RICS Code of Practice

RICS Professional Guidance, UK

Service charges in
commercial property
3rd edition

rics.org/guidance
 rics.org

Service charges in
commercial property
RICS Code of Practice, UK

3rd edition

Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square
London
SW1P 3AD
www.rics.org
No responsibility for loss or damage caused to any person acting or
refraining from action as a result of the material included in this
publication can be accepted by the authors or RICS.
Produced by the Service Charge Code Steering Group of the Royal
Institution 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 this
work may be reproduced or used in any form or by any means including
graphic, electronic, or mechanical, including photocopying, recording,
taping or web distribution, without the written permission of RICS or in
line with the rules of an existing licence, see appendix C for more details
on reproducing the service charge accounting sample report.

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

Service charges in commercial property

Contents

Acknowledgments 1
RICS guidance notes 2

Introduction 4
The service charge arrangement................................... 4
New service charge lease provision.............................. 4
Using this Code of Practice .......................................... 4

Section 1: The Code 5

Aims and objectives ...................................................... 5
Core principles............................................................... 5
Limitations of the Code ................................................. 7

Section 2: Recommended best practice to support

the core principles 8
1 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 management
accommodation........................................................ 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......................... 17

3.1 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 ......................... 19

4.1 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 ......................................................... 25

5.1 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 of

fabric, plant and equipment ....................................... 31
8.1 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......................................... 33
9.1 Green leases............................................................ 33
9.2 Carbon Reduction Commitment Energy Efficiency
Scheme (CRC) ............................................................... 33
9.3 Improving environmental performance.................... 34

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Service charges in commercial property

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

10 Additional best-practice guidance for shopping

centres .......................................................................... 35
10.1 Marketing and promotions .................................... 35
10.2 Commercialisation (non-core income)................... 35
10.3 Apportionment of service charges in shopping
centres – weighted-floor area apportionment ............... 36

Appendices 37
Appendix A: Best-practice compliance checklist ......... 38
Appendix B: Standard industry cost classifications ..... 39
Appendix C: Service charge accounting sample
report.............................................................................. 43
Appendix D: Glossary and terminology ........................ 63
Appendix E: Further reading.......................................... 67

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Acknowledgments

RICS would like to thank the following for their This edition of Service charges in commercial property
contributions to this guidance note: is dedicated to the memory of Chris Edwards (1951 –
2013).
Lead author:
Chris was one of the UK’s most sought after advisers
Peter Forrester is a director and head of service charge
on property management issues and was the driving
consultancy at international property consultants Savills
force behind the RICS Code of Practice Service
and is an acknowledged industry expert and outspoken
charges in commercial property which launched in
advocate of best practice in the management and
June 2006. The Code’s welcome from all sides of the
administration of service charges in commercial
industry as a real breakthrough in best practice is
property. Peter is the Chairman of the RICS Service
testament to his foresight and energy as well as his
Charge Working Group.
commitment to ensuring fairness and transparency in
With special thanks to the Service Charge Working the management of commercial property.
Group and representatives of the industry bodies
Throughout a career spanning more than 40 years,
supporting this Code:
Chris was a popular figure who made a hugely
Andrew Varley, Next plc significant contribution to raising standards in the
profession.
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 Lang

LaSalle Ltd and Duncan Ashman, BDO LLP for their
invaluable help with regard to the accounting section.

RICS Guidance Note 1

Service charges in commercial property

RICS guidance notes

This Code has the status of a guidance note. It The Code has been prepared to promote best practice
provides advice to practitioners. Where procedures are in terms of service charges for commercial properties in
recommended for specific professional tasks, these are new leases or renewed leases. Circumstances can
intended to embody ‘best practice’. arise where the suggested best practice in this Code
cannot be applied. This Code therefore should not
Practitioners are not required to follow the advice and
compel owners, occupiers or managers to an
recommendations contained in the Code. They should
inappropriate course of action. Transparency simply
however note the following points.
requires that in the event the Code is inappropriate the
When an allegation of professional negligence is made reasons for this are shared with all relevant parties and
against a practitioner, the court is likely to take account a record kept.
of the contents of any relevant guidance notes in
In addition, guidance notes are relevant to professional
deciding whether or not the practitioner had acted with
competence in that each practitioner should be up to
reasonable competence.
date and should have informed him or herself of
A practitioner conforming to the practices guidance notes within a reasonable time of their
recommended in this Code is unlikely to be adjudged promulgation. In the opinion of the approving
negligent on account of having followed these professional bodies, this Code represents best
practices. However, practitioners have the responsibility practice.
of deciding when it is appropriate to follow the
guidance. If it is followed in an appropriate case, the
practitioner will not be exonerated merely because the
recommendations were found in a guidance note.

On the other hand, it does not follow that a practitioner

will be adjudged negligent if he or she has not followed
the practices recommended in this Code. It is for each
individual practitioner to decide on the appropriate
procedure to follow in any professional task. However,
where practitioners depart from the practice
recommended in this Code, they should do so only for
good reason. In the event of litigation, the court may
require them to explain why they decided not to adopt
the recommended practice.

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Document status defined

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

Type of document Definition Status

Standard
International Standard An international high level principle based standard Mandatory
developed in collaboration with other relevant
bodies
Practice Statement
RICS practice statement Document that provides members with mandatory Mandatory
requirements under Rule 4 of the Rules of Conduct
for members
Guidance
RICS Code of Practice Document approved by RICS, and endorsed by Mandatory or recommended
another professional body / stakeholder that good practice (will be
provides users with recommendations for accepted confirmed in the document
good practice as followed by conscientious itself)
practitioners
RICS Guidance Note (GN) Document that provides users with Recommended good
recommendations for accepted good practice as practice
followed by competent and conscientious
practitioners
RICS Information Paper (IP) Practice based information that provides users with Information and/or
the latest information and/or research explanatory commentary

RICS Guidance Note 3

Service charges in commercial property

Introduction

This Code of Practice is a best practice document and leases. Managers are expected to provide the
the industry as a whole is expected to aspire to follow facts and figures to support and vindicate such a
its recommendations decision
+ future redevelopment costs
+ such costs that are matters between the owner
The service charge arrangement and an individual occupier, for instance,

Service charges enable an owner to recover the costs – enforcement of covenants and collection of
of servicing and operating a property from the rents
occupiers, as well as any others who benefit from and – costs of letting units
use the services and facilities provided. consents for assignments
–
The service charge arrangement is set down in the – subletting
lease(s) and the aim is to entitle the owner to recover alterations
–
his or her charges and any associated administrative
costs incurred in the operational management of the – rent reviews or
property. This will include reasonable costs of – additional opening hours, etc.
maintenance, repair and replacement (usually where + any costs arising out of the failure or negligence of
beyond economic repair) of the fabric, plant, equipment the manager or owner.
and materials necessary for the property’s operation,
plus any other works and services the parties agree are
to be provided by the owner, but subject to New service charge lease provisions
reimbursement by the occupier.
The City of London Law Society
If the property is fully let, the owner will normally be (www.citysolicitors.org.uk) and Practical Law Company
able to recover all expenditure on services through the (uk.practicallaw.com) have both drawn up service
service charge, except any concessionary discounts charge lease provisions that have been specifically
the owner may have given. designed to comply with the principles and provisions
of this Code. These can be downloaded from their
Usually, there will be a manager who administers these
websites.
services, for which he or she will receive a fee.

Service charge costs do not generally include the

following: Using this Code
+ any initial costs (including the cost of leasing of This Code sets down best practice in the management
equipment) incurred in relation to the original and administration of service charges in commercial
design and construction of the fabric, plant or property. Section 1 of this document outlines the aims
equipment and objectives of this Code, along with stating its core
+ any setting up costs, including costs of fitting out principles. Section 2 then gives recommendations and
and equipping the on-site management offices that guidance on how the Code can be followed. The
are reasonably considered part of the original appendices contain additional information and
development cost of the property resources to support an understanding of the Code
and to assist with its implementation.
+ any improvement costs above the costs of normal
maintenance, repair or replacement. Service This Code of Practice is freely available at
charge costs may include enhancement of the www.rics.org/servicechargecode
fabric, plant or equipment, where such expenditure
can be justified following an analysis of reasonable
options and alternatives, and with regard to a cost-
benefit analysis over the term of the occupiers’

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Section 1: The Code

Aims and objectives how the costs are made up. Management fees are
to be on a fixed price basis with no hidden
+ To improve general standards and promote best markups.
practice, uniformity, fairness and transparency in
the management and administration of services Allocation and apportionments
charges in commercial property.
4 Costs should be allocated to the relevant
+ To ensure timely issue of budgets and year-end expenditure category. Where reasonable and
certificates. appropriate, costs should be allocated to separate
schedules and the costs apportioned to those who
+ To reduce the causes of disputes, and to provide
benefit from those services.
guidance on the resolution of disputes if these
arise. 5 The basis and method of apportionment should be
demonstrably fair and reasonable to ensure that
+ To provide guidance to solicitors, their clients individual occupiers bear an appropriate proportion
(whether owners or occupiers) and managers of of the total service charge expenditure that clearly
service charges in the negotiation, drafting, reflects the availability, benefit and use of services.
interpretation and operation of leases, in
6 Managers are expected to make available to all
accordance with best practice.
occupiers a full apportionment matrix that clearly
shows the basis of calculation and the total
apportionment per schedule for each unit within
The core principles the property/complex.

‘Tenants who agree to service charge clauses under Certification

which they contract to pay against a surveyor’s 7 Certified accounts of expenditure are to represent
estimate or an accountant’s certificate rely upon the a true and accurate record of expenditure incurred.
professional people involved performing their roles Those certifying service charge accounts should
with professional scrupulousness, diligence, integrity recognise that they have a duty of care to both
and independence and not in a partisan spirit,
owners and occupiers to act with professional
supposing their only task to be to recover as much
money as they can for the landlord.’ care, diligence, integrity and objectivity.

Communication and consultation

Jonathan Gaunt QC sitting as a deputy high court
judge: Princes House Ltd v Distinctive Clubs Ltd 8 While the owner has the right to set the standards
[2006] All ER (D) 117 (sep). [2007] 14 EG 104 (CS) by which his or her investment will be managed
and has a duty to manage, managers are advised
The service costs to consult with occupiers with regard to the
standard and quality of service charge provision
1 Best practice recommends that services are
required.
procured on an appropriate value-for-money basis,
9 Managers are expected to communicate with
and that competitive quotations are obtained or
occupiers to ensure services are delivered
the costs benchmarked.
effectively for the benefit of all, and to ensure that
2 Owners should not profit from the provision or occupiers understand what they can expect to
supply of services. Save for a reasonable receive and how much they are required to pay.
commercial management fee that reflects the
10 Managers claiming compliance with the principles
actual costs of managing the services, the amount
of this Code will be transparent in demonstrating
an owner may recover is limited only to the proper
how they comply with it.
and actual cost incurred in the provision or supply
of services. Duty of care
3 All costs are to be transparent so that all parties, 11 The owner and/or manager has a duty to manage
owners, occupiers and managers, are aware of the property, as well as a duty of care to both the

RICS Guidance Note 5

Service charges in commercial property

occupiers, who entrust the spending of their own Right to challenge/alternative dispute resolution (ADR)
business overhead and cash flow by funding the 21 All new leases (including renewals) should make
services, and to the owner whose investment they provision for either party to require the resolution
are servicing. of disagreements through the use of alternative
dispute resolution (ADR) as a cost effective
12 There will be clear policies as to how the service
charge will be managed. alternative to court action.
22 If the parties cannot agree a mediator or
Financial competence independent expert to determine the dispute the
President of the RICS should (on request)
13 In incurring costs in the provision of services, the
manager is spending the occupiers’ money. nominate a suitable person. Where leases do not
Managers are therefore expected to demonstrate a allow for ADR, parties are reminded that there is
high degree of competence, professionalism, nothing to stop them agreeing to use ADR to
integrity, diligence, objectivity and transparency in resolve a dispute.
dealing with the service charge accounts.
Timeliness
14 When issuing statements of accounts and/or
23 Communication and consultation between
certifying expenditure, managers are urged do so
managers and occupiers is to be timely and
in a non-partisan spirit, acting as experts. The
regular to encourage and promote good working
manager will therefore endeavour to ensure that all
relationships and understanding with regard to the
costs have been incurred and are properly
provision, relevance, cost and quality of services.
recoverable in accordance with the leases.
24 Managers will issue budgets to occupiers,
15 Service charge monies will be held in one or more including an explanatory commentary at least one
discrete bank accounts in recognition of the fact month prior to the start of the service charge year.
the monies are being held to provide for the Detailed statements of actual expenditure, together
procurement and delivery of the services. with accounting policies and explanatory text, will
16 All interest earned on service charge accounts – or be issued within four months of the service charge
where separate accounts per property are not year-end.
operated, a proper and reasonable amount of
interest calculated on normal commercial rates – Transparency
will be credited to the service charge account after 25 Transparency is essential to achieving good
appropriate deductions have been made. This communication. By being transparent in the
applies, for instance, to bank charges, tax, etc. accounts, the explanatory notes, policies and day-
to-day management, the manager will help prevent
17 The recommended Industry Standard Cost
disputes. Prompt notification of material variances
Headings should be used in reporting budget and
to plans or forecasts ensures better working
actual expenditure.
relationships between owner, manager and
Occupier responsibilities occupier.

18 Occupiers are obliged to ensure prompt payment

Value for money
of all service charge on-account and balancing
26 Service quality is to be appropriate to the location,
charges. Where a legitimate dispute exists, any
use and character of the property. The manager is
payment properly withheld should reflect only the
urged to procure quality service standards to
actual sums in dispute.
ensure that value for money is achieved at all
19 Occupiers will recognise that the service charge times. The aim is to achieve effective, value-for-
provision of any lease has legal effect, and should money service rather than merely the lowest price.
ensure that any representatives involved in
discussions, meetings, etc. have an appropriate
level of responsibility and authority to make
decisions concerning service charge matters.
20 In recognition that value-for-money and
maintenance of quality standards will be enhanced
through partnership, occupiers are urged to be
proactive in assisting owners in the operation and
utilisation of services and service systems – for
example, by separating waste to facilitate
appropriate and cost-effective recycling, adopting
energy-saving measures, etc.

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Limitations of the Code

Existing lease terms Proportionality
This Code cannot override the lease but, if read in The extent to which owners and managers should seek
conjunction with it, it can enable users to identify the to comply with the recommended best practice
best way forward in interpreting that lease to ensure processes and procedures set down in this Code will
effective management of services. often depend on a variety of issues, such as the size,
nature and type of property; the aggregate of the total
As business practice constantly evolves, so it is with
service charge costs; and the amounts payable by
service charges. Negotiating a new lease, or the
individual occupiers, which are likely to be consistent
renewal of an existing lease, provides an ideal
with best-value principles.
opportunity to ensure that modern and flexible best-
practice service charge clauses are incorporated within Nevertheless, owners, managers and occupiers should
the lease contract to facilitate effective management of at all times seek to comply with the core principles set
the property and aid the relationships between the down in this Code.
parties.

An ADR clause will enable any difficulties during the

term of the lease to be resolved efficiently.

