Industry comment, updates and news from the Websters team.

Tenant dissatisfaction continues?

Wednesday, October 14th, 2009 in Commercial, Landlord, News, Service charge audits

A recent article in Property Week written by Christopher Hedley, a director of IPD, about Occupiers and Management highlighted the general dissatisfaction of tenants with how their managing agents and landlords deal with service charges.

The majority felt that the large increases in service charge costs could not be justified and that control and communication of costs by managing agents was poor – so much so that fewer than 10% of occupiers felt they were getting value for money.

The tenants also expressed major concerns over exceptional expenditure and improvement costs.  At best these create unpredictable variations in service charges year on year and at worst may be outside the scope of recoverable service charge expenditure.

Overall it was felt that better compliance with the RICS Code of Practice, more participation in decision processes and a much greater level of transparency was required to keep occupiers satisfied.  This would enable occupiers to forecast service charge costs in their business and treat this cost in a similar way to other business overheads with which they have their own control.

Websters have become more and more aware of these problems over recent years while dealing with audits for service charge accounts on retail and other commercial properties.  It is clear that the RICS code ‘Service Charges in Commercial Property’ which came into force from April 2007 was designed to address some of these issues. 

In order to assist these problems one of the most straightforward steps to take is to appoint an independent auditor to certify each period’s statement of expenditure, even if this is not a requirement of the lease. 

The advantages are clear:
• provides improved compliance with the RICS Code
• assures adoption of industry standard cost headings with accurate cost allocation enabling better analysis by the tenant and landlord
• provides the assurance of independent audit and cost transparency
• educates agents and landlords of the need for accurate expenditure coding enabling better provision of information during the financial year
• eliminates inclusion of costs not recoverable under the terms of the lease
• ensures proper matching of costs to the correct period, reducing service charge fluctuations year on year
• accurate year-end statements enable accurate budgets resulting in better predictability by the tenants
• the treatment of Landlords’ commercialisation is checked (e.g. advertising, kiosks, toilets etc).

In order to give the largest possible assurance of accuracy, Websters’ audit service tests 100% of service charge transactions.  Our experience shows that 100% testing is the only sure-fire way to iron out the common reporting problems found within ‘self-certified’ statements (e.g. inclusion of items directly recoverable from an individual tenant, enhancement expenditure etc).

The problems reported by tenants will not go away overnight but the adoption by the landlord of the RICS code of practice backed by an external audit to give assurance and to assist and advise on this adoption process can only help reduce the “expectation gap” between landlord and tenant.

Andrew Salmon, Partner

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