Annual Building Service Charges: Your Questions Answered

As a leaseholder, you may have to pay an annual service charge towards the upkeep of your building or development. But what is this charge and what exactly does it cover? Here, we look at the most common questions people have about building service charges.

What is an annual building service charge?

The annual building service charge is the fee you pay to cover the overall management of your building. Typically, this fee is levied by a managing agent – a third-party company responsible for looking after the building or development. It’s important to note the service charge is different to ground rent, which is the financial consideration payable under the terms of the long lease between you (the lessee) and your landlord.

How much is a typical annual service charge?

Service charges can vary dramatically. The average annual service charge is around £1,800 to £2,000, although it can be significantly higher for luxury properties in prime locations.

What exactly does the annual service charge pay for?

The service charge includes all the pro rata costs for the repair and maintenance of the building, including its common areas. In other words, the service charge pays for all the things – big and small – that make your building or development a safe and comfortable place to live. This usually includes:

  • Everyday maintenance and management
  • Repairs to the building or development as required
  • Buildings insurance, and health and safety measures
  • Gardening and maintenance of the grounds
  • Cleaning of communal spaces and windows
  • Wages for any staff employed at the development (for example, a concierge)
  • The managing agent’s professional fees

What are the advantages of the service charge?

If you’ve ever lived in a poorly-run building, you’ll know it can really impact your quality of life, not to mention the value of your property. A well-run building or development – i.e. one that is properly serviced, comfortable and safe – is a far more pleasant place to live, and a better financial investment.

How do I know the money is being used properly?

This is one of the biggest concerns people have about service charges, yet a scrupulous managing agent will always be transparent about how your money is being spent. For example, at Perry Hill, each building or development that we run has its own dedicated bank account for service charges and, every year, we share a detailed breakdown of the account with payees, setting out how the money has been spent.

With 25 years’ experience managing buildings and developments across the South East, Perry Hill understands how to deliver maximum value for development owners and residents. Learn more about our trusted approach to property management.

The Importance of a Break Notice in Commercial Leases

A break notice or break clause is an essential part of any commercial lease, since it allows either the landlord or tenant to terminate the lease early. So far so simple. But making sure the break notice is worth the paper it’s written on? That’s where many commercial leases go wrong.

Why do you need a break clause?

The break clause can be one of the most difficult elements to negotiate in a commercial lease. Yet, there are clear benefits to both tenants and landlords. For the tenant, a break clause gives a certain amount of flexibility to react to market conditions – for example, by downsizing (or perhaps moving to a bigger space) as the business demands. It’s a much-needed safety net for tenants, particularly in unpredictable times like these.

And what about landlords? Surely they want to hang onto tenants for the full term of the lease? For the most part, that’s true. However, sometimes a landlord may want to redevelop or sell the property before the end of the lease. The break clause gives them that opportunity.

The potential pitfalls of a break clause

The idea behind the break clause may be simple, but the reality is often more complex than people expect. The courts deal with a surprising number of disputes over commercial lease break clauses – specifically, exercising a break clause to end a lease early.

In many of these cases, the break clause has been drafted in such an ambiguous way, it makes it difficult to exercise the clause in practice. Or sometimes the procedure for exercising the break clause hasn’t been properly followed, or certain conditions haven’t been met. Whatever the underlying reason, these disputes can be extremely costly.

Therefore, when you’re negotiating a new commercial lease, it pays to give your break clause plenty of attention, and seek specialist advice on whether it really protects your interests. It could save you a great deal of money and legal wrangling further down the line.

At Perry Hill Chartered Surveyors, we work with both tenants and landlords across London and the South East to agree unambiguous break clauses in commercial leases. From leisure and retail premises, to offices, industrial warehouses and mixed-use schemes, our team will ensure your commercial lease works for you. Talk to us about your commercial lease needs.

What is a Photographic Schedule of Condition report? (And how can it benefit landlords and tenants?)

Last month, we explored what happens when a tenant fails to repair or maintain a building, and how a Schedule of Dilapidations can help to document and address maintenance issues.

