Property occupiers hit as neighbours renege on their service charges
RISING service charges are beginning to impact commercial property occupiers, many of whom are having to shoulder an extra portion of these costs as some developers or owners of vacant properties renege on paying their share of the costs.
While leases in many communal office buildings specify that the costs must be attributed to each of the tenants in proportion to their ownership/usage of the property, we see ongoing issues arising especially in relation to the potential for bad debts from companies and/or developers unable to pay their proportion of service charges and also voids being created by companies going into liquidation or under the control of receivers.
In general, where a property is held under the terms of the lease, it is specified that the occupier must contribute their ongoing proportion of all the service charges.
In the event of non-payment of service charges, the debt will attribute to the property and should be discharged if the property is sold in the future.
However in the current market some of these properties are not selling on. This therefore creates a problem for management companies in these situations or the managing agents who are maintaining the services on behalf of the remaining group of owners.
Practical solution available
In some cases the only practical method by which cash flow can be generated again is for recognition of a bad debt to be taken on board by the property agent or management company as part of the service charge calculation. This has the effect of making all of the other owners contribute to the loss of the bad debt on the previous occupier of the property who is now insolvent.
Owners therefore need to ensure that where practicable, as much of this bad debt is recovered from the receiver or whoever is put in control of the property in relation to its subsequent letting or onward sale. Failure to do so either creates a situation whereby part of the old sinking fund is destroyed, or alternatively new levies will need to be imposed in order to try and build up the fund going forward.
For multi-use developments, often the only way to encourage new tenants or owners into the ground floor properties, which are usually retail outlets, is to offer fixed service charges or a discount to the norm.
Whilst this helps to generate cash flow, nevertheless all of the other occupants are contributing towards this new subvented amount.
This can thus create additional unforeseen charges to current property occupiers and lead to an increased service charge amount per unit. Alternatively the existing sinking fund required to finance large capital works may be dissipated.
In these cases a schedule of dilapidation works should be drafted to ensure that any sinking fund is sufficient to meet the requirements of the property going forward and if necessary a supplementary charge may have to be levied in order to bring the sinking fund to the appropriate level for the building.
Owners/occupiers should also ensure that where they have a management company in place that the common areas within the building are transferred from the initial developer, and in the event that the developer is currently controlled by NAMA that they ensure that all the legal procedures are undertaken to ensure that title is transferred appropriately. This ensures that no complications will arise on title held by companies which are potentially in receivership or heading towards liquidation.
Furthermore, occupiers should review their service charge certificates, ensure such certificates are audited and strictly review any reasons for bad debts that may increase such charges.
Aidan Scollard has acted as advisor and auditor to property companies, as auditor of service charge certificates and is a partner with RSM Farrell Grant Sparks