Tenants Say: Checking!
Commercial space tenants now have between a couple of weeks and a few months to check whether their service charges for 2018 were correctly calculated.
As a rule, service charges are paid by tenants monthly as advance payments and settled when a calendar year has ended. Tenants should have received service charge statements for 2018 by now. Property managers usually deliver such statements by the end of the first quarter following the accounting year. Now is the time (between two weeks and three months, depending on lease provisions) in which tenants may communicate that they want to check the costs of a landlord’s services for which they pay service charges. After that time, property managers may deny them access to invoices, bills or subcontractor agreements.
You get what you’ve agreed to
The tenant’s liabilities under an office lease agreement include rent, service charges and reinvoiced utility charges. “When it comes to signing a contract, tenants usually focus on the first item and somewhat pay less attention to service charges – they are generally happy to know the amount of advance payments,” says Artur Sutor, Partner and Head of Office Department at Cresa Poland. “Service charges are, however, a heavy financial burden for tenants, averaging 20-25% of the base rent. What’s more, imprecise or unclear lease provisions may open doors to malpractice and such interpretation of vague provisions that will put the tenant at a disadvantage. That’s why in order to avoid the risk of running into high costs in the future, it’s best to make sure before you sign a contract that it clearly sets out what you as a tenant pay for and how costs will be charged.”
Precise provisions will protect tenants
How to protect yourself and what to take care of during lease negotiations? “First and foremost, the lease must state the exact percentage of the tenant’s leased premises in relation to a building’s total area. This information should be clearly set forth in a lease agreement and the landlord should present an easy to understand algorithm used to calculate the tenant’s share of the building’s area and add-on factor. Otherwise, the tenant runs the risk of paying more for his space than necessary and will pay for instance for the maintenance of technical premises,” says Łukasz Dreger, Senior Associate, Office Department, Cresa Poland. “The lease agreement should also specify a closed list of items classified as shared costs and settled as service charges. Tenants should also make sure that they pay for their building’s maintenance and running costs only, excluding capital expenses.”
According to advisors of Cresa Poland, service charges can be broken down into nine basic categories: property tax, perpetual usufruct, insurance, property management, technical services, cleaning of common areas, security and reception desk, and other services. As utilities make up as much as 37% of service charges, says Łukasz Dreger, the fairest way would be for the tenant to have separate electricity, water and heating meters mounted and to have utility costs reinvoiced monthly. Next year, in service charge statements for 2019, these items are likely to account for more than 40% of all additional costs, the highest proportion on record, due to the freeing up of the electricity market and the contracting of electricity supplies at stock exchange quotations.
After the first quarter
If a lease agreement contains all the required provisions brokered by experienced advisors, tenants will find it a lot easier now. “It is critical that a service charge statement is delivered in a clear and transparent form, preferably in at least two tables: one with shared costs for the entire building and the other with costs broken down according to the tenant’s share of the building area,” says Łukasz Dreger. “Unfortunately, procedures vary and tenants very often find service charge statements and calculation algorithms unclear.”
If a tenant decides to check such a statement, he will usually have between two weeks and three months in which to do it – depending on a lease agreement. To review the costs, the tenant will need to see all source invoices from utility suppliers and subcontractors, service agreements, a property tax return, a statement on the municipal waste disposal fee, and the most recent perpetual usufruct fee notice (if the land is not a freehold).
“Calculation of service charges is a very complex matter. A tenant who suspects that it hasn’t been done in line with the best practice should notify the property manager that he wants to check its accuracy. Although this can be done on one’s own, it could be quite a challenge without a proper experience in this business. Besides, solving disputes between suppliers and tenants may sometimes be problematic; and it’s worth remembering that parties to a lease agreement need to collaborate on a variety of levels for many years. That’s why it is a good idea to consider hiring real estate specialists to conduct a comprehensive audit of service charges. They have the relevant expertise and experience, and can replace the tenant in discussions with the landlord or property manager, which is particularly recommended in more complex matters,” concludes Łukasz Dreger.