Yet, there’s another report that can serve to avoid unexpected maintenance issues and disputes altogether: the Schedule of Condition. Let’s look at what a typical Schedule of Condition covers – and see how it benefits both parties in a commercial lease.

A forensic breakdown of the property’s condition

The Schedule of Condition provides a factual record (including detailed photographs) of the condition of a property. Essentially, it supports the lease by acting as a contractual agreement between the landlord and tenant on the condition of the property, and the repair/maintenance duties for the duration of the lease.

The Schedule of Condition is therefore used at the start of a new lease, and is designed to protect both parties against future disputes – particularly at the end of the lease.

If a landlord or tenant attempts to prepare their own Schedule of Condition without taking professional advice, it’s unlikely to be detailed enough to provide any real protection. That’s why the report should always be prepared by a chartered surveyor.

Protecting landlords and tenants

Any commercial lease will have a section covering the tenant’s obligations to repair and maintain the property. Without a detailed Schedule of Condition, the extent of those obligations can be open to interpretation – potentially leading to disagreements further down the line.

Because the Schedule of Condition provides contractual certainty on the state of the property and maintenance requirements, it reduces the risk of unpleasant (and potentially expensive) surprises for either party. What’s more, at the end of the lease, it eliminates the need to spend time and money negotiating any claim for dilapidations.

This peace of mind is priceless for both landlords and tenants. For the landlord, the Schedule of Condition reduces their liability and clarifies their expectations. And for the tenant, they know up front exactly what their maintenance obligations will be.

Get expert help

We at Perry Hill Chartered Surveyors believe the Schedule of Condition is a vital prerequisite when leasing premises, and our team has many years’ experience preparing these reports for both landlords and tenants. Discover how our forensic approach to detail can help protect your interests.

Why would a landlord issue a Schedule of Dilapidations?

It’s typical for a lease to set out certain obligations for the tenant in terms of keeping the property in a good state of repair. When a tenant is in breach of these requirements – perhaps by neglecting maintenance or misusing the property in some way – the landlord may issue a Schedule of Dilapidations.

What does the Schedule of Dilapidations cover?

In simple terms, the Schedule of Dilapidations is a document stating that the tenant has failed or is failing to repair/maintain the building. It will usually set out items of disrepair and what needs to be fixed; however, some Schedules of Dilapidations are more detailed than others, depending on whether they’re issued during the lease (known as an Interim Schedule of Dilapidations) near the end of the lease (Terminal Schedule of Dilapidations) or after the lease has expired (Final Schedule of Dilapidations).

Learn more about our Schedule of Dilapidations services.

A proactive approach to maintenance issues

As a landlord, why would you go to the trouble of issuing a Schedule of Dilapidations? The benefits are clear:

  • Maintenance issues can be flagged and addressed early, instead of letting problems get worse.
    The Schedule of Dilapidations requires the tenant to take action, thereby providing a clear, legal way forward.
  • It reduces the risk of financial loss and helps to protect the value of your investment – remember, the cost of issuing a Schedule of Dilapidations may be a fraction of the cost of repairs or lost rental income further down the line.
  • If the tenant doesn’t fulfil their obligations, you have a paper trail to support a claim for damages.

It’s worth noting that the Schedule of Dilapidations benefits the tenant, too:

  • They have an itemised list of what work is needed, and in the event of a dispute, the Schedule serves as a useful starting point for negotiations.
  • The tenant can get on top of maintenance issues before they become major, expensive problems. No one wants a big, unexpected repair bill at the end of their tenancy!

At Perry Hill Chartered Surveyors, we work with both landlords and tenants to resolve dilapidations claims, and provide support with all aspects of dilapidations – from conducting inspections to issuing the paperwork. Let us help you navigate this potentially difficult process with confidence.

What is the difference between an Interim Schedule of Dilapidations, Terminal Schedule of Dilapidations and Final Schedule of Dilapidations?

If a tenant mistreats a property or fails to maintain it according to the terms of their lease, the landlord can issue a Schedule of Dilapidations. This process provides a much-needed failsafe for landlords, helping to protect their investment and clarify a fair, appropriate way forward. And for tenants, it helps to avoid nasty surprises – like being presented with a huge repair bill at the end of the tenancy.

