand dates of any reviews.

Where a contract has been retendered or placed duringthe service charge period, the manager should providea brief summary of the results of the selection processand a clear explanation of the rationale for theappointment.

Where appropriate and in any event, every three yearscontractors and suppliers should submit competitivetenders or quotations, although where this is notconsidered to be cost effective, the manager shouldbenchmark the service standards and pricing toconfirm value for money.

For each of the main service lines the manager shouldprovide a brief summary of when the service linecontract was last retendered.

7.3 Explanatory notes and variances

Note to managers

Include summary information under each standardindustry cost classification detailing the serviceprovided, the cost and comments on thespecification or staffing levels, last tendered, etc.Explanatory notes are to include a detailedexplanation of significant individual costs togetherwith an analysis and full explanation of any materialvariances between budget and actual expenditure.

Service charge budgets and actual expenditurereports must use the standard industry costclassifications. As a minimum acceptable level ofreporting, all reports must be detailed at cost classand cost category level as set out in appendix B ofthe Service charges in commercial property Code ofPractice (2014).

However, to achieve transparency in accordancewith the principles of the Code it is recommendedbest practice, particularly in respect of largerproperties, that budget and actual expenditurereports and analyses should be provided at detailedcost description level whenever practicable, with asummary of the total costs under each costcategory.

In accordance with the proportionality statementincluded under the Code’s core principles, forsmaller properties or those with limited servicecharge expenditure (e.g. industrial sites) it isconsidered acceptable to report at the higher costcategory level although this should generally beregarded as an exception rather than the usualpractice.


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8 General notes

[Insert any other relevant information.]



Annexes

Annex A: Example service charge summary expenditure report

Annex B: Example service charge detailed expenditure report

Annex C: Example service charge variance report

Annex D: Example service charge apportionment schedule


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Annex A: Example service charge summaryexpenditure report

SUMMARY EXPENDITURE REPORTPeriod [dd/mm/yyyy] to [dd/mm/yyyy]Property address ………………………………………………

Cost categoryExpense

totalSchedule1 Estate

Schedule 2Building 1


MANAGEMENT1 Management fees £60,000 £10,000 £25,000 £25,000

2 Accounting fees £1,600 £1,600

3 Site management resources £71,135 £21,135 £26,600 £23,400

4 Health, safety and environmental £10,000 £10,000

Subtotal £142,735 £42,735 £51,600 £48,400

UTILITIES5 Electricity £229,900 £5,900 £112,000 £112,000

6 Gas £11,050 £1,050 £5,000 £5,000

7 Fuel oil (heating) £0

8 Water £7,000 £3,500 £3,500

Subtotal £247,950 £6,950 £120,500 £120,500

SOFT SERVICES9 Security £144,100 £137,500 £3,500 £3,100

10 Cleaning and environmental £185,730 £52,250 £58,300 £75,180

11 Marketing and promotionsSubtotal £329,830 £189,750 £61,800 £78,280

HARD SERVICES12 Mechanical and electrical services £187,970 £32,750 £74,750 £80,470

13 Lift and escalators £24,500 £14,000 £10,500

14 Suspended access equipment £5,300 £2,800 £2,500

15 Fabric repairs and maintenance £99,325 £36,850 £40,700 £21,775

Subtotal £317,095 £69,600 £132,250 £115,245

INCOME16 Interest -£1,068 -£332 -£373 -£363

17 Income from commercialisationSubtotal -£1,068 -£332 -£373 -£363



INSURANCE18 Engineering insurance £900 £500 £400

19 All risks insurance cover20 Terrorism insurance

Subtotal £900 £0 £500 £400

EXCEPTIONAL EXPENDITURE21 Major works £92,483 £92,483

22 Forward funding -£90,000 -£90,000

Subtotal £2,483 £0 £2,483 £0

Grand total £1,039,925 £308,703 £368,760 £362,462


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Annex B: Example service charge detailedexpenditure report

DETAILED EXPENDITURE REPORTPeriod [dd/mm/yyyy] to [dd/mm/yyyy]Property address ………………………………………………

