2009_loughborough_report

THE LOUGHBOROUGH REPORT 2009Commercial Property Service Charges

Dr John CalvertLOUGHBOROUGH UNIVERSITY ENTERPRISES LTD

Sponsored by Property Solutions

An analysis of twelve years worth of data from 1998 to 2009 carried out by:

Dr John R. CalvertSenior Lecturer in Management Science, Loughborough University Business School

With in-depth statistical analysis and substantial contribution throughout from:

Simon LodgeBSc (Hons), Business Administration, University of Bath

Stefan DimovBSc (Hons), Business Administration, University of Bath

THE LOUGHBOROUGH REPORT 2009Commercial Property Service ChargesBy Dr John R. Calvert – LOUGHBOROUGH UNIVERSITY BUSINESS SCHOOL

ACKNOWLEDGEMENTSWe would like to thank the following organisations for their permission to include the data used in this research project:

Sponsored by

Published by Loughborough University Enterprises Limited,Rutland Hall, Loughborough University, Leicestershire LE11 3TUCopyright of Loughborough University Enterprises Limited

November 2009 ISBN 978-0-9551895-5-5

THE LOUGHBOROUGH REPORT 2009 3

THE LOUGHBOROUGH REPORT 2009Commercial Property Service Charges

LOUGHBOROUGH REPORT SERVICE CHARGE STUDY 2009

Service Charge Costs – a SummaryService charges for multi-let offices remain big business. Government figures put total office space in England & Walesfor 2008 at 905 million sq ft (Department for Communities and Local Government). Last year the Occupiers PropertyDatabank (OPD) estimated that 76.2% (690 million sq ft) of that space was multi-let – so, potentially, attracting servicecharges. The Loughborough figures for 2009 give an average actual service charge bill of £6.02 per sq ft and thereforean estimate of total 2009 office service charges for England & Wales is £4.15 billion.

This 2009 edition of the Loughborough Report updates the expanded 2008 Report and includes more than the regular annual

insight into service charge costs and management performance. For the second year we look at how the UK multi-let office

industry has responded to the guidance and direction set out by RICS Code of Practice: Service Charges in Commercial

Property, which came into force in April 2007. We also begin a focus on interest in service charge accounting, the impact of

VAT and highlight some facts about air conditioning costs. A section of the report compares the Loughborough and Office

OSCAR datasets and analyses. We also look forward to the other research planned in 2010.

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The total cost per sq ft from certificates still varies widely. The values are skewed and so the usefulness of the average(mean) cost per sq ft is compromised and the standard deviation may have limitations. The median as a measure of centralityis much more robust and this is why it has again been used as the chosen metric for the 2009 Loughborough Report.

The median cost within the sample has fallen slightlyby 0.9% to £5.29 per sq ft and the spread of theupper and lower quartiles has slightly narrowed to£7.80 (from £7.78) and £3.29 (from £3.15) from theprevious Loughborough studies.

As in previous years, the principal variables ofinflation, location, size, air conditioning or VAT do notexplain more than a small amount of the variability.Accordingly, the upper quartile of £7.80 per sq ftshould be used as an action warning limit and themedian of £5.29 per sq ft should be used as amonitoring warning limit.

CONTENTS PAGE

Acknowledgements 2

Summary 3

Service charge costs 4

Compliance with RICS Code 5

Interest 7

VAT 8

Comparison with Office OSCAR 9

Recommendations 10

Further reading 11

Conclusion 11

Year

4 THE LOUGHBOROUGH REPORT 2009

Service Charge Costs - the 2009 Research SampleThe Loughborough Report research was carried outduring the summer of 2009 on an increased samplesize of 576 buildings with a total of 42,734,444 sq ft.This is an increase of 14.1% in buildings in the samplecompared with last year and 19.7% in terms of sq ft.The 576 buildings are from a variety of regions andare of varying sizes.

The database now covers 6.2% of the total estimatedmulti-let office space in England and Wales over theyears 1998 to 2009. This span allows some longi -tudinal study of one sample rather than comparisonsof different samples each year as are reported byJones Lang LaSalle’s annual Office OSCAR report.

The Loughborough data comes from 3,285 documentsof which 1,786 are certificates and 1,499 are budgetsand these are distributed fairly evenly through theyears involved. This is 13.9% more documents thanlast year and includes new documents for prior yearsdue to the late arrival of some certificates and budgets.