All parties should carefully consider the principles

and requirements of this Code prior to entering into
a new or renewal lease

RICS Guidance Note 7

Service charges in commercial property

Section 2: Recommended best practice to

support the core principles of the Code

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1 Administration

1.1 Standard and quality of service best and agreed performance standards. As they will
need appropriate skills in general management,
provision
employment, and health and safety matters, any
The aim of service provision is to ensure that services necessary training costs may also be covered by the
are beneficial and relevant to the needs of the property, service charge.
its owner, its occupiers and their customers.
To ensure the services are provided efficiently and
Managers and occupiers should consider the nature, cost-effectively, sufficient staffing of the right type and
type and complexity of each property, as the levels and calibre is to be provided. In keeping with the goal of
standards of service provided will differ according to transparency, it is best to declare the total costs for
these factors. In providing these services, the aim is to such additional staff.
achieve effective, value-for-money service rather than
the lowest price. Site-management teams and managers are advised to
perform according to defined standards. It is also
The manager is responsible for: advisable to measure and review performance regularly
+ ensuring the standards of services provided are against these performance standards.
monitored
Where reviews of staffing levels are undertaken, it is
+ ensuring that the quality and cost of the services
reasonable that costs associated with achieving
provided are regularly reviewed and
beneficial changes – such as the termination of
+ where possible, demonstrating that service
employment contracts – will be recovered under the
standards are being delivered and that value for
service charge. This is provided that such costs can be
money is being achieved.
justified following the analysis of reasonable options,
It is recommended that management policies and and that the purpose is proven to achieve greater cost-
procedures be established to define the procurement, effectiveness and value for money.
administration and management of services, and to
ensure the respective obligations of owner and
occupier are discharged and services are provided
1.3 Management charges
efficiently, economically, cost-effectively and safely.
1.3.1 Total cost of management
Where there are sound reasons for implementing
The total cost of management is the reasonable price
alternative procedures to those set out in the Code, the
for managing the provision of the services at the
manager is expected to be able to explain and justify
location, and relates only to work carried out in
these in advance.
managing and operating the services and administering
Effective communication is key to achieving best the service charge.
practice. The aim is to provide transparency between
manager and occupier in the way services are provided The total cost of management might comprise two
and managed, and in how the costs of these services elements:
are recovered. + the fee charged by the manager for managing and
supervising the services at a site (the management
On occasion, additional services will be provided
fee) and
outside the service charge. Occupiers are entitled to
+ the cost of the site-specific management staff,
expect similar transparency, accountability, etc. in
whether based on-site in a full- or part-time
these services. The Code applies to these as well.
capacity (the site-management costs).

No two buildings are identical in the way they need to

1.2 Staffing and personnel
be run to meet the requirements of all parties with an
On-site management staff are required to have a sound interest in the property. Management fees and site-
knowledge of appropriate modern business practices management costs will need to be set at the
and to be adequately skilled in order to provide the appropriate level.

RICS Guidance Note 9

Service charges in commercial property

It is not for this Code to prescribe the operating + when they were appointed and
business model of the manager. + the basis of the management fee payable, which is
recoverable under the service charge.
Where, for instance, a regional facilities manager is
employed, to oversee a number of properties, Where owners manage the property in-house they
managers should be aware of the additional costs in should have due regard to the principles as outlined
creating a tiered management structure and should be above, and be able to support the basis of their fees
prepared to demonstrate that the total cost of when benchmarked against other comparable service
management is fair and reasonable in the providers.
circumstances and consistent with the value for money
It is advisable for the costs of reports (e.g. fire-risk
principles set out in this Code.
assessment reports, Disability Discrimination Act (DDA)
Best practice requires transparency and a management reports, health and safety reports, etc.) undertaken by
structure where costs are clearly identified and specialists working for the same organisation as the
explained. It is therefore recommended that this manager to be excluded from the management fee,
information be contained within the explanatory notes and for any fees for these additional services to be
included in the budget, along with a clear statement of stated clearly and to represent value for money. If other
the actual expenditure to occupiers. costs of providing the management service are being
included as separate items, the management fee is to
1.3.2 Management fees reflect this separate ‘accounting’ as part of the
management service.
The management fees charged should comprise only
the reasonable costs and overheads borne in the Further detailed information and guidance is available
process of operating and managing the services. These in the RICS information paper, Limiting liability in
would also reflect the actual work necessary to fulfil the commercial property management contracts(2009).
principles of this Code. It is recognised that whoever is
providing the service is entitled to cover their costs and 1.3.3 Duties of the manager
overheads, including a reasonable profit element.
Items 11 and 12 of the core principles outline the duty-
The manager should ensure that the management fee of-care responsibilities relating to service charges. The
relates only to the actual work carried out in managing owner has the duty to manage or delegate
the service charge. Other costs, for instance, asset management of the property, and the responsibility to
management and rent collection, should be excluded administer and account for the tax properly due on the
from the service charge management fee, which would service charge. Best practice requires the manager to
be stated in the service charge report. recognise a duty of care, both to the occupiers who
fund the services being provided, and to the owners
The Code requires that fees be set on a fixed-price
whose investment they are servicing.
basis rather than being calculated as a percentage of
expenditure. Percentage is no longer appropriate, and The manager will usually perform additional roles and
is considered to be a disincentive to the delivery of duties relating to investment interests, for instance,
value for money. The management fee should therefore asset management and rent collection. In such cases,
be a fixed fee subject to annual review or indexation. the fees the manager charges in relation to performing
such additional duties will be excluded from the service
It is recognised that many leases refer to the
charge management fee.
management fee as a percentage of the total service
charge, or contain a percentage cap. This guide cannot
1.3.4 Site-management costs
override the terms agreed between the parties and
recorded in the lease. However, where the lease limits Site-management costs are the full employment costs
the amount or quantum of the fee recoverable from for sufficient staff, as described in 1.2. The job titles of
occupiers, it is a matter between the owner and the staff will vary, however, the total cost of the staff
occupier and should not prevent or limit the manager’s will include wages, National Insurance (NI), tax,
ability to charge a commercial fee that reflects the compliance with statutory requirements, training and
requirements of this Code. In certain circumstances, other appropriate benefits.
this may result in a shortfall in the recovery of service Site-management costs might also include:
charge costs on behalf of the owner, but the overriding
+ the costs of providing appropriate office
principle must be to achieve best-practice principles
accommodation and administrative support where
for the management and administration of service
necessary
charges in commercial property.
+ a fee representing the human resources (HR) and
Managers should confirm in the service charge report: payroll costs associated with dealing with staff
+ the basis of their appointment (often referred to as an administration charge)

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+ separate specialist consultancy fees payable, for there are situations where the management premises
instance, in connection with the carrying out of comprise accommodation (offices) that would
health and safety risk assessments, asbestos otherwise be lettable space; in these cases, there is an
surveys, etc. and which should be clearly identified element of rent foregone to provide accommodation for
in the service charge accounts. the on-site management team.
One way of ensuring the costs reflect value for money It is generally not advisable to charge occupiers
is to compare them to a third party providing similar notional rent in situations where either the premises are
services. Where such fees are included the basis of incapable of beneficial occupation for any other
calculation and/or quantum of the fees included should purpose, or where provision has not been made for
be clearly communicated to occupiers to aid facilities management accommodation, for example, a
transparency. modern building designed without facilities
The total on site-management cost should be explicitly management accommodation as part of the original
shown in the service charge accounts. Staff costs design specification.
should not generally be split between other account There is also an argument that if notional rents are
code headings, for instance, the cost of a directly applied, it may discourage an efficient use of space, or
employed security manager would be included as part a consideration of alternative uses for areas currently
of the on-site management cost whereas a security occupied by centre or facilities management.
supervisor provided by a contractor would be included
as a security cost. However, where such costs are not
included as a site-management cost but allocated to a 1.4 Contract procurement
specific cost heading (i.e. cleaning or security) the
manager should be clear and explicit as to how these 1.4.1 Service standards and provision
management costs have been treated. It is advisable to ensure that all contractors and
Similarly any additional administrative charges included suppliers perform according to written performance
should be clearly and explicitly identified. standards. It can prove valuable to regularly measure
and review performance against these defined
Where on-site staff are responsible for more than one performance standards, as well as to regularly review
property, their costs (and any appropriate the appropriateness of the standards used.
accommodation and administrative support costs) are
best distributed accordingly so that each property
1.4.2 Procurement of services
covers a fair share of their cost. The service charge
report should identify clearly whether this is the case It is the responsibility of the manager to identify the
and how the costs are split. procurement strategy most suitable for the property
based on an appropriate level of service and value for
Many buildings require management 24 hours a day, 7
money.
days a week. A manager may consider supporting the
function of the on-site staff by providing a customer In 2011, a new standard covering the procurement of
support/help desk to deal with property matters facility-related services was published. British Standard
outside of usual business hours, or when the manager (BS) 8572:2011, Procurement of facility-related services
cannot be contacted. Where this is provided as an provides owners, operators, facility managers and
alternative to employing additional on-site staff, the property managers with guidance and
reasonable cost of running this service may be recommendations for procuring a broad range of
recovered from the service charge. services that are required to support the physical
assets that make up a facility, also the needs of users
1.3.5 Notional rent for management accommodation of that facility.

Many leases contain provisions for the inclusion of a The BS takes the form of guidance and
notional rent within the service charge for management recommendations, and is not intended to be quoted as
accommodation, or for other premises used in if it were a specification.
connection with the management of the property.
The manager may use a procurement specialist to
Notional rents were originally included to provide
deliver best-value solutions, as long as the purpose is
developers with a return on otherwise unlettable space
to achieve greater cost-effectiveness and value for
and to cover the initial provision costs for management
money. The cost of any procurement specialists
accommodation.
employed is considered to be recoverable through the
In many cases, management accommodation cannot service charge, but the costs are to be clearly identified
be separately let, and thus has no market value other in the charge report, along with details of whether it is
than as a location for such an operation. However, a 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 reflect placing of group contracts. However, the pricing of
the work undertaken, which may also be performance- services under such contracts can differ in either
related. providing a single contract sum, a separate cost per
property or a schedule of rates for different services.
It is generally the responsibility of the manager or the
procurement specialist to: Where such bulk or group contracts exist, occupiers
+ develop procurement systems are not entitled to have access to documents relating
to properties other than the one they occupy. However,
+ vet and select the most appropriate contractors,
where the contract/tender includes other properties,
based on track record, skill and management
transparency in terms of the apportionment and
experience and
allocation of costs to the subject property is essential.
+ prepare a contract and specification, including
Transfer of Undertakings (Protection of Where contracts are reviewed, it is reasonable that
Employment) Regulations (TUPE) information, costs associated with achieving beneficial change –
where appropriate. such as termination of contracts – are recovered under
the service charge. This is applicable where such costs
Contract costs are to be transparent and in accordance
can be justified following the analysis of reasonable
with the provisions for transparent accounting.
options, and where the purpose is to achieve greater
Further information can be obtained from the RICS value for money and cost-effectiveness.
information paper, TUPE: Information for property
managers (2013).
1.5 Allocation and apportionment
The manager or procurement specialist is expected to
be responsible for: 1.5.1 Schedules
+ the provision of full pre-qualification assessments Costs are to be apportioned to each occupier in
of suppliers and contractors in terms of their accordance with items 4 and 5 of the core principles.
financial standing and proven compliance with
The basis and method of allocating and apportioning
health and safety
the service charge expenditure is to be transparent and
+ appropriate indemnity in respect of the services clearly communicated to all. Any inducements or
provided, including any undertakings via sub- concessions to attract occupiers to a property are to
contractors (with provisions for prior approval be borne by the owner, and not spread among other
thereof) and occupiers. The rationale for the apportionment between
+ proven environmental/sustainability credentials. occupiers should be set down in writing, and
Managers should ensure that there is transparency in subsequently re-examined periodically to see whether
procurement fees and charges for verifying contractor there is a need for a new apportionment matrix or new
financial standing, health and safety records, and apportionment method to be applied. Where
environmental credentials, etc. including cost or fees reasonable and appropriate, costs can be allocated to
charged to owners. separate schedules and the costs apportioned to those
who benefit from those services.
If any fees are received from contractors, managers
In many cases, particularly regarding buildings with a
should clearly state what these are and what they are
variety of users, not all of the occupiers will benefit
for. Managers should also be aware that the practice of
from the services to the same extent. In such
requesting fees, other than a reasonable administration
circumstances, it may be necessary to divide the
charge, from contractors for inclusion in approved
service charges into separate parts (schedules) to
contractor lists, contract tendering, etc. is contrary to
reflect the availability, benefit and use of services, with
best practice and is considered to be wholly
each part being individually apportioned between
inappropriate under any circumstances.
occupiers according to the core principles. The
On receipt of tenders, a tender report should be allocation of costs to separate schedules is essential in
prepared containing recommendations on which achieving a fair and proper apportionment of costs
contractor is most suitable. Copies of all tender between those occupiers that benefit from specific
documents should be made available for inspection, if services. Occupiers will therefore often pay different
requested. If further copies are required, the manager percentage apportionments under different schedules.
will be entitled to charge for the time, cost of copying
and postage of such documents. 1.5.2 Flexibility
Owners and/or managers are often able to achieve It is worth considering that the availability, benefit and
substantial savings and other benefits in the provision use of the services within a building, and the demand
of services through bulk purchasing or through the for those services by individual users, could vary over

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time, therefore, leases would benefit from being drafted 1.5.6 Rateable value apportionments
to include flexibility and variation. For example,
Rateable values are no longer recommended as an
additional units may be created or the use of a
appropriate method for calculating service charge
property may change, thus causing different demands
apportionments.
for services and necessitating a change to the costs/
payments structure. Even with the grant of shorter-term Rateable values take account of a variety of factors
leases, the ability to change allocation and relating to value, such as location, etc. and do not
apportionment methods, where necessary and generally reflect a reasonable assessment of the benefit
appropriate, could be made available during the term and use of common services.
to ensure service charges are spread fairly and
While many leases require service charges to be
reasonably between beneficiaries and users.
apportioned based on rateable value, with no provision
for any alternative basis to be used and
1.5.3 Void and unlet premises notwithstanding that this Code cannot override the
contractual terms of any lease, it is nevertheless the
Occupiers are not expected to be liable for the costs
view of the steering group that rateable value
attributed to unlet premises; the owner is to meet the
apportionments should be changed to such other
cost of these, as well as any special or personal
recognised methods of apportionment consistent with
concessions given to individual occupiers. Owners are
the aims and aspirations as set down in this Code.
also responsible for bearing a fair proportion of costs
attributable to their own use of the property, for
example, where an on-site management premises is 1.5.7 Owner’s cost/profit centres
also used for other purposes unconnected with the
Where there is a separate cost or profit centre within a
day-to-day management of the building and services.
property complex that generates income for the owner
that is not credited to the service charge account, the
1.5.4 The apportionment matrix costs associated with maintaining and running that
cost centre will not be allocated to the service charge
Managers are to make a full apportionment matrix
account (for example, car parks, mobile phone masts,
available to all occupiers that clearly shows the basis
advertising, radio aerials, etc.). If the separate cost/
and method of calculation, and the total apportionment
profit centre derives benefit from staff or services that
per schedule for each unit within the property/complex.
form part of the service charge, the cost/profit centre
For the avoidance of doubt, and to preserve will be incorporated into the service charge matrix (for
confidentiality this should exclude details of any example, the car park, management office, etc.).
individual concessions or other arrangements between Alternatively, owners can estimate and declare a
individual owners and occupiers; these are costs that contribution to the service charge that reflects the
are normally to be borne by the owner. An individual benefit and use of the common services enjoyed.
occupier should be able to clearly verify the basis and
method of calculation used in arriving at his or her 1.5.8 Tenant alterations
particular percentage apportionment.
Alterations carried out by tenants may have an impact
on the calculation of the apportionment of occupier
1.5.5 Floor-area apportionment service charge liabilities.
Apportionment based on floor area is the most Tenant alterations that change any factor on which the
common, and often the simplest, method of apportionment calculation is based (such as, but not
apportionment. The standard floor-area apportionment limited to, floor area, rateable value, or the extent of
is the ratio the premises bear to the total lettable parts use and benefit of the services derived) might
of the building. determine whether adjustments to tenant service
charge apportionments would be appropriate.
RICS Code of Measuring Practice sets out definitions
of the measurement of buildings and their In the case of a warehouse/distribution centre, the
recommended applications, e.g. Gross External Area introduction of an additional mezzanine floor, in
(GEA), Gross Internal Area (GIA), Net Internal Area preference to full eaves-height racking, may not affect
(NIA), etc. or increase the use of the premises, and therefore the
use and benefit of the common services.
Where the service charge is apportioned based on floor
area, managers should ensure that the method of However, a mezzanine floor installed in a unit on a retail
measurement used is consistent. Do not mix different park might generate additional sales and customer
measuring methods in the same schedule. footfall, with a corresponding increase in goods