Cost categoryExpense

totalSchedule1 Estate



MANAGEMENT1 Management fees

Management fees £60,000 £10,000 £25,000 £25,000

2 Accounting feesS/C audit fees £1,600 £1,600

3 Site management resourcesStaff costs £15,000 £15,000

Receptionists/concierge £50,000 £26,600 £23,400

Site accommodation (rent/rates) £4,335 £4,335

(telephones/stationery) £1,800 £1,800

4 Health, safety and environmentalRisk assessments and audits £10,000 £10,000

Subtotal £142,735 £42,735 £51,600 £48,400

UTILITIES5 Electricity

Electricity £224,000 £112,000 £112,000

Electricity procurement consultancy £5,600 £5,600

Fuel (standby electrical power) £300 £300

6 GasGas £10,000 £5,000 £5,000

Gas procurement/consultancy £1,050 £1,050

7 Fuel oil (heating)8 Water

Water and sewerage charges £7,000 £3,500 £3,500

Subtotal £247,950 £6,950 £120,500 £120,500

SOFT SERVICES

9 Security

Security guarding £132,000 £132,000

Security systems £12,100 £5,500 £3,500 £3,100

10 Cleaning and environmental

Internal cleaning £91,200 £38,400 £52,800

External cleaning £15,500 £15,500

Window cleaning £22,800 £9,600 £13,200



Hygiene services/toiletries £8,180 £4,500 £3,680

Waste management £9,050 £9,050

Pest control £1,600 £700 £500 £400

Seasonal decorations £1,000 £500 £500

Internal floral displays £9,400 £4,800 £4,600

Estate cleaning £18,000 £18,000

External landscaping £9,000 £9,000

11 Marketing and promotionsSubtotal £329,830 £189,750 £61,800 £78,280

HARD SERVICES12 Mechanical and electrical services (M&E)

M&E maintenance contract £151,250 £20,000 £63,000 £68,250

M&E repairs £16,250 £2,150 £6,750 £7,350

M&E inspections and consultancy £7,500 £7,500

Life safety systems maintenance £11,350 £2,350 £5,000 £4,000

Life safety systems repairs £1,620 £750 £870

13 Lift and escalatorsLift maintenance contract £21,000 £12,000 £9,000

Lift repairs £3,500 £2,000 £1,500

14 Suspended access equipmentMaintenance contract £5,100 £2,700 £2,400

Repairs £200 £100 £100

15 Fabric repairs and maintenanceInternal repairs and maintenance £50,000 £35,000 £15,000

External repairs and maintenance £6,775 £6,775

Redecorations £5,700 £5,700

Estate repairs and maintenance £32,100 £32,100

Car park repairs and maintenance £4,750 £4,750

Subtotal £317,095 £69,600 £132,250 £115,245

INCOME16 Interest

Interest -£1,068 -£332 -£373 -£363

17 Income from commercialisationSubtotal -£1,068 -£332 -£373 -£363

INSURANCE18 Engineering insurance

Engineering insurance £900 £500 £400


Subtotal £900 £500 £400

EXCEPTIONAL EXPENDITURE21 Major works

Plant replacement £92,483 £92,483

22 Forward fundingSinking funds -£90,000 -£90,000

Subtotal £2,483 £0 £2,483 £0

Grand total £1,039,925 £308,703 £368,760 £362,462


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Annex C: Example service charge variancereport

EXPENDITURE VARIANCE REPORTPeriod [dd/mm/yyyy] to [dd/mm/yyyy]Property address ………………………………………………