If we look at a rolling five year sample from this year’sdata, there are over 1,000 documents for eachconsecutive five years from 1999 onwards. This allowsthe underlying trends in service charges to bemonitored rather than be influenced by continuallychanging groups of buildings analysed for just one year.

Every year new documents arrive some of which arelate arrivals from previous years. So the number inthe current data base for each year is as shown in thetables. The following analyses covering both compliancewith the Code and value for money are all carried outon data falling within the 5 year data group 2004-2008.

Service Charge costs - Value for MoneyPrevious Loughborough Reports have found thatservice charges were both higher than necessary andinexplicably variable.

Many of the problems on service quality, cost andvalue for money have been shown to result frommisunderstandings and misinformation betweenlandlords, their managing agents and the tenants.Tenants are often frustrated by a feeling of beingunable to influence service charge costs, comparedwith their ability to influence or control most othercosts in their businesses.

The RICS Code strongly encourages a policy ofcontinual communication between the parties, withthe tenants having an opportunity to challenge thepropriety of all services procurement and expenditures.

The Loughborough Reports have shown that themedian as a measure of centrality is more robust overtime than the average and can provide tenants withmeaningful warnings. Quartiles are also more robust andso can provide tenants with meaningful action limits.

Cost Changes Through TimeThe median of the total cost per sq ft rises and fallsfrom year to year with no consistency. In addition thespread of service charge bills in each year is so greatthat using the whole sample is a better guide to thelevel of costs than taking one year in isolation. So timeis not a major factor in predicting service charges.The year 2009 is not included since no certificateshave been received for that year.

YEARTOTAL NUMBER OF DOCUMENTS

CERTIFICATES BUDGETS

1997 39 33 6

1998 113 82 31

1999 158 116 42

2000 186 126 60

2001 221 144 77

2002 246 156 90

2003 302 186 116

2004 360 222 138

2005 416 241 175

2006 437 219 218

2007 427 200 227

2008 263 61 202

2009 117 0 117

Total 3,285 1,786 1,499

FIVE YEARPERIOD

TOTAL NUMBER OF DOCUMENTS

CERTIFICATES BUDGETS

2005 - 2009 1660 721 939

2004 - 2008 1903 943 960

2003 - 2007 1942 1068 874

2002 - 2006 1761 1024 737

2001 - 2005 1545 949 596

2000 - 2004 1315 834 481

1999 - 2003 1113 728 385

1998 - 2002 924 624 300

1997 - 2001 717 501 216

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1 61 121 181 241 301 361 421 481 541 601 661 721 781 841 901

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RICS CODE REQUIREMENT April 2007 to 2009ACHIEVEMENT

1998 to 2007ACHIEVEMENT

Budgets must be delivered one month prior to the start of the year 21%* 5%

Certificates must be delivered within 4 months of the end of the year 46%* 24%

Management Fees must be a fixed cost 33% 18%

Interest must be credited to service charge accounts 28% 16%

Apportionment basis clear 44 %** 77%

Budget Accuracy. Budgets should be within 2% of actual costs 15% 14%

1. *Estimated percentages since documents are still being delivered for the period.2. **As shown on the face of the certificate3. Improvements may be achieved for other measures but since the majority of budgets and certificates are produced

long after they are due, much of the data for the period will not be available for some time to come.

In the last two Loughborough Reports, published after the Code became operational, we noted that the industry’sachievements were significantly below “best practice” as required by the Code and that there were no beacons of goodpractice. Although significant progress has been achieved, this remains the case today and ‘getting up to speed’ to thebase line set by the Code may take some years. New and renewed leases drafted in accordance with the Code are aprerequisite. This relies on the cooperation, education and training of lawyers and managing agents and the agreementof their landlord clients. It could, therefore, take up to five years before significant levels of Code compliance becomeestablished. However, as retail tenants have shown, it is possible that tenant action may speed the compliance timetable.

