Most modern office buildings and shopping centres will have some central mechanical and electrical plant for the purposes of providing services such as heating, cooling, ventilation and hot water throughout, which requires regular maintenance. The installations associated with these essential services can be complex and extend to building infrastructure such as pipework, ducting, cabling and control systems. Therefore, the operational impact and associated costs relating to repair, or replacement can be significant.
Where a building is let to more than one tenant, it is typically the Landlord that covenants to maintain the building assets under the terms of the leases. A typical lease will permit the Landlord to recover the cost of inspecting, maintaining, repairing, replacing, or renewing items of building plant and machinery via the service charge and require a tenant to make a contribution towards the costs incurred. It is also increasingly common for leases to include provisions relating to building-wide energy management plans, which must be carefully considered by tenants, to ensure they do not inadvertently commit to typically irrecoverable and unreasonable improvements, or enhancements.
There is often confusion, sometimes arising out of poor lease drafting, relating to the extent of landlord assets (as opposed to tenant) and maintenance responsibilities. For example, components of centrally controlled systems, such as the building management system (BMS) or lighting control system, conducting media, power distributions boards, or heating and cooling terminal units, such as fan coil units. To ensure that no critical assets are neglected in error, it is essential for the Landlord to maintain an accurate building asset register. The provisions of the Lease must then be reviewed to understand the parties’ maintenance responsibilities.
The Landlord will usually implement a third-party maintenance contract to maintain landlord assets consisting of resident engineers, who will undertake routine maintenance duties (e.g. system testing, changing filters, etc), attend to breakdowns and carry out repairs. The cost of mechanical and electrical maintenance and repair (excluding major replacement) often represents a significant proportion of service charge expenditure. In accordance with Bellrock’s benchmarking report SCOR for Offices 2022, mechanical and electrical services represented between 18% (offices in London) and 13% (rest of the UK) of an underlying service charge (excluding major works). SCOR for Shopping Centres 2022 confirmed it represented between 6% (London) and 10% (rest of the UK).
Maintenance contracts are typically held on a reactive, comprehensive, or semi-comprehensive basis. Reactive contracts are those where the contractor is paid a fixed cost for planned maintenance and consumables, while unplanned reactive repairs are subject to supplementary charge. Under a comprehensive contract the contractor is paid an additional “risk” premium to absorb the cost of undertaking whatever works are deemed necessary to maintain, or swiftly reinstate service delivery, which can even extend to complete replacement. Under a semi-comprehensive contract the contractor will only absorb the cost of a discrete repair up to an agreed cost threshold, while the balance is subject to a supplementary charge. Whether or not a comprehensive element delivers value for the building will be subject to factors such as ageing building assets and typical remedial costs year-on-year.
The Landlord is responsible for procuring maintenance service contracts. However, given that the services are delivered for the benefit of the occupiers, it is logical that tenants should be consulted in matters such as maintenance access, out of hours support and contractor response times. Contracts are typically procured on a like for like, or alternatively, a labour loading basis. Like for like will generally retain existing engineering resource, although this can often be excessive due to years of poor management oversight. Labour loading is a more focused approach, that seeks to determine the time required to maintain each individual building asset based on industry recognised maintenance specifications. That said, contractor estimates can vary significantly due to applied uplifts and pricing models and so, with a view to establishing best value and validating proposed service delivery, it is essential for property managers to determine the applicable base case for the building.
Maintenance contracts frequently incorporate numerous specialists by way of sub-contractors, which should be carefully considered during the procurement process, as sub-contractor costs are often subject to significant mark-ups. Other mark-ups, such as overheads, profit and yearly uplifts should also be explored during procurement and alternative contractor selection to achieve best value.
Once a contract is established, property managers must ensure that contract terms are available to management staff, fully understood and applied correctly. This is particularly important where contract compliance and cost authorisation is devolved to site management resource, which appears increasingly to be the industry trend. Property managers also frequently implement a self-authorisation procedure, which means that costs are only scrutinised (if at all) when total cost incurred exceed a predetermined contingency budget cost for the year. It is essential to establish an appropriate governance structure whereby contractor quotations are market tested, comprehensive elements are correctly applied and invoice supporting evidence is properly reviewed to ensure that individual repair costs are not aggregated to avoid comprehensive terms.
At the end of a maintenance contract term, it is essential to assess whether the outgoing contractor has properly discharged its maintenance obligations, particularly under comprehensive contract terms. If not, the new contractor may assess the condition of plant, which could have an adverse impact on the annual cost of the comprehensive contract. A failure to properly maintain and repair can also lead to premature wear, or even asset failure, which must be avoided.
Generally, although subject to the terms of the Lease, the Landlord must continue to maintain and repair building plant to a reasonable standard for as long as it remains economical to do so, having regard to technical condition, available support (from manufacturers, or other specialists) and repair options. Where the Landlord considers replacement, or renewal to be necessary, detailed and appropriately qualified technical assessments are essential in conjunction with a correct understanding of applicable lease terms.
It is essential to first determine the extent and degree of disrepair. An inspection of assets and a detailed assessment of site records and technical reports will help to ascertain condition. Available evidence may demonstrate that major replacement, or renewal, arises out of poor maintenance and repair, in which case recovery will be challenged by tenants. Alternatively, there may be components that rectify inherent defects, or improvements, which might also be challenged by the tenants. In any case, once the nature and extent of disrepair is understood, reasonable repair options and the appropriate service charge recovery from tenants can be considered having regard to the collective provisions of the Lease. It is often the case that landlords will not properly consider alternative repair options, given the extended interest in the property (beyond lease expiry). Should the Landlord decide to pursue the preferred replacement scheme, it will be for the parties to negotiate a reasonable contribution having regard to the leases and technical evidence.
Issues that can arise include:
- Replacement of plant or the undertaking of major repairs close to lease expiry when an alternative programme of less costly repairs may be more appropriate.
- Plant and services being replaced for energy improvement purposes but without a cost benefit analysis relative to a tenant’s residual lease term.
- Exceptional expenditure including reactive repairs are authorised by building management staff without sight or knowledge of applicable maintenance contract terms.
- A lack of clarity or definition as to the responsibilities of a landlord or tenant in relation to plant and distribution services.
- Poor quality maintenance resulting in accelerated failure and/or premature replacement.
- Incorrectly applied contract terms and/or poor contract management by property managers or building management resource.
Regular communication and transparency between the parties is key to achieving efficient and cost-effective service delivery.
We hope the contents of this article is helpful to both landlords and tenants. Please do, however, get in touch if you have any enquiries, or require assistance.