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Service charges in commercial property

deliveries, etc. and an increase in the enjoyment, use transparency, accountability, etc. in these services,
and benefit of common services such as parking, since the Code is also applicable to these.
security, cleaning, etc.
1.6.1 Insurance
While this situation can often present a dilemma for the
landlord, the answer may often be found in the precise Value for money
wording of the lease. If this makes specific reference to Where owners are responsible for insuring the property
the basis on which the service charge apportionment is the insurance policy terms should be fair and
to be calculated, for instance, to the floor area, the reasonable and represent value for money, and be
landlord would be obliged to factor in the additional placed with reputable insurers.
floor area of the demised premises to the
apportionment matrix. Commission

Where the lease does not make specific reference to The principle of commission retention is now long
the basis of apportionment and refers, for instance, to established. In its base form, the use of commission to
a ‘fair and reasonable proportion as determined by the cover administrative costs – including broker fees – is
landlord’s surveyor’, the landlord’s surveyor, acting as to be recognised, also the owner’s ability to benefit
an expert, will be required to adopt a basis of from the economies of scale generated by the pooling
calculation that conforms with the basic principles of of risks into a common programme.
service charge apportionment. This would need to be
Owners and managers are also required at all times to
demonstrably fair and reasonable to ensure that
disclose any commission(s) they are receiving.
individual tenants bear an appropriate, fair and
reasonable proportion of the total service charge Service
expenditure that reflects the benefit of the services
Owners are obliged to provide full insurance details on
enjoyed.
request, and to be able to explain the process by
When dealing with alterations to premises, particularly which occupiers can make claims under the policy.
where these require the prior consent or approval of
Policies are expected to include an ability to note the
the landlord, it is always desirable that careful
interest of occupiers, as well as any subrogation
consideration be given to the potential impact on the
waivers and non-invalidation provisions for the benefit
calculation of the service charge, to ensure that the
of the occupier. Again, these are to be in line with lease
apportionment continues to be fair and reasonable.
obligations.
This is in view of the underlying principles set out in
this Code of Practice. Further information and guidance can be obtained from
the RICS guidance note Insurance for commercial
Landlords are also advised to consider including
property managers (2010).
appropriate wording within any licence for alterations in
order to clarify the position and basis of calculation of
the service charge for the future. 1.6.2 Utilities

Further information and guidance can be obtained from Where a service is provided directly to an occupier or
the RICS information paper Service charges and tenant to the occupied premises, such as mains water or
alterations (2009). electricity supply as distinct from common works and
services, it is important that the manager and occupier
understand the basis on which the service is provided,
1.6 Direct recoveries and whether the costs are intended to be included
within the service charge account, or will be issued as
Service charges usually include the cost of utilities for
a separate charge.
any common parts and services. Traditionally, buildings
and/or rent insurance is apportioned to occupiers Separate metering, or full submetering of utility
outside of the service charge arrangement as a directly supplies, is considered essential to ensure an
recoverable cost. Occupiers are often responsible for apportionment of cost between occupiers that reflects
payment of electricity/gas consumption supplied to the actual consumption and usage.
occupied premises direct to the utilities provider. In
Costs should be recovered in accordance with the
some circumstances, however, the lease may provide
terms of the leases, which ought to allow additionally
for the cost of buildings insurance and demised
for the payment of a reasonable administrative charge.
electricity to be recovered within the service charge.
The recovery should state unit costs and administration
Where owners are seeking to recover the cost of charges and include copies of the original invoice in
insurance and utilities outside of the service charge order to comply with the requirements for transparency
arrangement, occupiers are entitled to expect similar set out in the Code.

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To avoid ambiguity, and to ensure that accurate Where a lease makes no such provision, it is
consumption and billing is recorded for occupiers, it is considered appropriate for the owners to open a
recommended best practice that the cost of reading dialogue with occupiers in order to seek to agree to
meters (where carried out by a third party) is included pay a security deposit in return for contract supply
as an acceptable cost under the service charge. rates, as opposed to default supply rates.
Otherwise, such costs would usually comprise part of
The payment of a deposit can be included in on-
the on-site management costs.
account payments for the relevant service charge
Occupiers should be aware of the ever-increasing period, credited at year-end and then re-budgeted for
pressure placed on owners by utility providers for the following period. Therefore, if a lease expires in any
prompt payment and should therefore ensure that all given period, the occupier will receive an appropriate
invoices are paid promptly. In certain circumstances credit in their final service charge balance.
payments in advance may be appropriate.

It is now also becoming increasingly common for utility

companies to request that owners either pay large
security deposits or higher energy rates.

Where a lease makes specific provision for the

inclusion of a security deposit as a service charge cost,
both owners and occupiers are urged to ensure that
the lease allows for the occupier’s proportion of the
deposit to be reimbursed on expiry; or alternatively on
sooner determination of the lease, in the event of a
change of owner/manager, or if the deposit is otherwise
reimbursed by the utility company.

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Service charges in commercial property

2 Communication and consultation

2.1 Communication commercial leases might set out certain procedures to

be followed, perhaps prior to incurring large
As poor communication often gives rise to disputes, extraordinary costs, such as major fabric or plant
effective communication is key to achieving best replacements etc. The courts have recently ruled in a
practice. Here the aim is to provide transparency number of instances that owners are obligated to
between manager and occupier in the way services are follow the terms of leases strictly when recovering
provided and managed, and in how the costs of these service charges. Therefore, in order to ensure recovery
services are recovered. Communication needs to be of the service charge, managers should take particular
timely and continuous, and works best when managers care to follow exactly the procedures as set down
and occupiers deal with each other’s reasonable within the lease.
enquiries and reciprocal obligations promptly and
efficiently. Even where the lease is silent it is considered best
practice for managers to consult with occupiers with
Managers are advised to seek feedback from occupiers regard to the standard and quality of the service charge
on the performance management standards and provision(s) required. While the manager has a duty to
service delivery, and take any action on this feedback manage the property and will not wish to incur
as appropriate. expenditure that might have a detrimental effect on the
It is important to have a clear communication structure. owner’s investment, managers should ensure that the
Best practice requires managers to hold regular standard of service provision (and therefore the cost to
meetings with occupiers, and occupiers have a duty of occupiers) does not unnecessarily exceed the
care to participate in these meetings and to be reasonable requirements and needs of the occupiers.
proactive in informing managers of the key contacts
who deal with service charges.
2.3 Budgeting and cost review
Managers are also obliged to make key contact
It is the manager’s duty to keep expenditure under
information available to occupiers, for instance, the
constant review in order to identify any unforeseen
management surveyor, credit controller, accounts clerk,
variances and to notify occupiers accordingly. When
etc., as well as the names of any on-site staff, along
significant variances in actual costs against budget are
with their roles and responsibilities.
likely, it is good practice for the manager to notify
Managers are to provide occupiers with a copy of the occupiers promptly and within the current service
management policy, which should contain standard charge year. When substantial works are planned,
information about how the property is managed and summary details of the results of tenders and the
the aims of the management team (e.g. the manager process used should be communicated to the
and the on-site team). Managers should also inform occupiers, together with full information on the
occupiers of any future plans for the property, programme of works, costs and the process to be
particularly if these are likely to have an impact on the adopted for keeping occupiers informed.
service charge.
Occupiers are entrusting their business overheads/
operating costs to an external manager, and as such
2.2 Consultation are entitled to be notified of any significant or material
variances to the forecast as soon as possible.
Managers of residential premises are required to follow
Whether a variance against forecast is to be regarded
statutory consultation procedures, and will be keenly
as significant or material will often be a subjective
aware that if the proper procedure is not followed, the
assessment, depending on a variety of issues such as
amount they can recover might be limited.
the size, nature and type of property and the amounts
Managers of commercial property are not generally payable by individual occupiers. Prompt notification of
obliged to ‘consult’ with occupiers prior to incurring unforeseen variances in the total annual spend should
costs that are ultimately to be recovered under the be made to all occupiers, with an explanation as to
service charge arrangement. However, some how this is being mitigated, at the earliest opportunity.

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3 Dealing with existing and new leases

3.1 Existing leases and type of property concerned. At the time of lease
renewal, the service charge clauses will certainly
The basis by which service charges are operated and require review and probably modernisation/updating. It
managed is set down in the contract between the is recommended that new leases be drafted with
owner and occupier, otherwise known as the lease. sufficient flexibility to allow for changes in best
Many service charge disputes are caused by the failure practice.
of managers and/or occupiers to read and properly The attention of owners, managers and occupiers is
understand the respective obligations and liabilities also drawn to the Code for Leasing Business Premises,
under the contractual arrangement made between which provides further guidance for negotiations before
them. Therefore, care and attention is required to the grant of a lease or lease renewal in creating a
understand the contractual basis of the service charge document that is clear, concise and authoritative.
arrangements properly.
Further information can be obtained from
Existing leases may contain service charge provisions www.leasingbusinesspremises.co.uk
that differ from the recommendations in this Code.
Where this is the case, this Code cannot override the It is unlikely that all leases within a multi-let property
lease, but existing service charge clauses are to be will fall for renewal on the same date. Modernising the
interpreted as far as possible in line with the principles service charges on an ad hoc basis may lead to a
and practices as set out here. This applies unless the ‘dual’ service charge, where in effect two service
lease specifically stipulates a different approach, which charge arrangements would operate in tandem, with
therefore has legal force. one based on the older form of leases, and the other
based on the modern form. Therefore, interim
Where doubt or possible ambiguity exists, seek
arrangements may be necessary to ensure the practical
specialist professional advice.
operation of the services and the recoverability of the
service costs during the intervening period until such
3.2 New leases time as all leases have been modernised. For example,
renewal leases might reflect the ideal service charge
As new leases are granted and older leases renewed, it regime going forward, as well as the status quo, so
is essential to bring service charge clauses up to that when the tipping point is reached, the owner can
modern standards. If modernisation of the service swap from the old lease service charge regime to the
charge provision of the lease is required, both to meet new.
best practice and in the interests of compatibility with
other occupiers, and this results in an increase or
decrease in the amount payable by the occupier, this is 3.3 Sweeper clauses
to be taken into account in any negotiations, for
It is often difficult to predict precisely what services
instance, as reflected in the rent payable.
might be provided through the duration of a long lease,
While this Code cannot override the lease, it does set and which are to be covered by the service charge. To
out the industry-accepted best practice in the field of avoid the risk of incurring costs that might fall outside
service charges. It will help solicitors, their clients (be of the service charge, most leases contain a ‘sweeper’
they owners or occupiers) and the managers of service provision entitling the owner to charge, not only for the
charges to draft, interpret and operate leases in services specifically listed, but also for other
accordance with best practice. miscellaneous services that might be provided in the
future.
It is recommended that owners, occupiers and their
solicitors ensure the lease they sign reflects this Code, This is not usually a problem for short leases however,
which will enable more effective, business-focused as in these cases it is far easier to accurately predict
service charge management during the course of the the services that are to be provided. Unless a lease
lease. Terms should be relevant and appropriate incorporates very clear wording to the contrary, if the
recognising the length of the lease term, and the scale owner had in mind the provision of a service, but has

RICS Guidance Note 17

Service charges in commercial property

not covered the right to include the cost of providing it

in the service charge, he or she will not generally be
able to use the sweeper clause as authority to recover
the cost.

A sweeper clause cannot be used to cover the cost

of something that was left out of the lease in error.
The intention is to give the owner the ability to
provide further services that are not identified or in
contemplation at the time the lease was granted,
and that, for any reason, are considered necessary
or desirable to be provided at a later time.

3.4 Professional arbitration on court

terms (PACT)
The Civil Procedure Rules (CPR) determines that ADR
must be considered before litigation, or the parties risk
a punishment of costs by the courts.

PACT is a scheme offered by RICS and the Law

Society as a form of ADR for lease-renewal disputes.

The scheme provides the opportunity for owners and

occupiers to have the terms and rent payable under
their new lease decided by a surveyor or solicitor,
acting as either an arbitrator or independent expert. It
is important to note that any decision made by either
an arbitrator or independent expert is legally binding.

The objective of the scheme is to increase the

effectiveness and flexibility of the legal system, and to
give a greater choice to owners, occupiers and their
advisers through the lease-renewal process.

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4 Financial controls and competencies

4.1 Accounting principles It is essential that any contractual requirements in the

lease be duly followed. Compliance with the
Annual statements of service charge expenditure requirements and procedures set down in the lease
should include a comprehensive list of accounting may be a ‘condition precedent’, and recent case law
policies and principles on which the statement is has determined that where a lease sets down specific
prepared, including: requirements and procedures, a failure to comply may
+ whether the statements are prepared on an adversely prejudice the owner’s ability to recover such
accruals or cash basis sums.
+ whether the owner has waived the exemption to Managers should therefore ensure that annual
charge VAT (opted to tax) statements of service charge expenditure are
+ a description of the intended purpose for any issued strictly in accordance with the procedures
sinking or reserve fund, together with an and requirements as set down under the terms of
explanation of the tax treatment of contributions to the lease.
and interest earned on such funds, and details of There is currently widespread confusion, however, as to
the trust where such monies are held the intention and purpose of the certification process
+ a statement of all contributions to and expenditure and the requirement for ‘auditing’ of service charges.
from the sinking or reserve fund account, together Furthermore, the terminology used in relation to the
with the account opening and closing balances, issuing of annual statements of account, particularly in
and the amount of interest earned and tax paid in older leases, may be quite generalised, and may not
the relevant period reflect modern auditing and accounting standards and
+ an analysis of any material variances between practice.
budget and actual expenditure, with a detailed Independent accountants who issue a report on a
commentary to explain trends and variances where statement of service charge expenditure will often carry
these are significant and out differing levels of work, and will each sign a
+ sign-off statements by the accountants and/or different style of report. Consequently, there is little
manager with regards to compliance, financial understanding of the level of assurance that owners
accuracy and the use of appropriate accounting and occupiers can take from the report, and potentially
policies. confusion regarding the actual work undertaken by
independent accountants.