What are the different types of Schedule of Dilapidations?

There are, in fact, three different Schedules of Dilapidations: Interim Schedule of Dilapidations, Terminal Schedule of Dilapidations and Final Schedule of Dilapidations. Broadly speaking, they all fulfil the same goal of setting out the tenant’s obligations to bring the property back up to scratch. The difference is they’re used at different points in the lease period.

Let’s take a look at the three options and see how they’re used:

Interim Schedule of Dilapidations

This first option is issued during the course of the lease, for example, if a landlord is concerned that proper maintenance isn’t being carried out. The idea behind the Interim Schedule is to remind the tenant of their obligations and clarify what’s expected – thereby helping to nip any neglect in the bud and protect the value of the property, while also protecting the tenant from higher repair costs further down the line.

Terminal Schedule of Dilapidations

The rather more ominous sounding Terminal Schedule is used towards the end of the lease, usually within the last 18 months to three years of the lease. It tends to be more detailed than the Interim Schedule, listing items of disrepair that need to be fixed before the end of the tenancy.

Final Schedule of Dilapidations

The Final Schedule is issued after the lease has expired, in the event that required repairs haven’t been carried out. Just like the Terminal Schedule, this one will generally set out in detail what works are needed, but, as the lease has already expired by this point, the Final Schedule may also include the cost of lost rent while the repairs are being carried out.

Professional Support from Leading Chartered Surveyors

Managing dilapidations while maintaining a good tenant–landlord relationship can be especially tricky, so professional support is a must. Perry Hill’s team of chartered surveyors guides both landlords and tenants through the dilapidations process – from carrying out inspections and estimating costs, to issuing paperwork and giving trusted advice.

Why use a building surveyor at the start and end of your commercial lease?

A building survey is not just for properties being sold. In fact, there are many reasons why you might appoint a surveyor to carry out a building survey or inspection on a rented commercial property.

Assessing the condition of the property

All commercial leases have clauses regarding the condition of the property, and how it should be maintained. This wording is designed to protect both landlords and tenants. But when it comes to enforcing these clauses, or ensuring a commercial property is being properly maintained, professional help is often needed.

This is where a trusted building surveyor is worth their weight in gold. They can carry out building surveys and other inspections, and provide detailed reports (including photos) on the condition of the property and any maintenance issues. With this in mind, having a building survey done at both the start and end of any lease is a good way to reduce risk and ensure peace of mind.

As well as a formal building survey, surveyors can also help with:

Schedule of Dilapidations – when a tenant has failed to properly maintain the property, this report outlines the items of disrepair and specifies the work needed to bring the property up to scratch.
Photographic Schedule of Condition – this document sets out the condition of the property in forensic detail, and covers the repair and maintenance obligations for the length of the lease, as agreed between the landlord and tenant.
Rent reviews – setting out the property’s current rental value, this report can be used to support lease negotiations and ensure the rent is set at the proper market rate.

Benefitting commercial landlords and tenants alike

Many commercial tenants choose to have a survey done before they take on a new lease because it can save them a lot of money in unexpected repairs. And for landlords, surveys and inspections are a vital way to protect their investment.

Ultimately, working with a professional surveyor means both sides can be sure the advice given is accurate and fair – which helps to promote positive communications and deepen trust between the landlord and tenant.

At Perry Hill Chartered Surveyors, we support both landlords and tenants with the full range of surveys, inspections and valuations. Discover how we can help you get the most out of your commercial lease agreement.

Commercial property to let guide

If you’re interested in buying a commercial property, take a look at Perry Hill Chartered Surveyors’ guide and make sure you get the best return on your investment.

Choosing the location of your commercial property 

When buying any property, whether it’s residential or commercial, location is always going to be an important factor to consider. Town centre and prime business district locations are always in high demand but they come at a premium price. However, a lot of smaller businesses now deal remotely with their clients and simply require an out-of-town base for staff to drop in for meetings.

