As UK commercial property service charges continue to rise at levels outstripping inflation, it is now more important than ever for occupiers to check and verify the accuracy of their demands, to ensure value for money and avoid over-payments and charges.
Commercial property service charges are often complex and represent a balancing act for landlords wishing to protect the value of their assets, whilst also maintaining good relations with their tenants.
Owing to the macro and micro economic climate impacting service charges, we are seeing a trend of continuing and significant cost increases, for a variety of reasons that are further discussed below.
Firstly, inflation will and is having an impact, albeit service charges are found to have typically increased at double the rate of inflation over the last five years.
Major project works are often the main cause for significant service charge increases. With interest rates in the UK not falling as quickly as expected, several investment and development deals remain paused, and there is a general trend that landlords are seeking to invest in, and maintain, their current assets at this time. In addition, it was not possible to carry out these major project works for a period during Covid-19, and many of these large-scale repair and maintenance schemes are now finally being progressed to site.
Construction cost inflation also continue to rise, peaking at around 10% and are now sitting at between 2-3%, meaning many of the large-scale repair and maintenance schemes postponed during Covid-19 are now costing significantly more than they would have previously.
Other trends and pressures on costs that we are seeing relate to the growing importance of ESG initiatives, particularly with institutional fund landlords. It is now common for UK Living Wage mandates to be adopted, which has resulted in security and cleaning costs increasing at around 9-10% on average, over recent years.
Similarly, building insurance premiums are at a record high and this impacts and increases the service charge. In some instances, leaseholders are also faced with significant increases owing to building safety compliance works that have been identified and deemed necessary under The Building Safety Act 2022.
Finally, we have the UK energy crisis, with utility costs having fluctuated wildly in recent years, in particular, electricity prices in the UK, which peaked and reached a record high in August 2022. There was another noticeable spike in December 2022, since then prices have stabilised. Many service charge Budgets for 2023 were based on these record highs, perhaps reasonably so. However, subsequent service charge Budgets for 2024 and going into 2025 should reflect the stabilising of electricity costs and in many cases, this is not being seen in practice and should be queried and challenged.
Service charges case law also continues to evolve, encompassing many of the hot topics that are currently prevalent across the UK real estate industry. At the end of 2024, the case of Avon Ground Rents v Pilgrim was heard in the Upper Tribunal. This related to a block of residential flats in Luton, where the landlord installed solar panels to the roof during construction, as part of the planning permission requirements. No electricity for the common parts was charged to the tenants initially, but this changed after 3 years. The tenants contended this was unreasonable and the judgment found in favour of the tenants, on the basis the landlord’s actions were indeed unreasonable. Caution is however advised, as this was a particularly fact-specific case and in slightly different circumstances, may have resulted in an alternative decision.
That said, with solar panel installs becoming increasingly popular across various asset classes, this will hopefully lead to reduced utility charges in the future for landlords and tenants alike, perhaps helping to buck the trend of service charge cost increases that we have seen in recent years.
If you have concerns about the accuracy of your UK commercial property service charges, please do get in touch to explore how we can assist you. Our expert team of building surveyors will be pleased to conduct a forensic review and detailed challenge on your behalf, to provide peace of mind, and often with significant savings identified.
Please contact us at contact-us/if you require assistance in this area.