4.2 Audit and certification of service 4.2.2 Service charge certification

charges The purpose of certification of the service charge

accounts is to provide occupiers with the comfort and
4.2.1 The requirements of the lease certainty that:
+ the accounts produced represent a true and
It is usual for leases to provide for an annual statement accurate record of the expenditure incurred by the
to be issued to occupiers following the end of each owner in supplying the services to the building and
service charge period; this would normally include a
+ the expenditure the owner is seeking to recover is
summary of the costs and expenditure incurred in the
in accordance with the terms of the leases and,
provision of the services and a calculation of the
where practicable, the provisions of this Code.
service charge.
Annual statements of service charge expenditure
Many leases will set out the procedures regarding the should be certified by the manager as complying with
preparation of the annual statement, and will often the statements above. In certifying the statement the
require that the annual statement be ‘certified’ by the manager is required to act in a professional, non-
landlord’s surveyor, managing agent and sometimes the partisan manner, and not supposing that the only task
landlord’s accountant. However, certain leases might is to recover as much money as they can for the
also require the statement to be ‘audited’. owner.

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Service charges in commercial property

Notwithstanding any specific requirements of the lease, exercise is likely to be extremely time-consuming, and
the certifier will need to be an appropriately qualified, hence costly, particularly for larger properties with
competent person with experience in dealing with many leases in operation. The auditor may need to
service charges. In certifying the service charge, the employ an expert in order to carry out this review on
certifier has a duty of care to both owners and his or her behalf.
occupiers to act with professional care, diligence,
The auditor’s reasonable and proper costs and fees
integrity and objectivity.
will, subject to the terms of the lease, be charged to
The lease might also set down the credentials/ the service charge account.
qualifications required of the person who will certify the
Frequently, the work required by a modern auditing
service charge statement. In certain circumstances, the
framework is not what was anticipated when leases
lease might specifically allow the surveyor or
were drawn up; especially where the original lease
accountant to be an employee of the landlord.
dates back many years. Where this is the situation, the
In the interest of transparency, the status of the person manager faces a dilemma whereby the lease requires
issuing the certificate and the capacity in which the an ‘audit’, but an audit in accordance with auditing
certificate is issued should be made clear (i.e. standards may exceed that which was intended. An
landlord’s surveyor, accountant, etc.). audit may not, therefore, provide best value for
occupiers. In such situations, owners/managers may
In certain instances, certification may be issued in the
consider it appropriate to engage an independent
name of the manager. Where this is the case,
accountant to examine the service charge accounts of
managers are advised to have clear internal procedures
a property, rather than carry out an audit.
in place that control who may sign in the name of the
firm, and to ensure this is an appropriately senior If the lease specifies that an audit is to be carried out
individual. then this should be undertaken, unless the occupiers
confirm in writing that it is not required. In these
Where the manager undertakes the certification, the
circumstances, an independent accountants’ report
management fee is to include this cost. Where the
should be prepared.
lease requires certification by someone other than the
manager, the costs of certification of the service
4.2.4 Independent accountants’ report
charge, together with the fees of an independent
accountant, will be recovered through the service In the majority of cases, it is considered appropriate for
charge. owners/managers to engage an independent reporting
accountant to examine the service charge accounts of
a property rather than carry out an audit, as the cost of
4.2.3 Auditing of the service charge accounts
an ‘audit’ in accordance with auditing standards is
+ An audit is an independent external review process
likely to be disproportionate and may not offer value for
that adds to the credibility of an entity’s
money.
disclosures, be it their annual financial statements,
systems of internal control, or compliance with Even where a lease requires the service charge to be
contractual or legislative obligations. audited, or certified by the landlord’s auditors, owners
+ An audit involves performing procedures to obtain and managers will need to make clear whether an audit
evidence that a specified process is being followed under accepted auditing standards has been carried
in order to give occupiers sufficient comfort that out, or alternatively an independent accountant’s report
there is no material misstatement within the prepared.
information subject to the audit (or in this case, the The onus and style of an independent accountant’s
service charge accounts). review differs from an audit. The procedures carried out
Where the lease specifically refers to an ‘audit’, this is may include:
to be carried out in accordance with International + checking whether the figures contained in the
Auditing Standards (IASs) (UK and Ireland), and should information were extracted correctly from the
be performed by a registered auditor. accounting records maintained by the manager
and
In carrying out an audit in accordance with accepted
+ checking, based on a sample, whether entries in
auditing standards, it is the auditor who would normally
the accounting records were supported by receipts
assess the level of risk involved in the instruction, and
or other documentation, or the evidence was
would also adjust the level of work (and cost)
inspected.
accordingly. For instance, the auditor is likely to require
a copy of the lease or leases governing the It would be usual for annual statements of service
administration of the property, and summarise the charge expenditure to be prepared, and certified, by
expenses that may be charged to the occupiers. This the owner or manager. In practice, for many small

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properties, the reporting accountant may be engaged In consultation with the ICAEW, RICS has issued a
to prepare the statements from accounting records sample report on service charge accounting (see
maintained by the owner or manager, as well as appendix C) setting out recommended best practice for
providing the independent accountant’s report. In these the disclosures and information that managers should
circumstances, the owner or manager will retain provide to the accountants appointed to carry out an
responsibility for the preparation and certification of the independent review of service charges, and for
statement. subsequent communication to tenants as to the nature,
type and cost of services provided.
Where the lease is silent or the audit is optional,
managers should not use an external audit or
independent accountant’s report as a means of giving 4.3 Industry standard cost classifications
credibility to service charge expenditure at the
Appendix B includes details of industry standard cost
occupiers’ expense, unless this is agreed with the
classifications that must be used in reporting budget
occupiers in advance. In addition, an audit or
and actual expenditure.
independent accountant’s report should not be used as
a substitute for an alternative method of certification The industry standard cost classifications provides
specified in the lease, unless this has been agreed with three levels of analysis:
the occupiers in advance. + cost class
+ cost category and
If an occupier requests an audit (subject to clarification
of ‘audit’ as above) or independent accountants’ + cost description.
report, the manager should agree and the costs thereof As a minimum acceptable level of reporting, service
should be charged to the occupier. charge budgets and statements of actual expenditure
are to be prepared at cost class and cost category
4.2.5 Recommended best practice level.

+ Annual statements of service charge expenditure Adoption of the industry standard cost classifications
should be certified by the manager to confirm that will reap enormous benefits for the industry as a whole,
they represent a true and accurate record of the as this will facilitate better cost comparison between
expenditure incurred by the owner in supplying the properties and the benchmark indices. It will also
services to the building, and that the expenditure reduce costs and assist in the transfer of information
the owner is seeking to recover is in accordance between managers and owners when properties are
with the terms of the leases. sold or when there is a change of manager (i.e. from
+ Annual statements of service charge expenditure in-house to external, or between managing agents).
should be reviewed by an independent accountant.
However, to achieve transparency in accordance with
However, to be consistent with best value
the principles of this Code, it is recommended best
principles this requirement should be considered
practice that budget and actual expenditure analyses
as optional for smaller properties and dependent
are provided at the detailed cost description level
upon the quantum and nature of the expenditure.
whenever practicable, and particularly in respect of
+ In certifying the service charge, managers have a larger properties, with a summary of the total costs
duty of care to both owners and occupiers to act under each cost category.
with professional care, diligence, integrity and
objectivity. In accordance with the core principle of proportionality,
it is acceptable for smaller properties or those with
+ If the lease requires an audit to be carried out,
limited service charge expenditure (for example,
then this should be undertaken, unless the
industrial sites) to report at the higher cost category
occupiers confirm in writing that this is not
level, although this is generally regarded as an
required. In these circumstances, an independent
exception rather than the norm.
accountants’ report should be prepared.
To maintain consistent industry standards and to
The Institute of Chartered Accountants in England and facilitate benchmark comparison, managers and those
Wales (ICAEW) is to issue a technical release to responsible for preparation of the accounts are
provide guidance on accounting for commercial service encouraged to use all best endeavours to comply with
charges. For the latest information see the ICAEW the cost class and cost category analysis as set out
website at www.icaew.com and not permit the creation of new cost categories or
cost classes.
This technical release will provide good practice
guidance on technical and practice issues relevant to However, the detailed cost descriptions set out are not
the work of accountants and other professionals. intended to represent an exhaustive list, but are

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Service charges in commercial property

included for illustrative and guidance purposes only. + the achieved and/or targeted measures of
Individual cost descriptions may vary from manager to improved management performance (e.g.
manager, and the inclusion of additional cost successes in delivering improved quality services
descriptions is encouraged where this will facilitate and greater value for money)
greater transparency and clarity with regard to the + on-site management team costs, separately
expenditure incurred or proposed. identified
+ details and results of the most recent previous and
The use of the standard cost classes and categories in
forthcoming tendering exercises. Occupiers are to
industry-standard format are essential if benchmarking
be advised of the contractors who are providing
is to be effective. However, for benchmarking
the services
purposes, accounts are only required at cost-category
and cost class level. It is not intended that benchmark + a full apportionment matrix that clearly shows the
analysis of expenditure be carried out at cost basis of calculation and the total apportionment
description level. per schedule for each unit within the property/
complex
+ the date of issue
4.4 Budgets and actual expenditure
A set of industry standard cost classifications has been
accounting drawn up, and is included in appendix B (see also 4.3).
The service charge accounting sample report It is essential that these be used at cost-class and
establishes a basic framework for the preparation of cost-category level.
service charge accounts, and identifies areas for
special consideration by managers and reporting 4.5 Right to challenge
accountants.
This Code cannot override an occupier’s legal right to
Core principle 24 requires managers to issue budgets challenge incorrect or inappropriate service charges
of anticipated service charge expenditure to occupiers, subject to the prevailing statute of limitations.
including an explanatory commentary at least one
month prior to the commencement of the service- Where the manager has demonstrably complied with
charge year. Budgets should also include a clear the provisions of the lease and this Code of Practice, it
explanation of the calculation of the occupier’s is recommended that the manager allow occupiers a
proportion of the total costs. reasonable period (e.g. four months from issue) in
which to raise enquiries or request further information
Detailed statements of actual expenditure, together in respect of the certified accounts. Managers are
with accounting policies and explanatory text, will be expected to deal with reasonable enquiries promptly
issued within four months of the service charge year- and efficiently, and to make all relevant paperwork
end. available for inspection. Where copies of the
supporting documentation concerning the certified
The accounts are to give an adequately detailed and
accounts are supplied, it is acceptable for an
comprehensive summary of items of expenditure, with
appropriate fee to be charged.
full explanations of any material variations (+ or -)
against the budget, and in a reasonably consistent Occupiers and consultants appointed on their behalf
format year on year. have a duty to respect and conform to the principles of
the Code. In the interest of promoting a swift and
It is recommended that the budgets and accounts be harmonious resolution of service charge queries, there
issued with a report that provides the following should be openness and transparency in disclosing the
minimum information: occupier’s brief to his or her consultant and whether
+ a comprehensive level of detail to enable remuneration is on a contingency fee basis.
occupiers to compare expenditure against
estimated budgets
4.6 Change of owner or manager
+ explanations of significant individual costs and of
variances from the previous year’s budget/ In the event of a sale or change of manager, it is
accounts essential that a definitive timescale is agreed within
a comparison against the previous two years’ which accounts will be closed and handed over.
+
actual costs, where appropriate It is recommended that as soon as practicable – but
+ information on core matters critical to that account not later than four months following the date of
(e.g. levels of allocation, apportionment, contracts, completion of a sale of a property, or a change of
report on tendering, etc.) manager – full details of all service charge expenditure,

22 RICS Guidance Note

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accruals, pre-payments, etc. for all outstanding service It is the owner’s responsibility to fund the contribution
charge years be provided to the new owner/manager, from void units, and to make these payments to the
up to the date of sale/transfer. account as promptly as payments made by occupiers.
If an owner is not as prompt as occupiers are required
The new owner or manager should issue any future
to be, the interest charges should apply in line with the
budget in such a way that it provides sufficient
payments made by occupiers.
information to enable occupiers to compare it with the
most recently issued certified accounts. The occupiers When communicating with occupiers through budget
can then convert historical data into a consistent and expenditure reports, managers should
format for comparison where the current manager was unambiguously state their policy concerning the
not responsible for previous years. crediting of interest to the service charge.

Further information on the recommended processes

and procedures in the event of a property’s sale, or 4.9 Forward funding of service charge
other circumstances where the manager changes, is
costs
included in the RICS information paper Commercial
property service charge handover procedures (2011). Leases should enable owners to recover the
This is particularly relevant to solicitors when drafting reasonable and proper cost of borrowing to fund major
and reviewing sale contracts. non-cyclical or exceptional unbudgeted expenditure as
a cost to the service charge. In older leases there is a
risk of having to fund shortfalls from negative cash
4.7 On-account payments flows. Where owners are crediting interest earned to
the service charge account, they should be reassured
Service charges are usually ‘reserved as rent’ in the
that charging the interest on borrowed money to fund
lease. However, in reality, the service charge is neutral
major non-cyclical or exceptional unbudgeted
in income and expenditure terms, after year-end
expenditure meets best practice requirements (see also
balancing charges/credits. Service charge monies will
section 7 Provision for anticipated future expenditure).
be held in one or more discrete bank accounts in
recognition of the fact that the monies are being held
to deliver the service expenditure. 4.10 Timeliness
Furthermore, and based on the principle that owners It is the responsibility of the manager to provide the
should not profit from the supply of services, all occupiers with budget and reconciled accounts for
interest earned will be credited to the service charge anticipated and actual service charge expenditure at
account (after appropriate deductions have been made, the appropriate time. This to include appropriate
i.e. bank charges, tax etc.). explanatory comments with regard to costs proposed
or incurred, together with details of the basis of
Where separate accounts are not operated per
apportionment, to enable occupiers to reasonably
property, or advance payments from more than one
understand how their liability has been calculated.
property are held in a single account, a proper and
reasonable amount of interest on normal commercial
rates is to be credited to the benefit of the service Budgets will be issued at least one month prior to
charge. commencement, and reconciled accounts issued
within four months of the end of the service charge
year in question.
4.8 Interest on service charge accounts
Where an occupier raises queries or seeks further
Interest earned and late payment interest should be clarification on any matters relating to the budget or
credited to the service charge account. Bank charges actual costs, the manager is encouraged to deal with
and account operating costs are to be offset against such proper enquiries promptly and efficiently.
the interest. Owners are required to perform their
obligations under the terms of the lease, and to
account to occupiers for any balancing charges due/ 4.11 Benchmarking and cost analysis
owed at the end of the service charge period.
Adoption of the standard industry cost classifications
Modern leases often enable owners to recover the cost (see 4.3 and appendix B) is considered essential to
of borrowing to fund major non-cyclical expenditure as facilitate better cost comparison between properties
a cost to the service charge. In older leases, there is a and the benchmark indices. It will also reduce costs
risk of having to fund shortfalls from negative cash and assist in the transfer of information between
flows. managers and owners when properties are sold, or if

RICS Guidance Note 23

Service charges in commercial property

there is a change of manager (e.g. from in-house to 4.12 Value for money
external, or between managing agents).
In providing the services, the owner/manager is
Further, these cost classifications are largely recommended at all times to endeavour to achieve
compatible with industry benchmark indices, which value for money and effective service, rather than the
facilitates a benchmark comparison of costs. lowest price. ‘Value for money’ can be simply defined
However, when using benchmark information to as ‘paying no more than is necessary for no less than
compare operating costs for any building, caution is is required’.
needed. Industry benchmark indices are not intended Occupiers are to be proactive in assisting managers
as a definitive database of costs for operating service with operating and using services that are consistent
charges in commercial buildings, but do serve to with the aim of achieving value for money, for example,
highlight indicative trends in service charge costs. separating waste to facilitate appropriate and cost-
Buildings differ substantially in terms of construction, effective recycling.
age, layout, gross to net floor-area ratio, staffing and
security levels, hours of operation, and standards of The manager is to keep all costs under review, and
maintenance and management. where appropriate (generally every three years), require
contractors and suppliers to submit competitive
These analyses take the average of service charges for tenders or provide competing quotations. However,
similar properties, and therefore provide a guide to the where it is considered that formal re-tendering would
cost effectiveness of the management service. not be cost-effective or practical, the manager should
However, property is not mass-produced in similar benchmark the service standards and pricing to
formats (as is a car, for example). Each property will confirm that value for money is still being achieved.
have its own variations from the average, therefore
‘beating the benchmark’ is not necessarily proof of It is advisable for managers to require major service
service efficiency and value for money. Industry providers to demonstrate that their services, methods
benchmark indices provide an excellent guide, but and processes are continually reviewed to ensure value
managers may wish to reflect further on how their and efficiency.
specific property is performing from a value-for-money
perspective.