Your property purchase is always going to be an investment, just like when buying a house, it is important to look at the location and any future development area. These will all have an effect on your property’s value whether positive or negative.

Commercial property is a viable investment medium – commercial mortgages 

With attractive financial yields, a commercial property can make for a sound business investment to take advantage of. It’s also worth remembering that when you make an investment, you can deduct the tax from interest payments on commercial mortgages.

Get the right survey – commercial property surveyors 

Don’t just rely on the basic survey that your mortgage-lender insists on. Whether you need a pre-acquisition building report or Homebuyers report, be sure to get the correct commercial property valuation performed by a reliable commercial property surveyor.

Budget for property costs

Budget for all eventualities. As with any property, there will be costs involved, whether that’s long-term upkeep and ongoing maintenance, or unforeseen repairs and emergency fixes.

Don’t forget about parking 

Whatever the business, employees are going to have to arrive at their workplace somehow and at least some of them are going to require parking.

Renting out commercial property 

Letting documents 

When entering into a letting agreement with a client, you’ll need to obtain the correct documents and establish a clear agreement. Failure to do so could make it difficult to remove tenants later if they are in breach. The surest way to manage your property is to use a professional commercial property management company, which can offer knowledge and experience of the local market as well as legal and contractual advice.

Commercial lease 

A lease is a contractual agreement between you and your tenant. With a commercial lease, your tenant gains exclusive possession of the property for a specified period of time. Exclusive possession gives your tenant the right to exclude anyone, including the landlord, from the property for the duration of the lease. The duration of your commercial lease will need to be established before signing. When you do need to extend your lease, our expert valuers will inspect the property and provide you with a formal lease extension valuation.

A licence 

A licence gives permission for someone, i.e. the licensee, to do something on your property. The licensee does maintain access to the property and you can get it back when required.

A tenancy at will 

This is only really used for short-term agreements. A tenancy at will means the tenant can use the property but the arrangement can be interrupted by either the landlord or the tenant at any time.

Repair and maintenance obligations under a commercial lease

Tenants will usually be responsible for the “reasonable” repair and maintenance of a rented commercial property; as the landlord, you will be responsible for structural repairs to the property. Obviously, since these terms are open to interpretation, issues can and do arise, so it is important to define all terms before the tenancy commences.

Repair covers damage to a portion of the property which needs to be fixed. Tenants are responsible for any damage which they cause to your property for the duration of the lease. Maintenance, on the other hand, involves taking steps to avoid deterioration of the building and its systems. Disputes often arise over repairs being required, and whether they are due to poor maintenance on the part of the tenant or through reasonable wear and tear, which would then be the responsibility of the landlord.

Structural repairs are necessary to hold the building together, such as foundations, walls, roofs, and floor structures. Unless expressly identified, you, as the landlord, will generally be responsible for structural repairs.

Make sure your lease is well worded

The surest way to avoid any potential discrepancies is to ensure that your lease is clearly written and outlines the standards to which your property must be maintained. This should include references to industry standards for ventilation and heating systems, that equipment manuals be followed, and that tenants only use qualified technicians for any on-site work. Your lease should also prescribe specific times and frequencies at which maintenance tasks and check-ups should be conducted.

Terminating a commercial lease 

You can hopefully avoid this by conducting regular property checks and enforcing maintenance work before the situation progresses too far. Terminating your lease should be your last resort since in these cases, courts often grant tenants relief from forfeiture, and if you failed to give sufficient notice, you may even be ordered to pay your tenant’s damages.

If you find yourself stepping in to perform your tenant’s obligations and performing maintenance work on their behalf, you cannot be assured of ever recovering your money back.

What to do if your tenants don’t meet their obligations 

Many leases give tenants a period of time in which they must complete any required maintenance work. If the initial deadline is not met, you will need to issue the first notice of default, stipulating a specific time frame in which the work must be completed and that failure to do will result in you potentially terminating the lease, or taking over the tenant’s responsibility.

Commercial property agents – Perry Hill Chartered Surveyors

Whether you’re buying a commercial property to rent out or as an investment for your business, Perry Hill Chartered Surveyors have extensive experience in rental leases and agreements. Give us a call on 01483 237333 or contact us here.