Previousyear actual

Current yearbudget

Currentyear

actual

Actual vbudget

Current vprevious

actual

MANAGEMENT1 Management fees £60,000 £60,000 £60,000 0.00% 0.00%

2 Accounting fees £1,500 £1,600 £1,600 0.00% 6.67%

3Site managementresources

£66,000 £70,000 £71,135 1.62% 7.78%

4Health, safety andenvironmental

£5,000 £15,000 £10,000 -33.33% 100.00%

Subtotal £132,500 £146,600 £142,735 -2.64% 7.72%

UTILITIES5 Electricity £218,700 £236,000 £229,900 -2.58% 5.12%

6 Gas £9,700 £12,500 £11,050 -11.60% 13.92%

7 Fuel oil (heating)8 Water £6,880 £7,500 £7,000 -6.67% 1.74%

Subtotal £235,280 £256,000 £247,950 -3.14% 5.39%

SOFT SERVICES9 Security £144,100 £144,100 £144,100 0.00% 0.00%

10Cleaning andenvironmental

£176,543 £180,000 £185,730 3.18% 5.20%

11 Marketing and promotionsSubtotal £320,643 £324,100 £329,830 1.77% 2.87%

HARD SERVICES

12Mechanical and electricalservices

£193,750 £180,000 £187,970 4.43% -2.98%

13 Lift and escalators £24,500 £24,500 £24,500 0.00% 0.00%

14Suspended accessequipment

£5,300 £53,000 £5,300 -90.00% 0.00%

15Fabric repairs andmaintenance

£34,500 £50,000 £99,325 98.65% 187.90%

Subtotal £258,050 £307,500 £317,095 3.12% 22.88%

INCOME



16 Interest -£989 -£1,000 -£1,068 6.80% 7.99%

17Income fromcommercialisation

Subtotal -£989 -£1,000 -£1,068 6.80% 7.99%

INSURANCE18 Engineering insurance £800 £1,000 £900 -10.00% 12.50%


Subtotal £800 £1,000 £900 -10.00% 12.50%

EXCEPTIONAL EXPENDITURE21 Major works £90,000 £92,483 2.76%

22 Forward funding £25,000 -£90,000 -£90,000 0.00% -460.00%

Subtotal £25,000 £0 £2,483 -90.07%

Grand total £971,284 £1,034,200 £1,039,925 0.55% 7.07%


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Annex D: Example service chargeapportionment schedule

APPORTIONMENT SCHEDULEPeriod [dd/mm/yyyy] to [dd/mm/yyyy]Property address ………………………………………………

Unit/address Tenants AreaSchedule 1

EstateSchedule 2Building 1


Building 1 (tower block)Ground floor 10,600 7.41% 10.43%

1st floor 15,400 10.76% 15.16%

2nd-4th floors 46,200 32.29% 45.47%

5th floor 4,900 3.42% 4.82%

6th floor 4,900 3.42% 4.82%

7th floor 4,900 3.42% 4.82%

8th floor 4,900 3.42% 4.82%

9th floor 4,900 3.42% 4.82%

10th floor 4,900 3.42% 4.82%

Total Building 1 101,600 100.00%

Building 2Ground floor and 1st floors 9,750 6.81% 23.49%

1st floor 6,500 4.54% 15.66%

2nd floor 6,500 4.54% 15.66%

3rd-5th floors 18,750 13.10% 45.18%

Total Building 2 41,500 100.00%

Grand total 143,100 100.00%



Appendix D: Glossary and terminology

Accrual accounting This is considered to be the standard accounting practice for most service charges,with the exception of very small operations. This requires that costs be recognisedin the accounts when incurred, not when the invoice is actually paid. This is theopposite of cash accounting, which recognises transactions only when there is anexchange of cash.

Accruals These are expenses incurred in a period for which no invoice has been received atthe period end. As the cost relates to the period, it must be charged to the servicecharge account for that period.

Administration charges The manager’s costs in procuring services directly (in other words, not through acontractor) where the actual cost of the service (e.g. the site-management team) isrecovered through the service charge. The administration charge is intended toreimburse the manager’s indirect costs (e.g. payroll, staffing, etc.) and is recorded tothe cost category where they are incurred, as would apply if the service(s) werecontracted.

Alternative disputeresolution (ADR)

The collective description of methods used to resolve disputes other than throughthe normal judicial process.

Allocation The splitting of the costs of a service to assign them to a specific schedule or costcategory.

Apportionment The spreading of costs within schedules between occupiers who benefit from theservices in that schedule, based on the availability, benefit and use of the services.

Arbitration Arbitration is a procedure whereby two parties in a dispute agree to be bound bythe decision of an independent third party (the arbitrator). The role of an arbitrator issimilar to that of a judge, although the procedures are often less formal. Anarbitrator is usually an expert in his/her own right.

Balancing charge The resulting difference between an individual tenant’s apportionment ofexpenditure and the on-account service charges demanded from that tenant for anyspecific service charge accounting period, having regard to any service chargeconcessions that may have been granted.

Commercial property All property that is not residential or agricultural and includes retail, office, industrialand leisure properties.

Depreciation charges The ‘cost’ to the owner representing the measure of the wearing out, consumptionor other reduction in life of an asset.

Direct recoveries Any expenditure that is charged directly to individual occupiers and not funded viathe on-account service charges

RICS Dispute ResolutionService (DRS)

RICS DRS can provide a simple, fast and cost-effective approach to resolvingdisputes in the complicated world of property and construction, where disputes arebound to arise.

Early neutral evaluation(ENE)

ENE is an ADR technique. ENE is voluntary, confidential and conducted on a‘without prejudice’ basis. The evaluation is non-binding, and aims to help clarify anddefine legal and factual issues in the dispute, identifying risks and likely outcomesbefore further significant resources are spent on the matter.

Gross internal area (GIA) The area of a building measured to the internal face of the perimeter walls at eachfloor level in accordance with the RICS Code of Measuring Practice.


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Independent expertdetermination

Independent expert determination in the UK and other territories is a process inwhich an independent third party, acting as an expert rather than as a judge orarbitrator, is appointed to decide a dispute (as an independent expert or ‘expertdeterminer’ – not to be confused with an ‘expert witness’).