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5 Dispute resolution

There are times where managers and occupiers can their dispute were properly considered. A party can be
disagree on matters such as which services are penalised in costs for failing to give proper
chargeable, what benefit the occupiers individually or consideration to the use of ADR, even if it wins at trial.
collectively receive, and/or how much they cost. Therefore, it is strongly recommended that in disputes
Traditionally, leases have not allowed for any form of about service charges, ADR be considered first before
redress for the occupiers, and therefore expensive taking legal action.
court action has often been necessary to query the
All new leases (including renewals) are to provide for
service charge (see paragraph 4.5).
ADR where it concerns service charge disputes. If the
It is usually beneficial to both owners and occupiers to parties cannot agree on the person to provide this
resolve service charge disputes quickly, as going to service, a decision can be taken by the President of
court can be slow and expensive. Many occupiers can RICS to appoint such a person. The RICS Dispute
become dissatisfied and, believing that disputing a Resolution Service (DRS) (www.rics.org/drs) manages
service charge in the courts is not cost-effective, will applications to the President for the appointments of
simply resort to withholding payment instead. mediators, independent experts and arbitrators.
Occupiers are advised not to arbitrarily withhold
Where leases contain no ADR clauses, there is
payment of any sums that are properly demanded,
nothing to stop the owner and occupier agreeing to
rather, where circumstances dictate, any payment
use ADR to help them find a resolution to a dispute.
withheld is to relate to the actual sums queried or in
It is possible that a party who declines to use ADR,
dispute, and not to the whole of the service charge
if it is available, could be penalised in a costs order
due.
if the court considers they have refused to engage
Alternative dispute resolution (ADR) can provide a more in ADR without a good reason.
cost-effective way of resolving service charge disputes
than the courts, and it is recommended that this There are issues as to which form of ADR is most
process be used even when leases do not expressly appropriate to service charges. The options are varied
provide for it (see paragraph 5.1). and include:
+ early neutral evaluation
When disputes are resolved, the base-rate interest is to
+ mediation (facilitative or evaluative)
be paid or allowed in respect of the period during
which the relevant amount has been under or overpaid. + independent expert determination or
In mediation, the parties will agree what they want to + arbitration.
achieve, and an independent expert will then determine
what the lease says.
5.2 Early neutral evaluation (ENE)
ENE is an ADR process whereby both parties retain a
5.1 ADR as industry best practice
neutral party to provide a non-binding evaluation on the
The glossary of terms in the Civil Procedure Rules 1999 merits of a dispute. As the name suggests, this is
defines ADR as a: ‘collective description of methods of usually most effective if attempted early in the life of
resolving disputes otherwise than through the normal the process, before positions become entrenched and
trial process’. significant costs have been incurred. There are no
procedural requirements for ENE beyond those agreed
Since April 1998, the courts have encouraged parties
between the parties.
to use ADR rather than go to trial. From April 2006, the
courts have been obliged to take into account whether The advantages of ENE are that where parties are
the parties have given proper consideration to the use engaged in direct discussions, the opinion of a
of ADR, and have used it to resolve their dispute, if mutually respected neutral person may assist in the
appropriate. The attitude of the courts is that litigation negotiations. An evaluative opinion from a neutral
is always a last resort. The courts can require parties to surveyor, who understands the practical issues relating
provide evidence that alternative means of resolving to the management and administration of the service

RICS Guidance Note 25

Service charges in commercial property

charge, or a senior legal professional on a disputed make a final and binding decision. The agreement of
point of contractual construction, can help provide the two parties to refer their dispute to independent expert
parties with a realistic appraisal of their cases while determination creates a contractual obligation for them
avoiding deadlock and/or positional bargaining. to be bound by the decision of the independent expert.
It is very unusual for such an independent expert’s
decision to be overturned by the courts.
5.3 Mediation
The independent expert usually is a specialist in the
Mediation is a non-binding structured settlement matter of service charges. It is usual for parties to
negotiation facilitated by a neutral third party – the make submissions to the independent expert, who will
mediator – who has no decision-making power. The normally incorporate them into his or her decision-
objective of mediation is to achieve a mutually making process. An independent expert will generally
satisfactory agreement between the parties, rather than make a decision on a dispute based on the application
have something imposed by a third party. of his or her personal expertise in the subject matter,
In a facilitative mediation, the mediator encourages the the results of their personal enquiries and the
parties to look at the issues from each other’s point of persuasiveness of the parties’ representations.
view, and each view is then ‘reality tested’ so it is
In independent expert determination, the parties usually
possible to see the strengths and weaknesses of each
are invited to agree the precise issues that are in
respective position. This process enables the parties to
dispute, and the independent expert then sets out the
form a more balanced view of their position, and also
procedures to be followed to reach a determination of
allows them to come to a genuine agreement as to a
this. Occasionally, there may be a need for a meeting
way forward.
of all the parties and/or a visit to the relevant property.
In an evaluative mediation, the mediator takes a
The fees of an independent expert are usually split
different role and uses his or her expertise to give the
equally between the parties unless it is agreed between
parties an honest appraisal of how their dispute, or
them that the expert will also decide who will be
certain aspects of it, might play out in a more formal
responsible for his or her costs as part of the overall
hearing. Armed with this information, the parties may
determination of the dispute.
then choose to negotiate a settlement on a different
basis to anything previously on offer. The parties usually bear their own costs incurred in
A mediated settlement is generally recorded in a formal preparing their case and instructing professional or
agreement (a contract). The mediation proceedings are legal representation, unless it is agreed between them
‘without prejudice’, which means that nobody can use that the expert will also decide who will be responsible
what has been said or recorded in the mediation in any for inter-party costs as part of the overall determination
subsequent legal proceedings, and the mediator of the dispute.
cannot be called as a witness in any subsequent court While this process can be more formal than mediation,
proceedings. What is said is confidential and remains it means that the expert is free to use his or her own
confidential. The process is informal. A mediation knowledge and investigation to come to a final and
hearing often lasts no more than one day, which makes binding determination of a dispute.
it more cost-effective compared to court, as the parties
share the costs of the mediation between them.
5.5 Arbitration
There are several organisations that can provide
mediators. RICS DRS can provide mediators who are The Arbitration Act 1996 governs all arbitrations in
chartered surveyors experienced in property matters. England and Wales. A request may be made to RICS
DRS for an arbitrator to be appointed, or the involved
There are no formal rules and procedures for
parties can agree on one. The process is more formal.
mediation, and in some cases, the parties may wish to
The arbitrator (who will no doubt have some knowledge
adapt the process so that it is less facilitative.
of service charges) will decide the outcome of the
dispute based on the evidence before him or her, but is
5.4 Independent expert determination not allowed to stray outside the evidence.

This is an ADR process where an independent third As with independent expert determination, the process
party (usually a chartered surveyor or solicitor who is may involve meetings known as ‘hearings’ and
an expert in the subject matter) determines the submissions. The decision of the arbitrator is usually
outcome of the dispute. The basis of the appointment known as his or her ‘award’. The arbitrator is also
of the independent expert is that he or she is entitled to decide on both his or her own costs and the
empowered by an agreement between the parties to costs of the parties involved in the dispute.

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5.6 RICS DRS fact sheets

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

The fact sheets mainly cover the jurisdiction of England

and Wales, but some also cover the position in other
jurisdictions.

For more information, refer to www.rics.org/drtoolkit

and www.rics.org/disputeresolution

RICS Guidance Note 27

Service charges in commercial property

6 Mixed-use schemes

Recently, there has been a huge increase in mixed-use Further detailed information and guidance is available
developments. While the concept is not new, what is in the RICS guidance note, Managing mixed use
different about mixed-use developments today is the developments (2012).
increase in the introduction of residential units into
Also see the RICS Service charge residential
commercial buildings. This is being driven not by
management code, which is approved by the Secretary
organic growth, but by public policy.
of State for England and has RICS guidance note
The mixture of commercial and residential uses, in status.
management terms, presents particular challenges that
often require both residential and commercial service
charge management skills and expertise.

The extent to which the owner is obliged to provide

and carry out works and services, in respect of both
commercial and residential leases, will depend on a
strict interpretation of the wording of the lease. The
Landlord and Tenant Act 1985, subsequently amended
by the Housing Act 1996 and Commonhold and
Leasehold Reform Act 2002, imposes statutory
constraints in respect of service charges for residential
properties.

It has been a common misconception among many

practitioners that if the residential element of a mixed-
use scheme was ‘let’ under a single head lease, it
would not be subject to the residential legislation. The
cases of Heron Maple House Ltd v Central Estates
[2002] and Oakfern Properties Ltd v Ruddy [2006] have
determined that an owner of a lease that includes both
residential and non-residential elements will also need
to follow the statutory procedures laid down by the
Landlord and Tenant Act 1985 (as amended) to ensure
that non-recovery does not result due to an
infringement of the legislation designed to protect
residential occupants only.

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7 Provision for anticipated future expenditure

The nature of commercial leases and, in particular, the

Sinking fund
length of these leases, has changed substantially over
A fund formed by periodically setting aside money
recent years. Many items managed under the service for the replacement of a wasting asset (for example,
charge will have a life expectancy longer than the lease major items of plant and equipment, such as heating
term being granted. Owners and occupiers need to and air-conditioning plant, lifts, etc.). It is usually
carefully consider how they will recover (or pay for) intended that a sinking fund will be set up and
these major expenditure items when they are due. It is collected over the whole life of the wasting asset.
therefore recommended that proper planned Reserve fund
preventative maintenance (PPM) plans are used. A fund formed to meet the anticipated future costs
of maintenance and upkeep in order to avoid
In addition to regular expenditure on services, owners fluctuations, or an anticipated large, one-off increase
and occupiers may need to make provision for in the amount of service charge payable each year
occasional one-off outlays on replacing major items of (for example, regularly recurring items such as
external cleaning and redecorations).
equipment (such as a heating system). Major
expenditure of a regularly recurring nature (such as Depreciation charge
external redecorations) can also cause significant A measure of the wearing out, consumption or other
fluctuations in the amount of service charge payable reduction in the life of an asset (for example, heating
each year. and air-conditioning plant and equipment, lifts, etc.).
An amount would usually be included in the service
charge to reflect the ‘cost’ to the owner of the
The move towards shorter leases creates difficulties in annual depreciation of plant and equipment, which
the recovery of the cost of long-term maintenance/ would be based on the initial cost of an installation
repair. An occupier occupying under a lease for a term rather than on the future cost of replacement.
of, say, five years may only have a ‘transitory’ interest
in the replacement of a boiler, for example, which might
have a life expectancy far beyond the term of his or her Where provision is to be made for significant future
lease. That occupier is therefore not likely to be expenditure such sums should not be included as
interested in the replacement of the boiler at an accruals but should be considered as contributions
indeterminate date in the future. towards reserve or sinking funds as above and
reported accordingly.
Contrast this with the situation of an incoming occupier
In managing sinking and reserve funds or depreciation
who has signed a new lease that includes a liability for
charges, the following is to be considered as best
payment of a proportion of the cost of repair and
practice.
replacement of the owner’s plant, who then finds that
the boiler requires replacement within the first year of Sinking, replacement and reserve funds
the term. Monies accumulated in a sinking or reserve fund
+
are to be held in one or more separate discrete
To the extent that these items can be foreseen, it may bank accounts to be maintained in trust for the
make sense for the cost of major extraordinary occupiers.
expenditure items to be spread over a number of years
+ The owner or managing agent is expected to act
(and over a number or lease periods) by setting up a
reasonably in estimating the amount of the sinking
sinking or reserve fund, rather than charging the whole
or reserve fund contributions to be included within
cost to the current occupiers in the year in which the
the service charge, which will relate to specifically
equipment is replaced.
identified expenditure only (for example, repairs or
replacement of the roof, boiler plant, lift, etc.)
Some confusion has arisen as the description and
rather than other unidentified future expenditure.
purpose of such funds has become interchangeable.
The following definitions set out industry guidance on
how these terms are to be used.

RICS Guidance Note 29

Service charges in commercial property

+ The owner or manager is to provide a clear Depreciation charges

explanation of the basis of calculation of the
+ Charges made in respect of depreciation belong to
sinking or reserve fund contribution and the items
the owner. Accordingly, where a depreciation
to which it relates, and will apply a realistic
charge is made, the responsibility for the cost of
assessment of the anticipated life cycle of the item
replacement moves to the owner. The owner or
in question and the funds accumulated from
manager will act reasonably in estimating the
previous service charge periods (including any
amount of the depreciation charge, and will
interest).
provide a clear explanation of the basis of the
+ The owner will make all payments into the sinking charge calculation and the details of the specific
or reserve fund account for void premises. items for which the depreciation charge is
+ Statements of service charge expenditure will calculated.
contain a clear statement of any contributions to + A proper and reasonable depreciation charge is to
and expenditure from the sinking fund account, be considered as an annual cost to the owner
along with the account opening and closing rather than the initial cost of installation.
balances, the amount of interest earned and any
+ Depreciation charges and sinking/replacement
tax paid in the relevant period.
funds are mutually exclusive. A depreciation
+ On completion of the sale of a property, the vendor charge cannot be made where a sinking or reserve
will pass all sinking or reserve fund monies held to fund is or will be made in respect to a specific
the purchaser, together with any accrued interest. item, and vice versa.
It is advisable to seek advice to ensure any tax
Further detailed information and guidance is available
liability on the fund is appropriately mitigated and
in the RICS information paper Sinking funds, reserve
accounted for.
funds and depreciation charges (2014).