Commercial Real Estate Basics

During this article we explore the benefits of investing in commercial property and run through a basic check list that every buyer should follow.

As a result of the raised stamp duty rates and the less favourable tax relief available on mortgage repayments, the housing market saw a record low of the amount of houses for sale. Investors are now considering investing in commercial property for the first time rather than residential property.

Commercial properties include:

  • retail buildings
  • office buildings
  • warehouses
  • industrial buildings
  • ground rent investments
  • a mix of the above

There are many myths about buying commercial property such as it is too expensive for the average buyer, it is too risky and you need to be an expert to buy commercial industry property. Perry Hill Surveyors can help you through this. In some cases, these may be deceptive. There are many advantages to buying commercial property – we explore the pros and opportunities associated with commercial real estate investment below.

Why buy commercial real estate, what are the opportunities and what return will I get?

Property is always generally an attractive investment opportunity though commercial properties typically offer more of a financial reward than residential properties. You can usually invest directly by buying a fund which holds actual physical property in its portfolio or by buying a property yourself. Or, you can invest indirectly by investing in property companies, developers and house builders, or in funds invested in those companies. There are many advantages to investing in commercial property over residential property which we outline below.

Income: The best reason to invest in commercial over residential rentals is the earning potential. Commercial properties generally have an annual return off the purchase price between 6% and 12%, depending on the area, which is a much higher range than typically exists for single family home properties (1% to 4%).

Professional tenants: Business owners will have more of a professional relationship with you as a tenant in comparison to a residential tenant. There will generally be more of a business-to-business customer relationship which will ensure the interactions are of good manner and conversions will be more efficient. Communication like this removes many possible problems that could come with an unprofessional residential tenant.

Building Repairs & Maintenance: Commercial tenants will be more inclined to keep the property well cared for and of good quality as it is a representation of their business. This helps you maintain and improve the quality of the property without needing to cover costs of damages from carelessness.

No late night calls: As these properties will likely be empty at night there is minimal chance of receiving a panic call in the middle of the night about a lost key. You only need to work when the business owners and employees are at work which is usually during normal day time business hours. Should a break in or a fire alarm happen in the middle of the night, you would usually have an alarm monitoring service that notifies the proper authorities as well.

Limited expenses: The lessee takes care of property expenses directly as well as real estate taxes, such as business rates, service connections such as gas, water, electric and drainage, repairs, and tenants improvements.

Income stream: It is common that a commercial property is purchased with the occupational tenant and lease already in place so there is no delay before receiving income. Rent is usually paid months in advance as well so income stream and cash flow is positively impacted.

Buying commercial real estate checklist

Buying commercial property for the first time can be a daunting time. Understanding the basic knowledge and having a check list in place will give you some peace of mind. See our checklist on buying commercial real estate:

  1. Explore the commercial property market and come up with a realistic budget.
  2. Location is key and you may want to look right in the city centre or just outside the inner city. Find a location that will attract the tenants you are looking for.
  3. Check local laws such as noise restrictions in the area you are looking at, make sure you are fully aware of all the restrictions you will need to adhere to in the area.
  4. Thoroughly check the condition of the building as you could be faced with high repair and maintenance costs if you have not carried out the proper checks.
  5. Make sure this is what tenants are looking for rather than just what you are looking for.
  6. Bring in a commercial real estate agent that will be able to help you make a more informed decision. See our services and how we can help you.

Perry Hill Commercial Property Services

Our team has overseen more than £200 million worth of sales and purchases since 2003. We successfully handle commercial property sales and lettings for all property types including office, retail, industrial, warehousing, leisure, mixed use and development land.

Our clients include private wealth, trusts, estates, business occupiers, receivers, lenders, investors and developers. We pride ourselves on our ability to close transactions at full market value, quickly.

Our property management services cover an array of disciplines, supported by our extensive knowledge and experience of the local property market. Here at Perry Hill, we ensure our property management services are thoroughly planned in order to effectively build strong Landlord and Tenant relationships.

Find out more about our services and how we can help you.

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