What’s Hiding in Your Service Charge? A Closer Look at Management Costs and Fees

If you pay service charge at a property then you are likely to know that it includes a management fee, and you feel this is reasonable, right?  A managing agent, or a Landlord if they directly manage, should be entitled to receive a fee to cover the resources they utilise to manage the service charge.  However, what does managing the service charge actually entail, and are you fully aware of all of the fees you are paying?

The RICS Professional Statement, ‘Service Charges in Commercial Property’ (the Code), provides extensive best practice requirements regarding fees and other charges that Landlords and managing agents include in the service charge.  Whilst this guidance cannot override lease terms, leases often only include generalised comments regarding fees, and it does represent commonly accepted best practice within the industry.  Some elements of the guidance are mandatory for RICS regulated firms.

Key elements from the Code are summarised below:

• Management fees should be on a fixed price basis with no markups.
• The total cost of management includes the management fee and costs associated with both site based and off-site staff who manage and oversee the services.
• Fees in all cases should only include reasonable costs and overheads plus a profit element.  They should only relate to the service charge and not other services provided to the Landlord, such as rent collection and asset management.
• Fees for specialist reports, e.g. health and safety, should be excluded from the management fee, clearly identified in budgets and reconciliations and represent value for money.
• The recoverable costs of site based and off-site staff will include, salaries, National Insurance, tax, office accommodation and support services such as HR and administration.

The Code strongly emphasises value for money, consultation and transparency, which is often lacking in both budgets and reconciliations.  Many managing agents are reluctant to share details of their management contracts and staffing arrangements, citing confidentiality as the reason.

An expenditure area that has seen growth over recent years is the inclusion of facilities management costs.  This is more understandable in a smaller building where there may be no site-based staff.  However, such costs are often included in buildings where there is also a site-based Building Manager, so are they necessary?

The Code clearly states that offsite staff should be clearly identified in budgets and reconciliations.  Furthermore, if they are responsible for several buildings, then the basis for apportionment should be clearly demonstrated (e.g. 10% of cost allocated as oversee ten properties).  This is seldom shown in budgets and details of what a facilities manager actually does are usually vague at best.

The Code also makes it clear that services provided by offsite staff, and by implication site-based staff, that are in place of rather than in support of the property manager, should be included in the management fee.  In practice this would be difficult to identify but might be more relevant in an unstaffed building where a visiting facilities manager gets involved in the supervision of services.

The Code also states that 100% of staff costs should not be recovered if they are involved in providing tenant services or other services to the Landlord, such as asset management.  Whilst this may be relatively uncommon, Assure are aware of instances where this may apply, for example one London office building where all tenants are required to use the Landlords cleaning contractor for security reasons.

Another growth area where fees are concerned are the add-on services that many managing agents now provide.  Traditionally, services such as health and safety risk assessment, preparing planned maintenance programmes (PMP) and managing major works projects would have been provided by third parties.  However, many of the big managing agents now provide some or all of these services in-house.

Another trend we have witnessed is the inclusion of costs that traditionally would have formed part of the management fee, such as supplier management, procurement and sustainability.  Whilst managing agents would no doubt argue that they are being transparent, there is a question as to whether total costs are now higher, compared to when all of these services were incorporated into the management fee.

This trend, of managing agents providing more services in-house, also seems to have had an impact on frequency.  It was not uncommon for PMP and some risk assessments to be reviewed bi-annually or even less frequently, but annual reviews and updates now seem to be the norm.

The Assure Index, which reports upon service charge costs and trends annually, includes benchmark data for all service charge expenditure categories including management fees.  The table below compares management fee levels from the 2020 and 2025 office indexes for Tier 1 (top 50 by spend) and Tier 2 (next 50 by spend) properties:

Whilst management fees as a percentage have decreased, this has to be seen in the context of a significant increase in costs psf, up almost 75% for Tier 1 properties and 56% for Tier 2.  What is more revealing is the increase in costs psf, up 19% in Tier 1 and a more modest 9% in Tier 2.

This must be considered in light of the additional fees that many managing agents are now charging, which are included elsewhere, within Site Management Resources and possibly other categories.

Nobody would dispute that managing agents and Landlords need to be paid to manage service charges and it is reasonable for them to also make a profit from this activity.  However, fees have escalated significantly over recent years and the inclusion of further fees for additional services have added to the burden.

As just one example, Assure are currently looking at a property for a new client where fees of all kinds make up 38% of the service charge. Whilst there is a ‘bottom line’ for fees that do not relate to property size, fees at this level are concerning.

If you have any concerns regarding fees and management costs, or your overall level of service charge, then Assure are here to help with advice and support.  Complete the contact form below and one of our team will be in touch.