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8 Initial provision, replacement and

improvement of fabric, plant and
equipment

The service charge would usually be limited to the relation to the original design and construction of the
recovery of the reasonable costs of maintenance, repair fabric, plant or equipment. The owner is expected to
and replacement (usually where beyond economic provide these.
repair) of the fabric, plant, equipment and materials
This also extends to the cost of fitting out and
necessary for the property’s operation.
equipping any on-site management facilities, as these
Service charge costs will not include: costs will be indistinguishable from other facilities and
+ any initial costs (including the cost of leasing of equipment such as lifts, heating, ventilating and air-
equipment) incurred in relation to the original conditioning plant, security systems, toilets, etc. that
design and construction of the fabric, plant or comprise part of the property. It is expected that these
equipment systems will be provided for the management,
any setting-up costs that are reasonably to be administration and operation of the property’s services
+
considered part of the original development cost of from the outset.
the property In line with best practice, the initial cost of providing
+ improvement costs above the costs of normal such furniture and facilities are not to be included as
maintenance, repair or replacement (also see part of the service charge.
below) and
+ future redevelopment costs.
8.2 Like-for-like replacement
Service charge costs may include improvements or
The service charge should be limited to the costs of
enhancement of the fabric, plant or equipment where
replacement and renewal of fabric, plant or equipment
such expenditure can be justified following the analysis
only, providing:
of reasonable options and alternatives, and with regard
to a cost-benefit analysis over the term of the + the relevant items being replaced or renewed are
occupiers’ leases. Managers should provide the facts beyond economic repair, or efficient or economic
and figures to support and justify such a proposal. operation
+ replacement or renewal of such items is a relatively
Recent case law has determined that the length of the
low cost compared with the much greater cost that
original or unexpired term of the tenant’s lease may be
could occur due to material postponement of the
a factor in determining whether costs are recoverable.
replacement or renewal or
Current decisions do not give occupiers authority to
sustain a proposition that, as a general rule, they + replacement or renewal of such items is a proper
cannot be required to pay a higher service charge for requirement of any public or competent authority
works carried out towards the end of the term of their or legislation, or of the insurers.
lease. If an owner can demonstrate that repairs are Plant and equipment reaches the end of its economic
necessary to comply with the obligations under the life when it is more economic to replace it than to
terms of and within the life of the lease, the costs are maintain it. Whether equipment is approaching the end
likely to be recoverable, even from a tenant whose of its economic life or not is determined by an
lease is about to end. inspection of the plant in operation by an experienced
engineer. As equipment approaches the end of its
economic life, it is reasonable to anticipate that failures
8.1 Initial provision of fabric, plant and
will occur with increasing frequency. Therefore a review
equipment of service records, along with records of the
Service charge costs will not include any initial costs occurrence and frequency of failures, will help to
(such as the cost of leasing of equipment) incurred in establish whether it is necessary to replace it.

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Service charges in commercial property

8.3 Replacement with enhancement The amount occupiers will contribute towards the cost
of refurbishment will depend on the extent and nature
Where plant and equipment that has become of the works proposed, in addition to the wording of
dilapidated or worn out is replaced, the replacement the lease.
will usually include an element of enhancement or
Owners will seek to protect the value of their
upgrade of the previous equipment, due to the fact that
investments and to maximise rental levels.
the replacement will be of an equivalent modern
Refurbishments are often dictated by market forces,
standard.
and are generally timed to coincide with rent reviews or
Strictly speaking, replacement of plant and equipment lease expiries. Occupiers often object to contributing
by its modern equivalent would generally fall within the towards the cost of refurbishment because not only will
definition of repair and not improvements. However, they be paying for the cost of refurbishment through
there may well be a tendency towards exceeding the the service charge, but also through increased rents as
design specification of the original equipment in order a result of any improvements.
to meet modern requirements, or to introduce new When refurbishments result in higher rental values, the
products or practices intended to improve the service owner is to be responsible for the cost of
levels and/or value for money. enhancements or improvements above those of
maintenance.
If the costs are to be recovered through the service
charge, it is important to consider whether the intention The need to carry out extensive repairs or to replace
is to improve or repair the existing equipment. services is also considered in the decision to refurbish.
Prior to a refurbishment, major repairs or replacements
If the additional cost of carrying out the improvement may be deferred to benefit from economies of scale
can be justified on a cost-benefit basis, for example, a through placing one major works contract. The
reduction in the ongoing maintenance costs, increased improved efficiency of the new environment and any
energy efficiency, etc., there is a case for the service improved services may produce cost savings in day-to-
charge to be made to cover these. In such day services management, resulting in the annual
circumstances, proper communication, supported by service charge being reduced.
figures to support and justify such a proposal, will help
Occupiers may still be liable for the costs of repair or
achieve a practical and common sense solution.
replacement carried out as part of a larger
refurbishment contract as though the works had been
8.4 Improvement and enhancement started separately from the refurbishment.

Service charges would not generally include the cost of

improvement above the cost of normal maintenance, 8.6 Communication
repair and replacement as above, but it is likely that To ensure agreement and avoid dispute, if it is
circumstances will arise where owners and occupiers proposed to include the cost of improvements in the
would see a direct benefit from the introduction of new service charge this is to be communicated to occupiers
innovations or additional improvement or before any expenditure is committed. It is also
enhancements of the building fabric, plant, or advisable to record any agreement in writing.
equipment. The service charge might include such
costs where the expenditure can be justified following In the case of refurbishment, the owner’s proposals are
analysis of reasonable options and alternatives, and to be communicated to all occupiers well in advance of
having regard to a cost/benefit analysis over the term commencement of any works to explain which costs
of the occupiers’ leases. Managers should the occupiers are responsible for in relation to the
communicate any proposals clearly to occupiers, and service charge. Best practice also recognises the need
provide the facts and figures to support and justify to establish regular communication between the
such a proposal (see also section 9 Environmental manager and the occupiers to monitor the
sustainability). refurbishment and to agree which elements of the
works are to be considered service charge costs. This
reduces or avoids the potential for dispute over any
8.5 Refurbishment unexpected costs following completion of the works.

Refurbishment is a different concept to improvement.

Within the scope of the refurbishment works proposed
there may include elements of catching up on
accumulated disrepair as well as elements of
improvement.

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9 Environmental sustainability

9.1 Green leases

The sustainability debate has been very much focused + the tax is structured in relation to environmental
on how to develop more sustainable buildings, but it objectives (for example, the more polluting the
has ignored two key issues: what to do with existing behaviour, the greater the tax levied).
buildings and the role of the occupier in reducing
The Carbon Reduction Commitment Energy Efficiency
emissions. The recent emergence of green leases in the
Scheme (often referred to as the CRC) is defined by
UK may be one way of addressing these issues. Green
the government as an environmental tax based on
leases are standard commercial property leases
these principles.
pertaining to cooperation between landlord and
tenants, with the aim of reducing waste production and The CRC is aimed at improving energy efficiency and
energy and water consumption. cutting emissions in large public and private sector
organisations. It does not apply to all organisations but
Owners and occupiers are advised to be aware of the
owners, managers and occupiers should continue to
environmental impact of their respective operations.
monitor for any updates.
This Code supports and promotes a cooperative and
collaborative approach in recognising and managing The CRC dilemma is that it is a tax levied on
the environmental impact of the occupation and organisations and is not property specific. Furthermore,
management of commercial premises. it is a tax levied at the highest corporate level of an
Leases are binding documents that are not easy to organisation and therefore in many instances the tax
amend. There may be value in owners and occupiers would not be paid by a tenant’s immediate landlord,
entering into a non-legally binding memorandum of but by the landlord’s parent company.
understanding (MoU), which provides a roadmap for CRC is not therefore a property specific charge in the
cooperation between the parties on improving the same way that the Climate Change Levy is directly
environmental performance of buildings. This allows the linked to actual electricity or gas consumption and as a
MoU to be updated to reflect the latest business tax on organisations is not a tax or charge on landlords
practice as agreed between the parties during the term per se.
of the lease.
The position is further complicated in situations where
Further information can be obtained from the Better
the owner is responsible for the electricity supply to the
Buildings Partnership’s ‘Green Building Management
whole of a building and is able to recover the cost of
Toolkit’, which is available at:
direct electricity consumption to the occupational
www.betterbuildingspartnership.co.uk/download/bbp-
premises, in addition to the costs of the landlord
green-building-managment-toolkit-1.pdf
common parts areas, through the use of submeters
etc. In such circumstances, the owner in effect and
9.2 Carbon Reduction Commitment Energy inadvertently becomes liable for payment of CRC costs
for which the occupier would otherwise have been
Efficiency Scheme (CRC)
directly liable.
In May 2010 the government committed to increasing
In older leases it is a matter of contract law as to
the proportion of tax revenue accounted for by
whether the lease specifically and unambiguously
environmental taxes. The government classifies
permits the landlord to recover the cost of CRC within
environmental taxes as those that meet all of the
the service charge. While the debate continues as to
following three principles:
whether, in principle, CRC costs should properly be
+ the tax is explicitly linked to the government’s recoverable under a service charge arrangement
environmental objectives owners and occupiers, managers and lawyers should
+ the primary objective of the tax is to encourage carefully consider the implications when drafting new
environmentally positive behaviour change and leases.

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Service charges in commercial property

Nevertheless there should be a fair and reasonable In accordance with the principles set out in this Code,
approach in the apportionment and recovery of CRC improved sustainability and other environmental
costs between owners and occupiers, based on the improvement measures are to be taken into account
core principle that owners should be able to recover when considering and assessing whether any particular
the full cost of providing bona fide serves to occupiers service or provider offers value for money. These are
and that occupiers should be in a no better or no also to be factors in any cost-benefit analysis carried
worse position than had they occupied premises on the out to justify improvement costs above the costs of
basis of a full repairing and insuring lease, although normal maintenance, repair or replacement (for
with the emphasis on the ethos that the ‘polluter example, the installation of energy-efficient plant).
should pay’.

Where CRC costs are to be recovered under a service 9.4 Energy Performance Certificates
charge arrangement the following is considered to
(EPCs)
embody best practice:
+ Occupiers should not be responsible for the For the avoidance of doubt, the cost of obtaining an
owner’s costs of managing and administering the Energy Performance Certificate (EPC) would not
CRC scheme. normally be considered to be a recoverable service
Owners owe a duty of care to take such steps as charge cost. An EPC is only required when a building is
+
are reasonably necessary to keep costs down and sold or rented, and therefore has no relevance to, nor
to procure that the relevant member of the group is it a requirement for, the provision and management
which has CRC responsibilities complies with its of common services.
duties. However, costs that might subsequently be incurred
+ The method of apportionment across the while improving energy efficiency identified when
landlord’s group and between buildings owned by obtaining an EPC might fall to the service charge,
the landlord’s group should be: subject to the terms of the lease and the principles set
fair and reasonable and out in this Code (see 8.4 and 9.3 above).
–
– consistently applied.
+ In the spirit of openness and transparency,
occupiers should be provided with information to
reasonably verify the accuracy and performance of
these objectives (particularly in relation to the
method of apportionment).

9.3 Improving environmental performance

The sharing of data and other related information is
essential. For this reason, it is advisable for owners,
managers and occupiers to cooperate on the running
of any building management systems and on a range
of environmental improvement measures. Non-reporting
will 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 between
owners and occupiers, although consistent with
the principle outlined above that there should be
an emphasis on the ethos that the ‘polluter should
pay’
+ the carrying out of works that improve the
environmental performance of the building and
+ restrictions on works by either party that adversely
affect the environmental performance of the
building.

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10 Additional best practice guidance for

shopping centres

10.1 Marketing and promotions

The marketing of and promotional activity supporting a The marketing of vacant units in the scheme is not a
retail shopping centre scheme are recognised as being service charge item.
of joint benefit to all stakeholders, and are therefore
jointly funded. This joint funding should cover not just
the actual marketing and promotions, but also the
10.2 Commercialisation (non-core
costs of providing specialist staff (and accommodation income)
etc.) whether directly or via an agency arrangement.
Increasingly, owners are finding additional non-core
The service charge budget and accounts should be income streams from their investments. It is clear that
transparent and should include the gross marketing they are entitled to receive this income from the
and promotional expenditure and the contribution from investment they have made. However, if the service
the owner. This will clearly show the net contribution charge has provided either the initial capital or ongoing
due from the occupiers. services for the income stream, the income is to be
used as a credit against the service costs. When the
It is best practice for marketing plans (including
owner provides the capital but uses the services to
promotions) to be prepared and presented to occupiers
support the operation, an appropriate contribution to
in advance of the period to which they relate. It is often
the service charge is to be made by the owner to
useful to agree and regularly review marketing plans
reflect the benefit and use of the services. Best
with occupiers’/retailers’ associations in order to
practice for the owner is to clearly state his or her
analyse their effectiveness, and to ensure that the
policy with regard to miscellaneous income within the
stated objectives are achieved. Where the service
development.
charge bears the cost, all pedestrian flow-data
collected is to be issued to occupiers as a matter of As well as rents being collected on occupational
course. leases, income is also generated from other sources.
As marketing and promotions are of joint benefit, it is Many properties receive income from vending-machine
important for owners/managers to encourage occupiers takings, selling recyclable waste, etc., while shopping
to recognise that they have an obligation to proactively centres and malls also receive income from
communicate their views on the best approach to the promotional space (e.g. advertising on displays and
marketing of centres. drums and in car parks, etc.) and licences granted for
other mall activities (e.g. children’s rides, photo booths,
Any costs incurred in relation to the initial promotional
etc.). Occupiers may also have (chargeable) use of
launch and/or rebranding of a scheme are to be borne
photocopiers in the management offices. How such
by the owner, and are not to be considered as
income is treated varies considerably from property to
recoverable service charge costs. It is recommended
property, and from owner to owner.
that any plan to relaunch a centre be discussed
between manager and occupiers so that they can There is to be a clear statement of policy on how and
agree to an appropriate split of the expenditure to each to where costs and income generated from services
party. and activities in the centre/malls are allocated.
Transparency is required at all times.
The costs of entertainments, attractions, Christmas,
and other seasonal decorations and events within the Income derived from the provision of a service or
shopping centre are not usually considered to be a activity, where the cost is included in the service
marketing and promotional cost, but are to be regarded charge, is to be treated as a service charge credit, for
as amenities or facilities. Where such costs are example, photocopying and fax reimbursements, etc.
included within the service charge, they would not be Income derived from promotional activity is to be
jointly funded as above. credited to the marketing expenditure budget.

RICS Guidance Note 35

Service charges in commercial property

Where the owner retains income from common-part Therefore, for example, a 5,000m2 unit may not cost
areas, and the space is used on a permanent or semi- five times that of a 1,000m2 unit, but a 500m2 unit may
permanent basis, for example, barrows or kiosks within cost twice that of a 250m2 unit.
shopping malls, the space is to be included in the
service charge apportionment matrix. Alternatively,
There is no such thing as a standard weighting
appropriate equivalent credit is to be given for the formula. Where the use of a weighted formula is
costs of that space. considered to be appropriate, this is to be
formulated to reflect the particular circumstances,
For less substantial or temporary fixtures, a sum is to
size of units, layout and use of the scheme being
be credited to the service charge to reflect a
serviced (see below).
contribution towards the benefit of the services
enjoyed. Owners are to estimate and declare a
contribution to the service charge to reflect the benefit The following is included for illustrative purposes
and use of the common services enjoyed. only:
The first 500 m2 @ 100%
Managers are to clearly state their policy on how costs
The next 500 m2 @ 80%
and income generated from services and activities are
The next 2,000 m2 @ 70%
allocated. The simple rules are as follows:
The next 2,000 m2 @ 60%
+ If the item is not funded by the service charge, nor
Excess over 5,000 m2 @ 50%
does it use any services, 100 per cent of the
income goes to the owner.
+ If the item is funded by the service charge, the In this example, a 1,000 m2 unit has a weighted floor
income is credited to the service charge (e.g. area of 900 m2 [i.e. (500 x 100%) + (500 x 80%)]
photocopying for occupiers). whereas a 10,000 m2 unit will have a weighted area of
+ If the item uses some of the services and/or needs 6,000 m2. Although ten times larger in floor area, the
support from the site team who are being paid via 10,000 m2 unit pays approximately six and a half times
the service charge, a contribution is to be made to the service charge of the smaller unit.
the service charge in accordance with the policy. Similarly, the floor area of ancillary basement and
In addition to the minimum information set out in upper-floor accommodation, or of remote storage,
paragraph 4.4, budgets and statements of actual might be discounted to reflect the reduced benefit
expenditure are also to include a statement detailing derived from certain services as distinct from the
how income generated from commercialisation or mall ground-floor retail space or main offices.
income is dealt with, and how shared services are For the avoidance of doubt, a reasonable and fairly
charged. The statement is also to clearly set out how administered weighting formula for apportionment of
this income impacts on the service charge, and what the service charge cannot usually be considered a
reimbursement has been made to it. concession.

