Recovering utilities costs from commercial tenants: are service charges a simple accounting exercise or complete minefield, asks TEBS director Martin Jaehme in this sponsored post.
As energy consultants we often manage utilities for large commercial properties working with clients who are either landlords or managing agents. Our task is to prepare utilities recharge statements, which on the face of it should be a simple apportionment of costs to each tenant, but invariably never is!
Naturally we adhere as closely as possible to the RICS code of practice – service charges in commercial properties and we model our recharge statements on the ICAEW service charge accounting sample report included in the RICS COP Appendix C, but these only provide guidelines. In practice, working with the managing agent or landlord, we have to decide what costs to include and how to apportion these among tenants.
The first step is to see what level of sub metering has been installed to measure tenant’s direct use of electricity. So we request to see the meter tree (a diagram showing where meters are positioned in the electrical infrastructure). What’s a meter tree? is the usual response! So we then carry out a comprehensive meter audit to determine which meters serve tenanted areas and landlord services. Clarifying this is absolutely essential if tenants are to have confidence in our recharge calculations.
Next comes all the detailed questions such as can we recover VAT and CCL, CRC costs, energy procurement costs and despite RICS expressing a preference for preparing service charges based on accruals, most tenants only want to pay for what has been used – i.e. we adopt a cash accounting approach.
RICS sets clear principles for recharging: tenants should only pay for the services they use. This brings into question whether tenants who only occupy ground floor areas should pay for lift electricity and maintenance – back to the meter tree – are lifts separately submetered? What about working hours?
One company in the building works extended hours and requires all building services to operate for 80 hours/week, so why should another tenants who works just 50 hours/week pay the same? OK back to the tenant leases to determine what the operating hours are. Sometimes building leases state occupancy as being 24/7 (much preferred by media companies), so tough if your company doesn’t work the same extended hours.
Obtaining satisfactory answers to all these questions is very worthwhile as clear and transparent recharges can then be prepared. This approach is much appreciated by tenants, removing potential concerns about paying too much or paying for services they do not use. Removing such negatives from discussions with the landlord or managing agent opens the door to positive discussions on how all parties can work together to green their operations to drive down energy use.
I was recently invited to present at a tenant’s meeting arranged by one of our managing agent clients who operates a campus office park of 10 modern office buildings.
Naturally, I was expecting some searching questions about utilities recharges and so I was very pleasantly surprised when the meeting, comprising of property directors and facilities managers was extremely positive where questions focused on joint opportunities to improve energy efficiency, sharing experiences with everyone present. To my mind this is the real benefit from an open dialogue with tenants – trust and co-operation.
If you have been affected by issues similar to the above and would like to discuss this with someone, we at TEBS are happy to talk through our ideas without any obligation.