Simplifying service charges

There are simple solutions that residential agents could adopt that would not only demystify service charge accounts, but also demonstrate that the agent is working efficiently and make handovers easier.

One suggestion is that agents should adopt the accounting principles contained within the RICS code for commercial service charges.

The key points which would be particularly useful are the standard set of accounts and lines of expenditure, the issuing of budgets no later than one month prior to the new lease accounting year and certification of accounts within four months of year end. The core principle of the code is to provide occupiers (leaseholders) with confidence in the integrity and diligence of the agent.

The commercial sector goes a step further by benchmarking costs across types of property, retail and office as well as regions of the country, in an SCOR or Service Charge Operating report. What this report measures is the cost of providing services for the type and location of building to the square foot. In effect, this allows occupants to better understand whether they are obtaining value for money from their agent.

The general practice in residential is that each building has its own heads of expenditure which are unlikely to match any other buildings, unless by extreme chance. Moreover, at the point the building decides to change agent, the incoming agent needs to understand the incumbent’s cost headings and even make changes to these in order to simplify or adopt to their method of accounting. In effect this creates problems of transparency for the leaseholder and added costs to the agent, which will ultimately be recovered through the service charges.

The added benefit of adopting an industry wide standard method of accounting and benchmarking is that it allows good managing agents to demonstrate how they have used their expertise to procure and provide services efficiently. This would show that sometimes it is more cost effective for RMCs to pay higher management fees to obtain more efficient service delivery that provides value for money and may in fact reduce the bottom line cost.

Further transparency can be provided by having standard costs and for agents to benchmark their costs internally or against regional data. This would allow agents to identify where costs are above the market norm and address these. There may be a practical reason why the cleaning or repair costs are higher for a particular building as each one is unique or it may identify that a service could be procured more efficiently.

The upshot of this brief outline is that by working to a standard set of accounts and practices, the residential sector can become more professional, transparent and efficient thus making life easier for their leaseholders.