10.3 Apportionment of service charges in

shopping centres: weighted-floor area
apportionment
In addition to the usual recommended methods for the
apportionment of service charges, many shopping
centre developments often feature a ‘weighted-floor
area’ basis of apportionment that seeks to reflect the
different costs involved in servicing different-sized
units.

A weighted-floor area apportionment discounts the

percentage the occupier will pay over a certain size to
reflect the benefit of the services provided. The floor
area is divided into bands with a progressive discount,
and is a similar concept to the zoning of shops for
rental purposes.

36 RICS Guidance Note

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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

RICS Guidance Note 37

Service charges in commercial property

Appendix A: Best-practice compliance checklist

The compliance checklist included below is a basis to enable owners, managers and occupiers to self-assess their
compliance with the core principles of this Code as set out in this guidance. However, merely ticking the boxes does
not 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
Competitive tender
Procure an appropriate level of service for the occupiers in the
building. Other market testing

Demonstrate that services offer good value for money. Cost benchmarking
Transparency
All apportionment schedules are published
All costs, apportionments and policies are explicit and open
to any scrutiny by occupiers or their agents. All policies are outlined in budget packs
Detailed explanations are provided in year-end
statements where the costs have materially varied
from the budget
The landlord bears the cost of all voids and
concessions
Timeliness of reporting
Budgets are issued at least one month prior to the
All reports are issued within timeframes required by the Code. start of the service charge year
Year-end statements of actual expenditure are
issued within four months of the end of the service
charge year

Management fee
Fixed fee (not per cent of service charge)
The management fee reflects a reasonable cost to undertake
necessary work to manage and operate the services and to Meets Code guidelines on what can and cannot be
administer the service charge. charged for management
Duty of care to occupiers – consultation and approval
All occupiers are given the opportunity to comment
All costs are recoverable in accordance with leases. on the budget
The occupiers are consulted where appropriate for their The occupiers are consulted on the levels of
agreement to the levels of service and services to be offered. service and/or the introduction of new services
Standardised financial reporting
Standardised cost categories are used
Budgets and statements of actual expenditure are reported in
line with the Code’s cost categories. Separate schedules are included as appropriate

Where appropriate, separate schedules are prepared to

allocate costs to reflect the availability, benefit and use of
different services.
Interest income and expenses
Bank statement of interest income and expenses
Separate interest-bearing accounts are operated for each
building, with all interest income and expenses credited or
charged within the service charge.
Code-compliant terms in new leases
Standard lease terms
New leases have adopted Code-compliant terms.
Support for alternate dispute resolution (ADR)
Standard lease terms
ADR is supported and recommended as the basis to resolve
service charge disputes. All policies are outlined in budget packs

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Appendix B: Standard industry cost

classifications

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

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

B1 Cost classifications

COST CLASS
Cost category
Cost description Notes

MANAGEMENT

1 Management fees

Management fees Owner or managing agent fees for managing and

administering building services excluding rent collection,
asset management etc.
2 Accounting fees

Service charge accounting fees Fees for preparation of year end service charge
statement and reconciliation
Independent accountant’s fees Independent accountant’s fees to review the year end
service charge accounts
Audit fees Auditor’s fees for carrying out formal audit of the service
charge
3 Site management resources

Staff costs Direct employment or contract costs for provision of

staff for management of on-site facilities
Receptionists/concierge Direct employment or contract costs for provision of
reception and concierge staff, including associated
administrative and training costs
Site accommodation (rent/rates) Rent, service charge and rates associated with site
management accommodation
Office costs (telephones/stationery) Costs of equipping and running site management office
Petty cash Miscellaneous minor expenditure incurred in relation to
site 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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Service charges in commercial property

Landlord’s risk assessments, audits and Consultancy fees and other costs associated with
reviews provision and review of owner’s health and safety (H&S)
management systems

UTILITIES
5 Electricity

Electricity Electricity supply to common parts and retained areas

and central plant, excluding occupier direct
consumption
Electricity procurement/consultancy Consultancy and procurement fees for negotiating
electricity supply contract and auditing of energy
consumption
Fuel (standby electrical power) Fuel oil to run any standby electrical power systems
6 Gas

Gas Gas supply to owner’s central plant, excluding occupier

direct consumption
Gas procurement/consultancy Consultancy and procurement fees for negotiating gas
supply contract and auditing of energy consumption
7 Fuel oil

Fuel Oil Fuel oil supply to owner’s central plant, emergency

generators etc excluding occupier direct consumption
Fuel oil procurement/consultancy Consultancy and procurement fees for negotiating oil
supply contract and auditing of energy consumption
8 Water

Water and sewerage charges Water supply to central plant, common parts and
retained areas excluding occupier direct consumption
Water consultancy Consultancy fees incurred in reviewing water usage

SOFT SERVICES
9 Security

Security guarding Direct employment or contract costs incurred in

providing 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’ toilet
accommodation
Carpets/mats hire Provision of dust and rain mats to common part areas
Waste management Refuse collection and waste management services
provided for building occupiers
Pest control Pest control services provided to common part and
retained areas
Internal floral displays Providing and maintaining floral displays within the
common part areas
External landscaping Provision and maintenance of external landscaped
areas and special features
Snow clearance/gritting Costs incurred in snow clearance and supply of snow
clearing equipment and gritting salt

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Seasonal decorations Provision and maintenance of seasonal decorations to

common part areas
11 Marketing and promotions

Events Promotional events

Marketing Marketing and advertising in accordance with marketing
strategy
Research Research into local market conditions, customer
surveys, etc.
Staff costs Direct employment or contract costs for provision of
marketing and promotional activity
Landlord’s contribution to marketing Financial contributions made by landlord towards
marketing and promotions
Local authority contribution to marketing Financial contributions made by local authority towards
marketing and promotions

HARD SERVICES
12 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 of
M&E plant and H&S compliance
Life safety systems maintenance Planned maintenance works to the owner’s fire
protection, emergency lighting and other specialist life
safety systems, including contractor’s H&S compliance
Life safety systems repairs Repair works to the owner’s fire protection, emergency
lighting and other specialist life safety systems
Life safety systems inspections and Auditing quality of maintenance works, condition of life
consultancy safety systems

13 Lifts and escalators

Lift maintenance contract Planned maintenance works to lifts in the common part
and retained areas, including contractor’s H&S
compliance
Lift repairs Repair works to common parts’ lifts
Lift inspections and consultancy Auditing quality of maintenance works, condition of lift
plant and H&S compliance
Escalator maintenance contract Planned maintenance works to escalators in the
common part and retained areas, including contractor’s
H&S compliance
Escalator repairs Repair works to common parts escalators
Escalator inspections and consultancy Auditing quality of maintenance works, condition of
escalator plant and H&S compliance
14 Suspended access equipment Suspended access equipment includes all forms of
high-level access equipment maintenance, i.e.
hatchways, eye-bolt, fall address and cradles

Suspended access maintenance contract Planned maintenance works to the owner’s suspended
access equipment, including contractor’s H&S
compliance
Suspended access repairs Repair works to the owner’s suspended access
equipment
Suspended access inspections and Auditing quality of maintenance works, condition of
consultancy suspended access equipment and H&S compliance

15 Fabric repairs and maintenance

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Service charges in commercial property

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 service

charge account
16 Interest

Interest Interest received on service charge monies held within

owner’s or agent’s bank account
17 Income from commercialisation Income yielded from any facilities installed and/or
maintained at the occupier’s expense

Car park income

Vending machine income
Other
Operational expenses
Contract charges Overheads, expenses and operational costs incurred in
providing any of the commercialisation facilities
Repairs and maintenance
Staff costs

INSURANCE
18 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 EXPENDITURE
21 Major works

Project works Exceptional and one-off project works, over and above
routine operational costs
Plant replacement Replacement of the whole or major components of
plant and equipment (where beyond economic repair)
Major repairs Significant one-off repairs or maintenance over and
above routine operational maintenance and repair
22 Forward funding

Sinking funds Forward funding of specific major replacement projects

(e.g. plant and equipment replacements, roof
replacements)
Reserve funds Forward funding of specific periodic works to even out
fluctuations in annual service charge costs (e.g. internal/
external redecorations)
Depreciation charge Depreciation charge in lieu of sinking/replacement fund
contribution of major plant and equipment

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Appendix C: Service charge accounting sample

report

Copyright in the Service charge accounting sample report (pp. 43-62), which forms appendix C of the RICS Code of
Practice 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, any
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RICS Guidance Note 43

Service charges in commercial property

Introduction

In managing the provision of services and in certifying + Service charge certificate (paragraph 3)
the service charge, managers have a duty of care to + The independent accountant’s report
both owners and occupiers to act with professional
+ Service charge expenditure report (paragraph 4
care, diligence, integrity, and objectivity.
and annexes A and B)
Accounting for service charges in the property industry
+ Notes to the expenditure report (paragraph 5)
is a specialist area that requires expertise and an
understanding of the sector. + Service charge allocation and apportionment
(paragraph 6 and annex D)
The RICS Code of Practice Service Charges in
Commercial Property (‘the Code’) recommends as best + Operational review and variance report (paragraph
practice that an annual statement of service charge 7 and annex C).
expenditure be certified by the manager to confirm that The information referred to in this sample report under
it represents a true and accurate record of expenditure Operational review is considered to be best practice to
incurred in supplying the services to the building, and meet the core principles for communication and
that the expenditure that is being recovered is in transparency as set down in the Code as to the nature,
accordance with the terms of the occupational leases. type and cost of services provided but would usually
The Code also recommends that annual statements of be outside of the scope of the independent
service charge expenditure should be reviewed by an accountant’s review. The basis of apportionment of the
independent accountant. service charge would also be outside of the scope of
the independent accountant’s review.
The Institute of Chartered Accountants in England and
Wales (ICAEW) is to issue a technical release to
provide guidance on accounting for commercial service
charges. This technical release will provide good
practice guidance on technical and practice issues
relevant to the work of accountants and other
professionals.

This sample report, prepared in consultation with the

ICAEW sets out recommended best practice for the
disclosures and information that managers should
provide to the accountants appointed to carry out an
independent review of service charges and for
subsequent communication to tenants as to the nature,
type and cost of services provided.

It is not for this Code to prescribe the operating

business model of the manager and therefore there is
no strict layout or order of preference for the statement
of service charge expenditure. However, it is
recommended best practice that the statement of
service charge expenditure should include the following
key elements:

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Statement of service charge expenditure

[Owner’s name]

[Property name and address]

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

Total service charge expenditure £

RICS Guidance Note 45

Service charges in commercial property

1 Introduction

This report has been produced by [manager’s name] on

behalf of [owner’s name], the landlord of [property
name], and relates to the reconciled service charge for
the period [dd/mm/yyyy] to [dd/mm/yyyy]. This report
has been produced having regard to the best practice
guidelines for service charges in commercial property
that have been published through the collaboration of a
number of professional bodies representing a diversity
of interests throughout the property industry.

The report is intended to provide further explanation as

to actual service charge costs incurred and any
material variances against the property budget issued
to tenants on [dd/mm/yyyy].

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2 The management team

[Insert names and contact details of management

team, i.e. property manager, building/centre manager,
accounts manager, etc.]

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Service charges in commercial property

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 information

available to me, the attached statement of service
charge expenditure report and accompanying
information on pages [X] to [Y] records the true cost to
the landlord of providing the services to the property
for the period [dd/mm/yyyy] to [dd/mm/yyyy], in
accordance with the terms of the lease and, where
practicable, the RICS Code of Practice Service charges
in commercial property (current edition).

Signed ………………………………………………

[Name and qualifications] …………………………

Position ………………………………………………

For and on behalf of [Manager Name]

Date: …………………………………………………

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4 Service charge expenditure report

The summary or detailed expenditure report should be

inserted. This should be prepared and presented in
accordance with the current edition of the RICS Code
of Practice Service charges in commercial property.
Examples of the summary and detailed expenditure
reports are included in this sample report as annex A
and annex B respectively.

RICS Guidance Note 49

Service charges in commercial property

5 Notes to the expenditure report

5.1. Accounting principles

A statement should be made as to whether the
£
accounts are prepared on an accruals basis or cash
Balance brought forward as at [dd/mm/yyyy] x,xxx
basis (best practice recommends all statements of
Contributions during the year excluding
service charges should be prepared on an accruals
interest x,xxx
basis).
Interest credited x,xxx
This section may also be used to provide further details Expenditure during the year excluding tax x,xxx
in respect of other accounting principles adopted in Tax paid x,xxx
preparing the expenditure report. For example, details Balance carried forward as at [dd/mm/yyyy] x,xxx
of landlord contribution to the service charge or
information regarding forward funding by the landlord.
5.4. Banking
5.2 VAT A clear statement is to be provided as to whether
service charge monies are held in one or more discrete
bank accounts and whether interest earned is credited
Example wording to the service charge account.
With effect from [dd/mm/yyyy] the landlord elected
to waive the exemption from VAT. Therefore all
service charge expenditure is shown exclusive of 5.5. Accruals
VAT. VAT will be charged at the appropriate rate on
all service charge payments demanded/invoiced by These are expenses for goods and services actually
the landlord. incurred in a period for which no invoice has been
received at the period end. As the cost relates to the
Or
period, it must be charged to the service charge
The landlord has not elected to waive the exemption account for that period.
from VAT and therefore all service charge
expenditure is shown inclusive of VAT where A schedule of accruals included in the service charge
applicable. expenditure should be provided. Where invoices are
not received in respect of an accrual brought forward
from the previous year, the accrual should be credited
back to the service charge unless there is a realistic
5.3 Sinking fund/reserve fund
expectation that an invoice will be received in the
This section is to include a description of the intended future.
purpose of any sinking/reserve fund together with an
Large round sum provisions included to spread the
explanation of the tax treatment of contributions to and
cost of significant works over a period of time are not
interest earned on such funds and details of the bank
accruals as they do not represent a liability at the end
account where such monies are held.
of the period. Accordingly, they should not be included
It is important to recognise and understand the as accruals but should be considered as contributions
distinction between sinking funds and reserve funds towards reserve or sinking funds and reported
and all contributions thereto should be accounted for accordingly (see above).
separately. For further information refer to the RICS
information paper Sinking funds, reserve funds and
depreciation charges (2014).