The Code The Code of Practice was drawn up in response to industry concerns about the cost and quality of common services provisionin multi-let commercial property. The discontent of tenants has been demonstrated by the poor results in the Tenant’sSatisfaction Survey and more recently in the Occupiers’ Satisfaction Index reports. [www.occupier-satisfaction.co.uk]

The 2007 Code of Practice provides much needed guidance on the subject and, although not mandatory, it establishes'best practice'. Practitioners are expected to follow the Code, interpreting existing service charge clauses in leases as faras possible in line with the principles and practices set out. The Code envisages that all new leases and those beingrenewed will be brought up to the required standard. As mentioned above, this will take some time even with currentlease lengths being the shortest in history.

The Code envisages a period during which time there may be a need to operate dual service charge regimes and otherinterim measures. This is to ensure the practical operation of the services and the recoverability of the service chargecosts during the transition period.

Implementation of the Code will require many changes to the current management processes and the willingness oflandlords and managing agents to change, what has up to now, been established practice. RICS members are expectedto use their management experience to achieve the changes set down in the Guidance. A key future imperative will beRICS sponsored, independent performance benchmarking, to measure member compliance with the Code. In themeantime, the Loughborough Report remains the only benchmark of compliance available to the industry.

Accordingly, the Loughborough Report includes the measurement of the current compliance of specific RICS Code itemswithin the database covering financial controls, transparency, value for money and management.

THE CODE – PERFORMANCE RESULTS

Financial ControlsThe principal financial controls for service charges are the annual budget and certification processes. The Code sets outdetailed requirements for both of these and offers examples of the detailed expenditure and variance reports required.

RICS CODE OF PRACTICE

A Report on ProgressThere are significant performance improvements in many aspects of compliance with the RICS Code of Practice,although overall progress against the Code remains disappointing. It should be noted that many documents are stillawaited for the period under review, so the analysis is not complete.

The following table highlights a number of key benchmarks within the Code that can easily be measured. The tableshows the percentage of buildings in the Loughborough database that currently meet the Code’s requirements setagainst the same measurements taken for the same sample at the time the Code came into force in April 2007:


Budget LatenessLooking at the last five years of data, only 16.2%of budgets (shown green) arrived one monthbefore the start of the period to which they relate.This is a improvement on last year (14%) becauseprogress (21% of budgets on time) has been madesince the Code came into force in April 2007.

Certificate LatenessLooking at the last five years of data, only 46%(shown green) of certificates arrived within fourmonths of the end of the period to which theyrelate. This is an improvement on last year(36%) because progress (39% of certificates ontime) has been made since the Code came intoforce in April 2007.

There is a clear indication that certificatesarriving late are higher cost than certificates thatarrive within the guideline timescale set down inthe Code. Whilst 24% of certificates arrivingwithin the Code’s 4 months are above the £7.80per sq ft action limit, this rises to 31% forcertificates that were late.

The reasons for late certification may includedifficulties certifying the accounts due todisputes with suppliers, complex or largeprojects, unexpected maintenance costs or poormanagement controls. Tenants should treatdelayed certificates with care, fully investigatingthe reasons for late arrival as well as the costbreakdown in the certificate.

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Late Certificates are Higher Cost Certificates within 4 months* Certificates later than 4 months*

% Above upper quartile of £7.80/sq ft 24% 31%

% Above Median of £5.29/sq ft 57% 58%

% Below lower quartile £3.29/sq ft 21% 25%

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Management FeesLooking at the last 5 years of data, only 21.2% of the fees charged are definitely following the Code guidelines and usinga flat fee and at least 39.8% of fees charged are definitely not in line with the Guidance.

Management fee basis Certificates Percentage

Flat fee 200 21.21%

Percentage fee 375 39.77%

Unknown 368 39.02%

Total 943 100.00%

Budget AccuracyOnly 14% of budgets are within +/- 2% of theactual service charge as required by the Code.This measure has shown no improvementversus last year.

The graph shows budgets within Codeguidelines in green. Under-budgeting (below theline, shown red) results in unbudgeted balancingcharges arriving with the certificate causingpotential cash flow difficulties for tenants.

Over-budgeting (above the line, shown red) iswhen tenants overpay to landlords and have towait many months to receive a balancing credit,in most cases, apparently without interest.49.7% of budgets are over-budgeted.

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1 86 171 256 341 426 528 613 698

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Interest on Service Charge AccountsOnly 23.1% of certificates mention interest. The interest credited is £2,604 on average per certificate.

