Four tips for managing your service charge before signing your lease
In the first of two articles, chartered surveyor Chris Johnson gives four tips to help practices fix or reduce the cost of service charges
Service charges are one of the most significant premises costs for GP tenants to contend with. They are not fixed and are prone to change, making planning and budgeting very difficult in some cases. Not only this, a large unexpected increase could be financially inconvenient, especially at a time when the strain on GP finances is already so great. Therefore, it is vital that GPs take steps to check their service charges and ensure that charges being levied by their landlord (PropCo or private) are in accordance with their lease.
All GPs must be clear that landlords should not be making a profit from the service charges they receive. The service charges should simply cover their costs. If you believe this not to be the case, you should speak to your surveyor as soon as possible in order to establish the facts before any action is taken.
The following tips should give you a clearer understanding of how service charges work, what’s involved in negotiating them, and how you could reduce your service charge as a result.
This article covers ways GPs can prepare before signing a new lease, or an old lease that has come up for review.
1 Seek professional advice before signing a lease
It is important that you and your surveyor work closely with your solicitor to ensure the terms of your lease protect you as much as possible against large and unnecessary service charge increases. Surveyors see the best results for clients where this is the case. (Note that managing your service charges only forms part of the premises strategy for a GP surgery).
What a tenant pays as a service charge depends entirely on how the lease is construed. It’s therefore imperative that GPs seek professional advice from a specialist healthcare surveyor before signing up to any lease.
Immediate and longer term problems can be avoided through effective drafting of the terms within the lease from the outset.1 As part of this, you must take note of whether your lease is on an FRI (full repairing and insurance) or IRI (internal repairing and insurance) basis. Your service charges should reflect these terms.
Moreover, your lease must clearly state your obligations to the landlord as tenants, include details of how your service charges will be calculated, and provide information about how these costs could increase over time.
2 Agree a cap
Caps are a great way of ensuring that your service charge does not exceed a certain amount and this gives you peace of mind that you will not suddenly receive a huge bill. If you want to negotiate a cap, you (or your surveyor) should ideally begin discussions with your landlord while negotiating the lease terms.
In some situations you will be able to negotiate a cap with your landlord if you agree to sign up to a lease quickly or for a longer period of time. This is because the landlord will benefit from immediate rent payments if you sign up quickly or they will benefit from the security of having a longer term tenant. Your surveyor will be able to advise you as to whether agreeing a cap would be right for you, as a quick rental agreement may mean that you agree a cap at the expense of other elements of the lease which should in fact be negotiated in more detail.
In the experience of surveyors at my firm, you have a much greater chance of being able to negotiate a cap on your service charge if you occupy a larger proportion of the premises than anyone else. You may also be able to agree a fixed, capped service charge across multiple sites if you occupy more than one building owned by the same landlord.
Be aware that caps are often linked to inflation. Therefore, your service charge may still increase slightly but only in line with the inflation rate. Some landlords can be opposed to agreeing caps because this leaves them open to a potential shortfall if inflation goes up or if their future service charge calculations exceed the agreed cap.
3 Don’t pay to enhance the building
Landlords are only allowed to recover the actual charges and costs of operating a building (including replacement where an item is beyond economic repair). They should not try and recoup any costs associated with enhancing or improving the building unless it is proved to be justified expenditure (having been part of a cost/ benefit analysis where other options are taken into consideration).
They should not charge for any costs incurred in construction or equipping a building. This is mainly because any improvements to the building will generally be reflected in the rent at the GPs next rent review.
That said, it stands to reason that if you take good care of the premises there will be less wear and tear. Therefore, the frequency of essential maintenance may be reduced through careful treatment of the premises resulting in reduced service charges.
4 Don’t pay for what you don’t use
If you occupy a mixed use building then you need to ensure that your service charges are calculated according to how each occupant utilises the space. For example, if you’re a GP surgery who shares a building with a pharmacy and a café who both produce a lot of bulky waste, you should pay proportionally less for the provision of bins.
Not only this, if you only occupy the building for 10 hours a day but the pharmacy occupies it for 24 hours a day, your service charge should reflect this too.
Check your floor areas are correct. If the service charge is apportioned on a floor space basis, ask your surveyor to calculate/agree correct areas and have them clearly inserted in the lease under the service charge element. You must also make sure these can be altered if floor space changes.
If you have never had your floor areas checked by a surveyor, make sure you do so as soon as possible.
Chris Johnson is a chartered surveyor and director at GP Surveyors.
1 RICS Code of Practice for Service Charges in Commercial Property, third edition. January 2014. http://tinyurl.com/okmlsg9
Details about the new rent review process can be found here: http://www.gpsurveyors.co.uk/resources/papers/Leased_premises
Premises Cost Directions. 2013. http://pulsetoday.co.uk/premises-directions