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5.6. Prepayments and security deposits 5.9.2 On-site management

The manager should provide details of all on-site
A schedule of prepayments included in the service
management staff and the total employment costs,
charge expenditure for the period should be provided
which would usually include NI, pension contributions
(including utility deposits).
and other direct employment costs. A separate
breakdown of any other costs incurred in employing
on-site staff, such as the provision of office
5.7 Marketing and promotions
accommodation, etc. should be provided.
The service charge accounts should be transparent and
If staff are employed on more than one property a clear
should include the gross marketing and promotional
explanation is to be given of the calculation of the
expenditure and the contribution from the owner, to
costs charged to the subject property, which should
clearly show the net contribution due from the
generally only relate to those costs associated with the
occupiers.
actual time spent working on that property.

If a separate administration charge is made in relation

£
to human resources and payroll costs associated with
Gross marketing/promotion expenditure x,xxx dealing with on-site staff this should be clearly stated
Contribution from the landlord x,xxx together with the amount of the fee and the cost
Net marketing/promotion expenditure x,xxx category in which it is included.

Where separate specialist consultancy fees are

incurred, for instance in relation to the carrying out of
5.8 Commercialisation
health and safety risk assessments, these costs should
If applicable include a clear statement of policy on how be shown separately.
and to where costs and income generated from
services 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 his
or her appointment and whether this relates only to the
subject property or includes other property owned by
the same landlord/client.

The manager should confirm the basis of the fee, for

example, a fixed fee of £x subject to annual review/
indexation and should include a clear statement as to
whether the fee relates only to work carried out in
managing the service charge. The RICS Code of
Practice Service charges in commercial property clearly
states that asset management and rent collection costs
are excluded from the service charge management fee.

If in addition to the management fee a charge is made

relating to the cost of providing a help desk, the
rationale should be explained and the costs detailed
separately.

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Service charges in commercial property

6 Service charge allocation and

apportionment

6.1 Empty units and concessions granted to Schedule 1 – Estate

tenants [Insert detailed description of schedule and basis of

allocation.]
Managers should confirm the basis on which costs are
apportioned for periods less than the full service Schedule 2 – Building 1
charge year, for example, on a daily basis. [Insert detailed description of schedule and basis of
For the avoidance of doubt, managers should also allocation.]
confirm that the landlord bears an appropriate Schedule 3 – Building 2
proportion of the service charge expenditure in respect
of voids and vacant premises. Likewise, if any tenant [Insert detailed description of schedule and basis of
has any form of concession whereby their contribution allocation.]
towards the service charge is capped or is lower than
the apportionment due, the landlord pays the
difference. 6.3 Service charge apportionment
Managers are to provide a full apportionment schedule
for the property/complex to all occupiers, which clearly
6.2 Service charge allocation – schedules shows the basis of calculation and the total
Where costs are allocated into separate schedules apportionment per schedule for each unit within the
managers should provide a detailed description of the property/complex.
schedules and the basis and rationale for the cost Managers should also be transparent with regard to the
allocation. treatment of void and unlet premises, any special
For example: concessions given to individual occupiers and the cost
attributable to the owner’s own use of the property (see
Service charge allocation empty units and concessions granted to tenants
Costs are allocated to separate schedules and the above).
costs apportioned to those who benefit from those See annex D for an example apportionment schedule.
services as follows:

[Insert list of schedules and description, for

example:]

Schedule 1 Estate
Schedule 2 Building 1
Schedule 3 Building 2

[Note to managers – add additional schedules as

necessary in order to achieve fair and reasonable
allocation of costs.]

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7 Operational review

This section should comprise a comparison between 7.3 Explanatory notes and variances
the budget and finalised actual expenditure for each
service line for the period in question. The report
should be prepared using the same headings as the Note to managers
service charge expenditure report and should include a Include summary information under each standard
detailed commentary and an explanation of significant industry cost classification detailing the service
variances. provided, the cost and comments on the
specification or staffing levels, last tendered, etc.
Explanatory notes are to include a detailed
explanation of significant individual costs together
7.1 Service procurement with an analysis and full explanation of any material
Procurement fees variances between budget and actual expenditure.

Where a procurement specialist is used this should be Service charge budgets and actual expenditure
clearly stated together with the amount of the fee and reports must use the standard industry cost
classifications. As a minimum acceptable level of
the cost category in which it is included. A clear
reporting, all reports must be detailed at cost class
explanation should also be provided as to the basis of
and cost category level as set out in appendix B of
calculation of the fee to demonstrate delivery of best the Service charges in commercial property Code of
value solutions, greater value for money and cost Practice (2014).
effectiveness.
However, to achieve transparency in accordance
with the principles of the Code it is recommended
best practice, particularly in respect of larger
7.2 Contracts properties, that budget and actual expenditure
reports and analyses should be provided at detailed
The manager should provide tenants with a schedule of
cost description level whenever practicable, with a
contracts in force during the service charge period with summary of the total costs under each cost
details for each contract of the contractor, a summary category.
of the scope of the contract, the annual contract sum,
the date of commencement and length of the contract In accordance with the proportionality statement
included under the Code’s core principles, for
and dates of any reviews.
smaller properties or those with limited service
Where a contract has been retendered or placed during charge expenditure (e.g. industrial sites) it is
the service charge period, the manager should provide considered acceptable to report at the higher cost
a brief summary of the results of the selection process category level although this should generally be
regarded as an exception rather than the usual
and a clear explanation of the rationale for the
practice.
appointment.

Where appropriate and in any event, every three years

contractors and suppliers should submit competitive
tenders or quotations, although where this is not
considered to be cost effective, the manager should
benchmark the service standards and pricing to
confirm value for money.

For each of the main service lines the manager should

provide a brief summary of when the service line
contract was last retendered.

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Service charges in commercial property

8 General notes

[Insert any other relevant information.]

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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

RICS Guidance Note 55

Service charges in commercial property

Annex A: Example service charge summary

expenditure report

SUMMARY EXPENDITURE REPORT

Period [dd/mm/yyyy] to [dd/mm/yyyy]
Property address ………………………………………………

Expense Schedule Schedule 2 Schedule 3

Cost category
total 1 Estate Building 1 Building 2

MANAGEMENT
1 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

UTILITIES
5 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 SERVICES
9 Security £144,100 £137,500 £3,500 £3,100
10 Cleaning and environmental £185,730 £52,250 £58,300 £75,180
11 Marketing and promotions
Subtotal £329,830 £189,750 £61,800 £78,280

HARD SERVICES
12 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

INCOME
16 Interest -£1,068 -£332 -£373 -£363
17 Income from commercialisation
Subtotal -£1,068 -£332 -£373 -£363

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INSURANCE
18 Engineering insurance £900 £500 £400
19 All risks insurance cover
20 Terrorism insurance
Subtotal £900 £0 £500 £400

EXCEPTIONAL EXPENDITURE
21 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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Service charges in commercial property

Annex B: Example service charge detailed

expenditure report

DETAILED EXPENDITURE REPORT

Period [dd/mm/yyyy] to [dd/mm/yyyy]
Property address ………………………………………………

Expense Schedule Schedule 2 Schedule 3

Cost category
total 1 Estate Building 1 Building 2

MANAGEMENT
1 Management fees
Management fees £60,000 £10,000 £25,000 £25,000
2 Accounting fees
S/C audit fees £1,600 £1,600
3 Site management resources
Staff 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 environmental
Risk assessments and audits £10,000 £10,000
Subtotal £142,735 £42,735 £51,600 £48,400

UTILITIES
5 Electricity
Electricity £224,000 £112,000 £112,000
Electricity procurement consultancy £5,600 £5,600
Fuel (standby electrical power) £300 £300
6 Gas
Gas £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

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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 promotions
Subtotal £329,830 £189,750 £61,800 £78,280

HARD SERVICES
12 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 escalators
Lift maintenance contract £21,000 £12,000 £9,000
Lift repairs £3,500 £2,000 £1,500
14 Suspended access equipment
Maintenance contract £5,100 £2,700 £2,400
Repairs £200 £100 £100
15 Fabric repairs and maintenance
Internal 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

INCOME
16 Interest
Interest -£1,068 -£332 -£373 -£363
17 Income from commercialisation
Subtotal -£1,068 -£332 -£373 -£363

INSURANCE
18 Engineering insurance
Engineering insurance £900 £500 £400
19 All risks insurance cover
20 Terrorism insurance
Subtotal £900 £500 £400

EXCEPTIONAL EXPENDITURE
21 Major works
Plant replacement £92,483 £92,483
22 Forward funding
Sinking 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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Service charges in commercial property

Annex C: Example service charge variance

report

EXPENDITURE VARIANCE REPORT

Period [dd/mm/yyyy] to [dd/mm/yyyy]
Property address ………………………………………………

Current Current v
Previous Current year Actual v
year previous
year actual budget budget
actual actual

MANAGEMENT
1 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%
Site management
3 £66,000 £70,000 £71,135 1.62% 7.78%
resources
Health, safety and
4 £5,000 £15,000 £10,000 -33.33% 100.00%
environmental
Subtotal £132,500 £146,600 £142,735 -2.64% 7.72%

UTILITIES
5 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 SERVICES
9 Security £144,100 £144,100 £144,100 0.00% 0.00%
Cleaning and
10 £176,543 £180,000 £185,730 3.18% 5.20%
environmental
11 Marketing and promotions
Subtotal £320,643 £324,100 £329,830 1.77% 2.87%

HARD SERVICES
Mechanical and electrical
12 £193,750 £180,000 £187,970 4.43% -2.98%
services
13 Lift and escalators £24,500 £24,500 £24,500 0.00% 0.00%
Suspended access
14 £5,300 £53,000 £5,300 -90.00% 0.00%
equipment
Fabric repairs and
15 £34,500 £50,000 £99,325 98.65% 187.90%
maintenance
Subtotal £258,050 £307,500 £317,095 3.12% 22.88%
INCOME

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

Income from
17
commercialisation
Subtotal -£989 -£1,000 -£1,068 6.80% 7.99%

INSURANCE
18 Engineering insurance £800 £1,000 £900 -10.00% 12.50%
19 All risks insurance cover
20 Terrorism insurance
Subtotal £800 £1,000 £900 -10.00% 12.50%

EXCEPTIONAL EXPENDITURE
21 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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Service charges in commercial property

Annex D: Example service charge

apportionment schedule

APPORTIONMENT SCHEDULE
Period [dd/mm/yyyy] to [dd/mm/yyyy]
Property address ………………………………………………

Schedule 1 Schedule 2 Schedule 3

Unit/address Tenants Area
Estate Building 1 Building 2

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 2
Ground 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%

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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 recognised
in the accounts when incurred, not when the invoice is actually paid. This is the
opposite of cash accounting, which recognises transactions only when there is an
exchange of cash.

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

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

Alternative dispute The collective description of methods used to resolve disputes other than through
resolution (ADR) the normal judicial process.

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

Apportionment The spreading of costs within schedules between occupiers who benefit from the
services 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 by

the decision of an independent third party (the arbitrator). The role of an arbitrator is
similar to that of a judge, although the procedures are often less formal. An
arbitrator is usually an expert in his/her own right.

Balancing charge The resulting difference between an individual tenant’s apportionment of

expenditure and the on-account service charges demanded from that tenant for any
specific service charge accounting period, having regard to any service charge
concessions that may have been granted.

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

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

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

RICS Dispute Resolution RICS DRS can provide a simple, fast and cost-effective approach to resolving
Service (DRS) disputes in the complicated world of property and construction, where disputes are
bound to arise.

Early neutral evaluation ENE is an ADR technique. ENE is voluntary, confidential and conducted on a
(ENE) ‘without prejudice’ basis. The evaluation is non-binding, and aims to help clarify and
define legal and factual issues in the dispute, identifying risks and likely outcomes
before 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 each
floor level in accordance with the RICS Code of Measuring Practice.

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Service charges in commercial property

Independent expert Independent expert determination in the UK and other territories is a process in
determination which an independent third party, acting as an expert rather than as a judge or
arbitrator, is appointed to decide a dispute (as an independent expert or ‘expert
determiner’ – 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 the
bank account of its owner.

International total ITOCC from the Investment Property Databank (IPD) Occupiers Property Databank
occupancy cost code (OPD) was designed to be the standard form of measuring property and facilities
(ITOCC) costs for all businesses and public sector organisations. It is prepared with the help
of IPD occupier and other leading occupiers, consultants, accountants, service
providers, developers and academics. As ‘total’ suggests, it takes account of all of
the 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 person
or company which owns and rents or leases premises. The person or company may
own the freehold or may have a superior leasehold interest in the property
themselves. To avoid confusion, this term is only used in this Code where the
context makes this necessary. In all other cases the reference is to ‘owner’.

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

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

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

Marketing and Advertising and other forms of promotion of a shopping centre intended to bring
promotions additional custom to the centre (as distinct from attractions and entertainments of a
general 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 of
methods and principles in the allocation and apportionment of costs between
occupiers.

Mediation The generally accepted description of commercial mediation is a voluntary, non-

binding, private dispute resolution process in which a neutral person helps the
parties to reach a negotiated settlement. A core principle of mediation is that the
parties ‘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 perimeter
walls 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 (although
the individual services within the costs may contain a profit element for the
individual supplier); but also, there is no residual loss (assuming a fully let property
with no concessions on service costs to specific occupiers) left for the owner to
pay.

Occupier A person in possession or occupation of premises and usually responsible for

payment of the service charge to the owner.

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On-account service An estimated charge raised in advance and anticipation of the final service charge
charge liability, calculated from the service charge budget.

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

Planned preventative PPM is maintenance that is performed purposely and regularly in order to keep the
maintenance (PPM) fabric, facilities, plant and equipment of a building in satisfactory operating condition
by providing for systematic inspection, detection and correction of failures, either
before they occur or before they develop into major defects. PPM also helps to
identify the point at which such items can reasonably be deemed to have reached
the 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 in
advance, 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 property
might reasonably be expected to be let from year to year if the occupier undertook
to pay all of the usual occupier rates and taxes, and was also to bear the cost of
repairs, insurance and other expenses (if any) necessary to maintain the property in
a 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 or

better condition. It is often a different concept to repair or improvement, and usually
includes elements of both. Where a refurbishment project includes improvements or
enhancements beyond normal repair or maintenance, this element of the cost would
usually be met by the owner.

Relaunching Marketing to change the perception in the eyes of its target audience. This may be
for letting purposes (an owner’s cost), or may benefit both owner and occupier – for
example, a shopping centre following refurbishment – in which case, an agreement
is 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 order
to avoid fluctuations in the amount of service charge payable each year (for
example, 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 as
maintenance and repair of the fabric and structure, and true services, such as the
provision of heating, lighting, cleaning, security, etc.

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

Service charge The method and details of apportioning liability between tenants for contributing to
apportionment a service charge.

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

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

Statement of service The account of service charge expenditure/ costs and related notes. Commercial
charge expenditure leases usually provide for an annual statement of service charge expenditure to be
issued to occupiers following the end of each service charge period.

RICS Guidance Note 65

Service charges in commercial property

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 pay
the service charge under the terms of the lease. As with ‘landlord’, this term is only
used when the context requires; references in the context of commercial property
and service charges are to ‘occupier’, see above.

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

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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), RICS
Books, 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 Property
Managers 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 British
Property 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

RICS Guidance Note 67

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