Apportionment BasisThe apportionment method is clear for only 58.1% of the 943 certificates in the study, a reduction of 4% on last year.This is believed to be due to ‘non-compliant with Code’ new data being added to the Loughborough dataset this year.This could be data from new buildings or late information being received from earlier years on existing buildings.

Sinking FundsOnly 9.3% of the certificates in the study (88 certificates) mentioned sinking funds with an average annual collection of£24,781 per certificate. This is an increase of 11.7% (£2,587) from last year.

In no case is the current balance of the fund shown on the certificate. It is unclear whether these funds are held by thelandlord in trust for the tenants, where tax is not payable or held within the landlords general funds, where it will beclassed as landlord’s income by HMRC and where tax will be payable.

INTEREST AND SERVICE CHARGE ACCOUNTSThe treatment of interest in service charge accounts was a new area for analysis in last year’s Loughborough Report.The following analysis is carried out on the last five years of service charge data and updates this analysis.

The RICS Code requires that where tenant’s on-account payments for service charges are held in a separate, interestbearing bank account, as is required by RICS accounting rules if a managing agent is employed, any interest received onthese service charge bank accounts should be credited to the respective service charge accounts.

Only 23.1% of service charge certificates show such interest credits in the Loughborough database.

The Code notes that unless specifically laid down in the lease, owners are under no contractual obligation to retainadvance service charge payments in separate bank accounts. Many owners manage their own property portfoliosdirectly, or through a management company, where RICS accounting rules do not apply.

The Code goes on to say that a separate client account does not oblige owners to credit interest earned to the benefitof occupiers but best practice does require this after making due deduction for tax.

Interest typically arises from three processes (excluding interest from sinking and other funds):

1. On-Account Payments: Tenants pay service charges on-account but landlords, or their agents, pay service charge billstypically in arrears. Thus the tenant’s payments sit in a bank account until needed to pay service charge bills.

2. Over-budgeting: On-account payments are determined by the budget. If the budget is set higher than the eventualcosts, more money will be collected through on-account payments than is used during the year. The remaining cashwill sit in a bank account accruing interest until the accounts are reconciled, the certificate drawn up and sent out andthe resulting balancing credit applied to the tenant’s on-account payments. In most cases the balancing credit will beapplied to the next on-account payment due from the tenant following receipt of the certificate.

3. Late Payment: Late payment interest clauses are commonly written into leases. If a tenant pays on-account but payslate, an interest clause may trigger a charge which is typically the interest on the late payment based on a rate ofinterest set out in the lease – which may be a penal rate to encourage payment on time.

The Code requires that “interest charged to, and received from, occupiers for late payment of service charges shouldbe credited to the service charge account net of any tax”. The Code makes no distinction between owners operatingservice charges under their own bank accounts or managing agents operating separate interest-bearing bank accounts.Therefore all late service charge interest payments should be credited to the service charge account. The Code doesallow bank charges and account operating costs to be offset against the interest received.

The Code notes that “Modern leases often enable owners to recover the cost of borrowing to fund major non-cyclicalexpenditure as a cost to the service charge. In older leases there is a risk of having to fund shortfalls from negative cashflows. Where owners are crediting interest earned to the service charge account, they should be reassured that chargingthe interest on borrowed money to fund major non-cyclical expenditure meets best practice.”

The Code suggests that the term “Interest” is an adequate income description to be used on certificates for any interestreceived. Loughborough maintains that the issue of interest needs more detailed attention.

For example, a tenant receiving a certificate with an income item called “interest” has no idea where the income isgenerated, or what, if any, off-setting costs may have been included. It is therefore impossible to check whether theinterest receipt is either reasonable with respect to the lease or even best practice as set out in the Code.

In normal times, interest credits can be large sums. In the current period of exceptionally low interest rates, interestcredits will be abnormally low. Loughborough estimates that if all service charges were operated using separate, interest-bearing bank accounts and making the following assumptions, the potential interest accruing to tenants on servicecharges in England & Wales might total as much as £27m p.a. This estimate is significantly lower than last year (£65m)due to the lower interest rate regime resulting from the credit crunch and subsequent economic slowdown.

