The Missing Millions: Uncertified service charges

The Missing Millions: Uncertified Service Charges

First the problem…

Our research team, led by Lee Mason & Karen Reynolds, examined the timeliness of service charge reconciliations across over 4000 schemes, from small high street developments to large scale offices & shopping centres.  The findings were disturbing, with uncertified service charge expenditure going back as far as 2013 and amounting to an aggregate sum in excess of £1 billion, with £583 million relating to 2020 and 2021 when actual expenditure was well below budget levels due to the impact of Covid.

Based on historic research and evidence, we know that delayed reconciliations are often below budget.  Pre-covid, the average rate was 1-2% below budget.  However, throughout Covid (2020 & 2021) that difference increased, with actual spend coming in approximately 12% under budget (note: this figure was subject to significant variation and is based on the evidence to date).  Taking some basic maths, of the £1 billion that has yet to be certified (and is more than 12 months past its year-end date), we can forecast that Tenants are due refunds of £76 million.  Here we stress that this figure is limited to the research sample and is solely related to significantly delayed reconciliations.

How it should be done…

The RICS Professional Statement – ‘Service Charges in Commercial Property’ has a key stated aim & objective to “ensure timely issue of budgets and year end certificates”. 

It also includes a Mandatory requirement for RICS members, that “Owners and managers must ensure that an approved set of service charge accounts showing a true and accurate record of the actual expenditure are provided annually” before indicating that that best practice is to issue within four months of the service charge year end. 

Many RICS members are failing to satisfy either best practice or (more concerningly) the mandatory requirements.  As a result (and especially over the Covid period) Tenants have suffered from delays, impacting on cashflow and potentially losing out on refunds altogether.

Why is this important?

Fundamentally, Landlords are holding on to Tenants money for too long with key concerns being:

  1. Even if the refunds do feed through, the lengthy delays impact on cashflow at a tremendously difficult time
  2. Landlords are going bust with uncertified service charge years and new owners finding it difficult (and sometimes impossible) to reconcile
  3. During the delays, Tenants are exiting (on final and binding settlements) or going bust themselves, so not getting the benefit of the refund
  4. Service charge years have been ‘skipped’, for example, 2019 and 2021 are certified but not 2020, a year when refunds should have been high
  5. During delays, the Landlords consider retaining funds for major works (and possibly plug other funding holes) and do not refund what is due to the Tenants

How do we resolve

To ensure that a Tenant gets the full benefit of substantial backdated refunds, it is critical to track receipt of certified accounts (and payments made) with accurate records before identifying problem schemes and initiating an escalation process to secure and maximise the refunds.  For example, it may become necessary to make a complaint to RICS regulated firms before moving on to the RICS directly or instruct legal advisors to pursue a claim for losses incurred (can be difficult to quantify).  Others take a different stance and withhold service charge until the accounts are reconciled.  This brings risks but it’s a commercial approach to encourage an early resolution. In these turbulent times, it can be challenging but the sums involved make it a necessary intervention.

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