Is the service charge percentage correct?

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10 things a business occupier can do to check whether their share of the service charge is correct ( the service charge percentage ).

There are different methods that landlords use to split service costs between the various occupiers whether in a building, shopping centre or on an estate but the most common by far is the floor area basis.

This is where the share payable (by a unit or occupier) is calculated by dividing the floor area of a particular unit by the sum of the floor areas of all the lettable units to arrive at a service charge percentage share payable . 

Your lease will specify how the service costs are to be split by the landlord so check it to ensure that the landlord is allocating costs to your premises correctly. 

Check:

  1. The landlord is using the sum of all of the lettable parts (not just the sum of the units that are actually let). Check that they don’t miss any vacant units or lettable parts and if they do question it. Check the arithmetic.
  2. Income-generating activities are contributing a fair share towards the service costs that they benefit from. If not why not?
  3. The floor area figures used by the landlord against your own measurements and those of other occupiers for accuracy. The landlord should be able to substantiate his figures by providing a copy of a measured floor area survey (ideally completed by an independent third party specifically for service charge purposes). 
  4. That the landlord has not mixed methods of measurement for example that they are not mixing NIA and GIA floor areas.
  5. That the floor areas are up to date to take into consideration recent tenant alterations such as expansion of a particular unit.
  6. Whether your lease specifies a fixed or capped service charge percentage and whether the percentage can be varied.
  7. Whether there is more than one percentage in your lease. 
  8. Whether the Landlord should use different schedules. Is it appropriate for there to be several schedules and if so which service costs should be included within each schedule and which units should be picking up a share of each schedule?
  9. How has the landlord arrived at splits between schedules and are they fair reasonable and are calculated in accordance with the lease. (Where the landlord is using different schedules it is common, but not always correct, for the landlord, rather than the provider/ supplier, to manually split certain costs between these schedules).
  10.  Check if the landlord has used weighting and if weighting is appropriate. What weighting bands have been used and are they correct? Finally is weighting being applied correctly?

The above are some of the basics with regard to checking the service charge percentage or apportionment and the list is by no means exhaustive.

Further recommended reading:  

Service Charges in Commercial Property. 1st Edition available from the RICS :

https://www.rics.org/uk/upholding-professional-standards/sector-standards/real-estate/service-charges-in-commercial-property-1st-edition/

Written by:  Jamie McNeil Bsc Econ (Hons) Dip. Surv. MRICS. FCIArb.

Director at McNeil Commercial Limited www.mcneilcommercial.co.uk.

Date: 8th December 2020

Service charge percentage

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