Our expert Russell Heath BSc (Hons) MRICS explains how service charge costs should be apportioned between occupiers.
What is apportionment?
Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted commercial premises. This method must be compliant with the terms of the lease. The exact method for apportioning costs is not always specified, but it is often covered by a catch-all “fair and reasonable proportion” provision.
What does the Royal Institution of Chartered Surveyors (RICS) have to say on the subject?
The RICS sets out, in the Professional Standard, “Service charges in commercial property – 1st Edition”, that costs should be apportioned according to the overriding principle:
“The basis and method of apportionment should be demonstrably fair and reasonable to ensure that individual occupiers bear an appropriate proportion of the total service charge expenditure that clearly reflects the availability, benefit and use of services.”
Russell Heath BSc (Hons) MRICS
Russell Heath is a Chartered Surveyor, who for the last 20 years, has specialised in commercial service charge management.
Russell is an acknowledged expert in the service charge field, with long-standing clients in the retail sector. He provides occupiers with comprehensive service charge management advice, focused on commercial return. Russell has been actively involved in the RICS professional statement – service charges in commercial property and is a regular speaker for the RICS CPD seminars.
In April 2019 the RICS Professional Standard – Service charges in commercial property came into effect for service charge years commencing on or after this date. The core principles relating to apportionment remain as in the previous RICS Codes, but there is a new mandatory requirement:
“Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants.”
The Professional Standard reiterates that the apportionment matrix should be clear and transparent. An individual occupier should be able to easily verify the basis and method of calculation used in arriving at their share of the service charge costs. It also makes it clear that costs that should be borne by the landlord, such as, void premises are not to be recovered from the remaining tenants.
Methods of apportionment.
It is common for service charges to be apportioned by reference to the lettable area as a percentage of the total lettable area of the building as a whole. However, it is not unusual for some shopping centre developments, for example, to use a “weighted-floor area” approach that ‘weights’ the floor area. In this way a tenant renting twice the floor space may not pay double the service charge. There is no “one size fits all approach” to weighting, although the RICS Professional Standard provides an example of a weighted apportionment schedule in Appendix CE, page 109.
Some leases provide for other methods to be used, for example, rateable value, although there are known issues associated with such an approach, so this is becoming increasingly rare. The exact method is largely dictated by the lease and, whichever approach is used, the agent should clearly state the method and provide a full apportionment matrix, in accordance with the RICS Professional Standard.
Allocation of costs across schedules.
In some cases, particularly in larger buildings or shopping centres, tenants may not equally benefit from the services provided. To reflect this, the service charge may be divided into separate “schedules”, with each schedule being apportioned between the tenants benefitting from the services within that schedule. Tenants might pay a different percentage for each schedule, or possibly not contribute to a given schedule at all. For example, a ground floor tenant that does not benefit from the use of the lifts may not contribute to the associated costs of maintenance, repair and replacement unless a lease expressly provides for that. The method of allocating the service charge costs between schedules should be carefully considered to ensure that it is fair and reasonable – this is very important as, if ill-thought-out, it can ultimately result in a proportion that may be unfair or inappropriate.
Apportionment of an estate service charge.
In the case of an estate including several buildings, the same principles apply as in a single building. The costs of delivering services to the estate, as opposed to the building, are allocated to a separate schedule (or more than one, if necessary) and can then be apportioned between tenants in an appropriate, lease compliant, manner.
Major expenditure close to lease expiry.
This can be a complex issue with apportionment implications. Landlords must make asset driven decisions in accordance with good estate management, yet when multiple leases are held over different terms, this can result in expenditure for long term solutions when shorter term options may be available.
Often a contentious area, one approach may involve an adjusted apportionment reflecting the actual benefit received during the residual term. There are counters to this which in turn link to the perennial question of fund collection.
Bellrock is the UK’s largest commercial service charge consultancy, specialising in the Office, Retail and Leisure sectors. Whether you are a tenant, landlord or managing agent, Bellrock can help ensure that your service charges are managed in the best way possible.