In trust Money or monies kept in a separately named account that is held in trust within thebank account of its owner.

International totaloccupancy cost code(ITOCC)

ITOCC from the Investment Property Databank (IPD) Occupiers Property Databank(OPD) was designed to be the standard form of measuring property and facilitiescosts for all businesses and public sector organisations. It is prepared with the helpof IPD occupier and other leading occupiers, consultants, accountants, serviceproviders, developers and academics. As ‘total’ suggests, it takes account of all ofthe costs of occupancy, not just those in the common part(s).

Landlord Landlord is the term used in Landlord and Tenant legislation in to denote the personor company which owns and rents or leases premises. The person or company mayown the freehold or may have a superior leasehold interest in the propertythemselves. To avoid confusion, this term is only used in this Code where thecontext makes this necessary. In all other cases the reference is to ‘owner’.

Manager The person or team that budgets, forecasts, procures, manages and accounts forthe services that comprise the service charge, whether they are the owner, an in-house team, management company or a managing agent (including any wholly orpartly owned related companies).

Management charge The management charge is the reasonable price for the total cost of managing theprovision of the services at the location, and relates only to work carried out inmanaging and operating the services and administering the service charge.

Management fees The remuneration of the manager (including his profit element) for managing theservices comprised in the service charge. Typically, this includes the supervision ofthe site team, overseeing the site contractors and the accounts work necessary tobudget, forecast, manage, disperse, balance and apportion the service charge.Specifically, these fees are not to include property management work separate fromthe service charge, such as owner approvals, income generation or rent collection.Where the subject property/site-management team is not sufficiently large to justifyspecific service managers (for example, a Health and Safety manager or buildingsurveyor) additional specialist fees may be charged to the relevant cost category forthe ‘manager provided’ service.

Marketing andpromotions

Advertising and other forms of promotion of a shopping centre intended to bringadditional custom to the centre (as distinct from attractions and entertainments of ageneral amenity, benefit, service or attraction within the centre).

Matrix An array of costs set out in rows and columns, which is used as a system ofmethods and principles in the allocation and apportionment of costs betweenoccupiers.

Mediation The generally accepted description of commercial mediation is a voluntary, non-binding, private dispute resolution process in which a neutral person helps theparties to reach a negotiated settlement. A core principle of mediation is that theparties ‘control’ the outcome, rather than it being imposed on them.

Net internal area (NIA) The usable area within a building measured to the internal face of the perimeterwalls at each floor level in accordance with the RICS Code of Measuring Practice.

Not for profit Descriptions of the service charge costs, which are not inflated for profit (althoughthe individual services within the costs may contain a profit element for theindividual supplier); but also, there is no residual loss (assuming a fully let propertywith no concessions on service costs to specific occupiers) left for the owner topay.

Occupier A person in possession or occupation of premises and usually responsible forpayment of the service charge to the owner.



On-account servicecharge

An estimated charge raised in advance and anticipation of the final service chargeliability, calculated from the service charge budget.

Owner The person who receives or is entitled to receive the rent. This person is usuallyresponsible for the provision, management, and administration of the services andthe service charge. In practice the owner may appoint a manager to discharge theowner’s obligations under the terms of the lease

Planned preventativemaintenance (PPM)

PPM is maintenance that is performed purposely and regularly in order to keep thefabric, facilities, plant and equipment of a building in satisfactory operating conditionby providing for systematic inspection, detection and correction of failures, eitherbefore they occur or before they develop into major defects. PPM also helps toidentify the point at which such items can reasonably be deemed to have reachedthe end of their economic life, such that replacement or renewal may be necessary.PPM programmes are usually prepared to periods of between 5–10 years inadvance, and is to be regularly reviewed and updated at frequent intervals.

Prepayments Expenses paid in a given period that relate to the following period in whole or part

Rateable value An official estimate of the value of a property used as a basis of local taxation.Rateable value is said to be the amount equal to the rent at which the propertymight reasonably be expected to be let from year to year if the occupier undertookto pay all of the usual occupier rates and taxes, and was also to bear the cost ofrepairs, insurance and other expenses (if any) necessary to maintain the property ina state to command that rent.

Rebranding The upgrading of house or corporate style, logos, names badges, etc.

Refurbishment Refurbishment is the renovation of fabric or equipment to bring it to a workable orbetter condition. It is often a different concept to repair or improvement, and usuallyincludes elements of both. Where a refurbishment project includes improvements orenhancements beyond normal repair or maintenance, this element of the cost wouldusually be met by the owner.

