BDO’s Propcast Offices 2022 report on service charge levels between 2019 and 2022, has revealed some interesting facts.
The GOOD NEWS: As the number of employees visiting offices has reduced, the service charge budget underspends peaked, particularly in 2021, with 44% more properties coming in under budget than their historical benchmark. Thus, many relieved office tenants will have received year-end credits once the service charge certificates were issued. Gas and electricity costs did increase but, despite the rise in the living wage, soft services costs, such as cleaning, remained steady in 2022. This is because the need for services is reduced due to lower occupancies under hybrid working. Overall, service charge costs have fallen 2.7% on average between 2020 and 2022.
The BAD NEWS: Going forward, now the reductions in soft services have bedded in, tenants will bear the ongoing rising costs from wages and materials that will impact budgets for 2023.
- Soft services alone with their high labour costs, represent 34% of average service charge costs.
- Welcome falls in gas and electricity prices will take time to filter through.
- We’ve seen an overall service charge budget rise of 36% in one building for 2023!
Impact of Energy Performance Certificates (EPC)
The Minimum Energy Efficiency Standards (MEES) are also having a significant impact on the ability of landlords to let their properties. Propcast’s stats show a clear correlation between offices with lower EPC ratings E-G and higher gas costs in past years. Occupiers are opting for Grade A-rated space (with the highest EPC ratings), pushing up rents. A recent Savills update showed 68% of office space transacted in Greater London and the South East in 2022 was Grade A.
Currently, landlords must comply with MEES.
- From 1 April 2023, it’s now unlawful for a landlord to continue to let a non-domestic property with an EPC rating less than E.
- From 1 April 2025, its proposed landlords must present a valid EPC for all rented non-domestic property within MEES scope.
- From 1 April 2027, it’s proposed the minimum rating will rise to C and then B by 2030.
Therefore, landlords of sub-standard properties are under pressure to improve their EPC ratings in time, and they may look to their tenants to bear or share any capital costs, e.g., replacement windows or new efficient heating systems. Whether you as a tenant should pay towards these capital costs are down to the following:
- Your specific lease terms.
- RICS Professional Statement on Service Charges in Commercial Property.
- Case Law.
- Communication and negotiation between you and your landlord (or their managing agent).
For example, an old boiler may be repairable and the costs recoverable under the lease, but where the landlord proposes to replace it with a new efficient alternative technology heating system and charge the tenants, should you pay for the new system?
Where to look for reductions in occupancy costs
There is more GOOD NEWS. By engaging a service charge and property costs specialist, savings are often found for office tenants reducing their overall occupancy costs burden that can hit their profits. ERA’s Property Cost specialists can uncover savings in most landlord cost areas including:
- Non-compliance with service charges and other lease terms.
- Poor accounting.
- Services not providing value for money.
- Planned maintenance programme (PMP) and capital cost reviews.
- High insurance costs.
- Utility recharge errors.
- Unfair service charge allocations.
- Excessive dilapidations claims.
Our initial benchmark analysis can highlight potential areas to explore, but don’t delay! A recent supreme court ruling, whilst acknowledging a tenant has a right to dispute their liability to a service charge cost, held that once a certified demand (at year-end) has been issued, the tenant must pay it first, then argue the quantum. In this case, the certified demand was for £400,000 leaving a big hole in the tenant’s cash flow.