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Watts Bulletin (Issue 133)

Welcome to the March edition of the Watts Bulletin. As this issue went to press, George Osborne had just announced his fiscal plans for 2012 and beyond. Flagged as a Budget designed to “back business”, there was little of substance to put a spring in the step of the construction industry. The Chancellor failed to announce the National Planning Policy Framework - which was finally released this week - and did not set out any plans to replace the Private Finance Initiative (PFI), although he does plan to simplify the Carbon Reduction Commitment (CRC) to make it less cumbersome and bureaucratic.

There were some positive measures including a further £150 million for new build housing; enhanced capital allowances available in certain areas; funding for much needed infrastructure in Manchester; and £150 million in Tax Increment Financing for local authorities. These initiatives have been given a cautious welcome by the industry, while the reductions in corporation tax will be of benefit to beleaguered construction firms.

It remains to be seen whether the measures announced on 21 March will go very far towards promoting the growth that is so badly needed, but as one well-known supermarket chain says – every little helps.

Watts Bulletin (Issue 133)

Is your service charge strategy really working?

In the current climate, rather than relying on new acquisitions to generate income, property investors and landlords are increasingly seeking ways to optimise performance and gain maximum benefit from their existing portfolio. One of the ways this can be achieved is by developing an effective service charge strategy which ensures that maintenance is carried out as cost effectively as possible.

March Bulletin_Main2012

Commercial leases for multi-tenanted offices typically contain a landlord’s covenant to keep the structure and common parts in good repair. The cost of this is normally included in the annual service charge, provided the lease permits it. Each tenant has an obligation to pay a proportion of the service charge on demand and the amount which each tenant must pay is set out in the terms of the lease.

By identifying early opportunities to implement repair and maintenance works, the cost of these works may be recoverable under the service charge provisions of the lease. Landlords can minimise their exposure to costs and expense by maximising recovery from tenants while at the same time keeping their building’s systems and finishes up-to-date.

In order to achieve this, landlords should:

  • Carry out a thorough review of leases and tenancy schedules to identify relevant clauses
  • Draw up a schedule of relevant types of covenant, lease terms and timing for each property; and
  • Carry out summary inspections of each property and review of the landlord’s planned maintenance programme (PMP) to identify areas requiring amendment.

When re-letting – and where the lease allows - landlords can ensure that some upgrade and refurbishment  to common areas has already been completed. Of course lease terms differ and in some cases tenants will be restricted to repair only, Both landlords and tenants should familiarise themselves with the terms of leases. For landlords this ensures they can develop an appropriate estates strategy. Failure to grasp the importance of an effective approach to service charges aimed at optimising performance can result in property-related costs that could be avoided. Aspects of which landlords should be aware include:

  • Failing to do cyclical works while tenants are in occupation and having to fund works themselves;
  • Failing to time works in a manner that takes into account service charge caps and discounts;
  • Undertaking improvement works which tenants dispute due to limited scope of landlord’s covenant to maintain; and
  • Failing to time works in a manner that recognises expiration of a lease term and vacation by a tenant.

Tenants should also be aware of their rights and obligations under the lease in order to ensure they are not being expected to pay for anything that is not their responsibility and can gain maximum benefit from their leasehold property.

For more information or advice on developing an effective service charge strategy, contact Simon Gorst, associate at Watts Group PLC, on 020 7398 8421.

Do you agree that fine tuning your service charge strategy can maximise your assets? Let us know your thoughts on Watts’ Twitter page @Watts_int or join the Watts Bulletin group on LinkedIn.

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The Watts Bulletin is the technical companion to the Watts Pocket Handbook, the essential guide to property and construction, as used by professionals since 1983.

Watts Bulletin editor: Trevor Rushton.

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