Relaunching Marketing to change the perception in the eyes of its target audience. This may befor letting purposes (an owner’s cost), or may benefit both owner and occupier – forexample, a shopping centre following refurbishment – in which case, an agreementis to be reached as to how the relaunch costs are split between the parties.

Reserve fund A fund formed to meet anticipated future costs of maintenance and upkeep in orderto avoid fluctuations in the amount of service charge payable each year (forexample, for external cleaning and redecorations)

Schedules The allocation of service charge costs into separate parts to reflect the provision,usage, benefit or availability of services between individuals or groups of occupiers.

Services Where the word ‘services’ is used, the reference includes works, such asmaintenance and repair of the fabric and structure, and true services, such as theprovision of heating, lighting, cleaning, security, etc.

Service charge account The service charge funds held for a specific property

Service chargeapportionment

The method and details of apportioning liability between tenants for contributing toa service charge.

Service chargereconciliation

A comprehensive comparison of all service charge income demanded against allservice charge expenditure (including accruals and prepayments) for a given servicecharge accounting period. This enables the calculation of any balancing chargesand credits due from tenants and/or landlords

Sinking fund A fund formed by periodically setting aside money for the replacement of a wastingasset, (for example, heating and air-conditioning plant and equipment, lifts, etc.)

Statement of servicecharge expenditure

The account of service charge expenditure/ costs and related notes. Commercialleases usually provide for an annual statement of service charge expenditure to beissued to occupiers following the end of each service charge period.


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Tenant The term ‘tenant’ is used in Landlord and Tenant legislation to describe any person(physical or legal) who owns the leasehold interest in property and is liable to paythe service charge under the terms of the lease. As with ‘landlord’, this term is onlyused when the context requires; references in the context of commercial propertyand service charges are to ‘occupier’, see above.

Void liabilities The share of the agreed service charge expenditure for any service chargeaccounting period that is attributable to vacant lettable accommodation.



Appendix E: Further reading

Bannister, E., Commercial Leases 2009: A Surveyor’s Guide (2nd edition), RICS Books, Coventry, 2008

Forrester, P., Case in Point: Service Charges (2nd edition), RICS Books, Coventry, 2008

Forrester, P. and Gibb, G., Residential & Commercial Service Charges: A Surveyor’s Handbook (1st edition), RICSBooks, Coventry, 2008

Freedman, P. et al., Service Charges: Law and Practice (3rd edition), Jordan Publishing Ltd, London, 2002

Tanfield Chambers, Service Charges and Management: Law and Practice (2nd edition), Sweet & Maxwell, London,2009

Marketing and promotions

A Good Practice Guide – Shopping Centre Marketing and Promotions, a publication produced for the PropertyManagers Association (PMA) by James Goodliffe of The Boots Company and Belinda Burnstone of WHSmith PLC,and endorsed by the British Council of Shopping Centres (BCSC), British Retail Consortium (BRC), PMA, the BritishProperty Federation (BPF), The College of Estate Management (CEM) and RICS

BS 8572:2011 Procurement of facility-related service, BSI, 2011

The Code for Leasing Business Premises in England and Wales 2007, available at:www.leasingbusinesspremises.co.uk

RICS professional guidance

Commercial property service charge handover procedures (1st edition), RICS information paper, 2011

Insurance for commercial property managers (1st edition), RICS guidance note, 2010

Limiting liability in commercial property management contracts (1st edition), RICS information paper, 2009

Managing mixed use developments (1st edition), RICS guidance note, 2012

RICS Code of Measuring Practice (6th edition), RICS guidance note, 2007

Service Charge Residential Management Code (2nd edition), RICS guidance note, 2009

Service charges and tenant alterations (1st edition), RICS information paper, 2009

Sinking funds, reserve funds and depreciation charges (2nd edition), RICS information paper, 2014

TUPE: Information for property managers (2nd edition), RICS information paper, 2013


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In a world where more and more people, governments, banks and commercial organisations demand greater certainty of professional standards and ethics, attaining RICS status is the recognised mark of property professionalism.

Over 100 000 property professionals working in the major established and emerging economies of the world have already recognised the importance of securing RICS status by becoming members.

RICS is an independent professional body originally established in the UK by Royal Charter. Since 1868, RICS has been committed to setting and upholding the highest standards of excellence and integrity – providing impartial, authoritative advice on key issues affecting businesses and society.

RICS is a regulator of both its individual members and firms enabling it to maintain the highest standards and providing the basis for unparalleled client confidence in the sector.

RICS has a worldwide network. For further information simply contact the relevant RICS office or our Contact Centre.

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