This is subject to the following assumptions:• Interest on sums held at the bank accrues at 2% p.a.• All tenants pay quarterly in advance (no late payment penalties invoked)• Service charge bills are paid 30 days in arrears• 50% of certificates are over-budgeted (see Budget Accuracy section of this report)

Loughborough estimates that the actual interest paid to tenants in England & Wales could be as little as £6m p.a.The reasons for this apparent shortfall could be:1. A higher proportion of multi-let space is owner managed than in the Loughborough sample and the owners do not

maintain separate accounts for service charges.2 Higher offset costs3. Landlords/Agents have yet to put the Code’s best practice requirements into practice.

It is recommended that the next edition of the RICS Code is expanded to explicitly include best practice, requiring that:• all owners and managing agents will operate separate, interest-bearing bank accounts for all service charge payments;• all interest received from such bank accounts will be credited to the service charge account;• all costs of operating bank accounts, borrowing to fund shortfalls in service charge accounts and tax are separately

identified on the certificate.

VAT AND SERVICE CHARGE ACCOUNTSThe VAT registration of buildings is an important factor for financial services company tenants since they are unable toreclaim VAT on any costs, including principal rent and service charges. However, most buildings are VAT registered andthe decision about registration is under the control of the landlord. Once registered for VAT, the position cannotgenerally be reversed.

The impetus to register a building for VAT often arises if the landlord intends to carry out a refurbishment of all or partof the building, so that VAT on the refurbishment costs can be recovered.

If a building is not VAT registered, principal rent is zero-rated for VAT, but many of the costs making up the service chargeinclude VAT. If a building is VAT registered, VAT is chargeable on both principal rent and service charge.

The Loughborough 2009 data shows a fairly even split between VAT registered (55%) and non VAT registered (45%)buildings by square footage.


Sq FtNot VAT

registeredVAT

registeredTotal

Space occupied byfinancial services tenants

16,341,937 85% 12,401,321 53% 28,743,258 67%

Space occupied by nonfinancial services tenants

2,965,775 15% 11,025,411 47% 13,991,186 33%

Total 19,307,712 23,426,732 42,734,444

Two thirds of the space in the Loughborough dataset is occupied by tenants from the financial services sector, who arelargely unable to recover VAT. It is therefore not surprising that financial services companies occupy 85% of non VATregistered buildings and 53% of VAT registered buildings.

So, financial services companies could be said to be twice as likely to choose a non VAT registered building as one whichhas been registered for VAT.

Conversely, one third of the space in this study is occupied by non-financial business tenants, who are able to recoverVAT. It is again not surprising that these tenants should choose to occupy 47% of VAT registered buildings, where theycan recover all the VAT levied on principal rent and service charge, but only 15% of non VAT registered buildings, wherethey cannot recover the VAT contained in the service charge.

Air-ConditioningIt is clear that the mean, median, upper quartile andlower quartile are higher for the air conditioned thanfor non-air conditioned buildings.

This confirms previous reports that, on average, airconditioned buildings cost more than non airconditioned buildings and this year the differences inaverage cost per sq ft have increased slightly (£0.09per sq ft to £2.39 per sq ft). Also, the more expensivebuildings are usually air conditioned and the cheaperones are usually non air conditioned.

However, the spread of costs per sq ft for the middle50% is so great that the air conditioning factor getslost and does not explain the variability for this groupof buildings. Hence, tenants should use the overallmonitoring and warning limits to check if their servicecharges are too high, rather than use averages for airconditioned or non air conditioned buildings.

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Loughborough Report 2009

Office OSCAR 2007

Type of AnalysisLongitudinal study

covering an 12 year periodAnnual snapshot covering 1 year

Number of Buildings 576 235

Total Size of Buildings (sq ft) 42,734,444 21,433,977

Proportion of total England & Wales multi-let office space 6.20% 3.14%

Period of data coverageBudgets and certificates

covering and received in theperiod 1998 to 2009

Certificates with year enddates falling within the 2006

calendar year.

Range of Data includedAll costs as shown on

certificates

All costs as shown oncertificates excluding

exceptional expenditure,insurance, interest credits

and VAT

Basis of measurement of centrality Median Mean

Basis of measurement of upper and lower limits Upper and Lower Quartiles Plus and minus 0.7 standarddeviations

Churn (change in number of buildings in this year’s analysis versuslast year [OSCAR] and 5 rolling years [Loughborough])

16% 46%

Loughborough and Office OSCAR - the Differences

Both studies cover a small, but representative proportion of the total England & Wales multi-let office space since.Thisyear’s Loughborough’s sample size has substantially increased 19.7% by floor area, whilst OSCAR had decreased by23.8%. Loughborough 2009 covers more than twice as many buildings (576) as OSCAR 2007 (235).

