Know what you’re paying for
Following recent utility price and minimum wage hikes, office tenants are taking a closer look at service charge statements. This should come as no surprise as service charges average up to 35% of all lease liabilities in some office buildings. That’s why before starting lease renegotiations office tenants increasingly opt for an audit of service charges as a starting point for any further discussions with landlords.
Do I know what I’m paying for?
An office tenant’s key lease liabilities include rent, reinvoiced utility and service charges such as costs of property management, technical maintenance, security, a reception desk’s fit-out and services, cleaning, maintenance of green areas, insurance premiums, taxes and local rates.
The amount of service charges varies by the age, quality and location of an office building (taxes). For instance, service charges stand at PLN 20–29 per sqm in the centre of the Polish capital and at PLN 19–23 per sqm in Warsaw’s Industrial Służewiec district.
Can I pay less?
“Office tenants used to pay less attention to service charges – they would just pay their bills. However, following a series of hikes – primarily utility price and minimum wage increases – having an office has become a major financial burden for companies. They ask: can such charges be lower? An audit will often show that they actually can,” says Artur Sutor, Partner, Head of Office Department, Cresa Poland.
In case of any doubts about an annual service charge statement usually delivered by the property manager by the end of the first quarter of the following year, the tenant may – on his own or with an experienced advisor – review the statement and request access to invoices, bills and subcontractor agreements. In more complex cases, it is advisable to engage a real estate advisory firm to carry out a professional audit of service charges.
Have strong arguments to kick off renegotiations
Renegotiations of a lease renewal are also an ideal opportunity to conduct an audit. “First of all, we check whether the costs included in the annual statement are on the list of items agreed in the lease. The general rule is that the tenant bears the office building’s maintenance costs – capital expenses are excluded. In practice, this means that the tenant should neither pay for any repairs of the building’s structure or elevation nor bear any costs of the transformation of the perpetual usufruct right to the plot on which the building sits into the ownership title,” explains Łukasz Dreger, Senior Associate, Office Department, Cresa Poland. “As specialists with a strong track record, we have the expertise necessary to establish whether service charge rates are market standard and whether calculations are clear and transparent.”
Where to look for savings?
If an audit reveals that the amounts of some charges differ considerably from market rates – for example if cleaning or security charges appear too high – the tenant or the tenant’s advisors could ask the landlord during lease renegotiations to come up with a renegotiated offer or change service providers. This is particularly important with tenants occupying larger spaces. “It’s hard to say in advance where to expect inflated costs. That’s why we need to take a close look at each item of the service charge statement. Tenants may overlook some items, but a seasoned auditor won’t,” says Artur Sutor.
A report on the service charge audit is an excellent starting point for further discussions with the property owner. How to make use of it? What to do to avoid unpleasant surprises in future?
“First and foremost, remember that service charges are not a bottomless pit. That’s why when we negotiate or renegotiate a lease on behalf of our client, we always do our best to have a closed list of items classified as shared costs. Our experience shows that keeping an open list may lead to many abuses. The next step will be to ensure we have control over a balanced growth in service charges, for example, by setting a cap on rises in items over which the property owner has control,” explains Łukasz Dreger.
“When you sign an annex or a new lease, you should make sure it includes provisions that will protect your interests as a tenant. Everyone should be aware that it’s not only the landlord who makes the decision on the list of shared costs or method of their calculation. Quite on the contrary, it is nearly always negotiable, especially in the case of a company leasing a substantial volume of space in a building,” concludes Artur Sutor.