Other than size, the basis of the studies is widely different. Loughborough is a longitudinal study of a group of buildingsover a 12 year period, where the dataset exhibits relatively low annual churn. OSCAR is a snapshot of the costs in adifferent group of buildings each year, where the dataset exhibits relatively high annual churn.

In this year’s study, due to a large increase in sample size (19.7%) and in new documents (13.9%), Loughborough’schurn is temporarily high at 15.7%. It is expected to fall again next year.

The Loughborough study has always included all costs shown on the certificate because these are the actual charges paidby tenants. OSCAR has excluded various costs from its surveys and these exclusions have varied across the years.

Following publication of the RICS Code in 2006, OSCAR 2006 said it would include both exceptional costs and interestcredits in 2007. However this has not happened and OSCAR 2007 continues to significantly under-report service chargecosts actually paid by tenants. OSCAR says they will include both exceptional expenditure and interest credits in futurereports.

Exceptional expenditure presently excluded from OSCAR covers project works, refurbishments, major repairs, draw-down from forward funding accounts, sinking/replacement funds, reserve funds, depreciation charges, repaymentcharges, estate/external service charges.

Since the total cost across the Loughborough sample varies widely and the values are skewed, Loughborough states thatthe usefulness of averages is compromised and the use of standard deviations suspect. OSCAR does not comment onthe statistical significance of this feature of their sample but says “As a consequence of items of exceptional expenditurebeing excluded from the OSCAR dataset it is (in the writer’s view) considered appropriate to use the arithmetic meanas a measure of central average rather than the median.”

Since the median of the total cost per sq ft rises and falls from year to year with no consistency and the spread betweenupper and lower quartiles is very wide, Loughborough says that using the whole sample is a better guide to the level ofcosts than taking one year in isolation. OSCAR does not comment on these features of their samples but comparesaverages and limit values directly year on year.

THE LOUGHBOROUGH REPORT: COMPARISON WITH OFFICE OSCARA comparison between Loughborough 2009 and OSCAR 2007 shows the main changes in the two reports to be:• Loughborough 2008 - sample size has grown by 19.7% in floor area (Sq Ft) and 14.1% by number of buildings.• Office OSCAR 2007 - sample size was reduced by 23.8% in floor area (Sq Ft) and 9.3% by number of buildings.Note: the OSCAR 2008 report was due to have been published in summer 2009 but has been delayed at the time of this report going to press.

The following table highlights some of this year’s principal differences between these annual studies.


OSCAR splits their sample principally between air-conditioned and non air-conditioned buildings and compares furthersub-costs within these principal groups. Loughborough says that air conditioning does produce a larger median servicecharge cost but the overlap in the upper and lower quartiles is so large that the landlord’s provision of air conditioningexplains very little of the variability in total service charges.

Loughborough says that the OSCAR sample size is too small for comparisons of cost between any of the costbreakdowns to be statistically significant.

Furthermore, Loughborough says that due to the wide difference between upper and lower quartile, it is impossible toexplain more than a small amount of variability of any of the principal variables of inflation, location, size, air conditioningor VAT. OSCAR does not comment on the variability of their sample or the validity of their cost comparisons –particularly those with very small sample sizes.

LOUGHBOROUGH RECOMMENDATIONSAs in previous years, the Loughborough research leads to conclusions which we record as recommendations as follows:

• That the industry recognises the value of benchmarking and supports and funds the collection and analysis of a moresignificant and representative proportion of total UK multi-let office space which could include Loughborough andOSCAR datasets.

• That any benchmarking scheme measures and reports on a range of measures (to be agreed by a representative bodyincluding both demand and supply side representatives) to show compliance levels and progress towards compliancewith the RICS Code of Practice.

• In view of the performance in the majority of the tests versus the RICS Code, Loughborough repeats the furtherrecommendations made in last year’s report:

PREVIOUS RECOMMENDATIONS

RICS & OTHERS • Implement a centralised data collection system of uniformly coded service charge data

and make this data publicly available to allow industry analysis and benchmarking

• Instigate and publish annual progress reporting against the goals set out in the Code

• Law Society/Inland Revenue initiative on taxation of sinking funds to resolve the

problems highlighted in the O’May & others v City of London Real Property Co Ltd case.

• Standard management contract for managing agents

• Law Society/RICS initiative on model service charge clauses in new and renewed leases.

• Monitor and review the effectiveness of ADR for service charge disputes.

LANDLORDS • Carry out an audit of each building that they own. Each audit should consider:

- How well each building meets the Code – not just in those areas measured above,

but across the range of requirements set out in the Code.

- What changes need to be made for each building to meet the Code.

- What the impact might be on both services and service charges as a result of the

changes necessary to meet the Code.

- A costed proposal and programme for implementing the necessary changes.

• Provide tenants with copies of these audits.

• Discuss and agree the necessary changes before the proposed changes are enacted.

TENANTS • Request Service Charge Code compliance audit report from landlord for each building.

• Seek proposals from landlord for actions to remedy any shortcomings against

RICS Code.

• Monitor service charges over £5.29 per sq ft.

• Investigate service charges over £7.80 per sq ft.

• Prepare for increased communications with landlords. Attend when meetings

are organised


We conclude from the analysed data that, whilst some areas of the financial management and delivery of services hasimproved, others remain the same at an unacceptably low level. The Occupier Satisfaction Index shows that substantialimprovement is required to move tenant’s opinion of service quality, management and value to acceptable levels. Tenantscontinue to pay for services which represent poor value for money.

Managing agents whose fees are paid by the tenants are in some cases failing to manage efficiently and effectively.Adherence to the Code is poor, apparently even amongst those landlords who have pledged to follow the Code. It isvery important for the industry to support the RICS Code because the efficient and effective management of tenant'sservices has an important effect on business productivity. Furthermore, the professional reputation of those who managethese buildings is on the line.

However, it is sometimes difficult for managing agents to adhere to the Code when their clients are unwilling to agree.Furthermore, there are many landlords managing their own properties who are not bound by the Code and will not givetheir tenants the benefits which Code compliance brings.

Again Loughborough concludes that it may take up to five years for good practice in line with the Code to become anestablished feature of service charge management.

The Future of The Loughborough Report and Other ResearchProperty Solutions are the sponsors of The Loughborough Report which has established a unique and valuable body ofinformation on service charges, now spanning 12 years. This report provides the only measurement metric of RICS Codecompliance. It is, therefore, important for this annual report to continue and Property Solutions are committed to itssupport through 2010 - 2011.

Further research is ongoing into the financial management of service charges and the auditing and accounting procedures,which should be standard practice, if a quality service to tenants is to become the established norm.

This continuum of research will help to throw more light and clarity on service charges, which for many tenants remainsa badly managed, uncontrollable area of cost, which reduces business efficiency and performance. In particular, it is hopedthat this research will encourage those involved in the sector to improve their property and service managementtechniques.

The Property Solutions web site provides downloads of previous Loughborough Reports and research outputs fromLondon Business School sponsored reports on service charge subjects. Research reports from Kingston University willalso appear here in 2010. The web site address is: www.property-solutions.co.uk

CONCLUSION

FURTHER READINGLoughborough - Original report & updates:http://www.property-solutions.co.uk/research/loughborough-university/

London Business School - Options for Change:http://www.property-solutions.co.uk/research/london-business-school/

London Business School – Fixing UK commercial service charges has the credit crunch helped:http://www.property-solutions.co.uk/research/london-business-school/

Kingston University - Revenue Recognition & other accounting papers:http://www.property-solutions.co.uk/research/kingston-university/

Gibson, V. and Moriarty, M. (2008):Property in the Economy A digest of key statistics, Royal Institution of Chartered Surveyors, London

Occupier Satisfaction Index:http://www.occupier-satisfaction.co.uk/

RICS Service Charge Code of Practice:http://www.servicechargecode.co.uk/

RICS A code of practice for commercial leases in England and Wales (Second edition) 2002:www.rics.or

Office OSCAR:http://www.oscar.joneslanglasalle.co.uk/

2510 The Quadrant, Aztec West, Almondsbury, Bristol BS32 4AQ

Tel: 01454 332211 Fax: 01454 332222 [email protected]

www.property-solutions.co.uk

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